JLLM Update - OFFICE SPACE TRENDS - Q2-Q3 2009

OFFICE SPACE TRENDS – Q2-Q3 2009

Pawan Swamy, Managing Director ( Western India) Jones Lang LaSalle Meghraj

Since the last quarter, there has been increased office space off-take in the top cities of Mumbai, Delhi and Bangalore. Vacancy levels have actually decreased as a result of a pep-up in office space transactions. This has taken the pressure off rentals, and we have not seen a dip in these values in the recent past. In other words, the hitherto witnessed downward trend in rental values has actually been arrested now. We expect them to stay flat the levels they are right now over the next quarter.

RENTAL VALUE MOVEMENT

In these three key Tier 1 cities, there has definitely been a declining trend from the peak rental values witnessed a year back. Depending on locations, project and sub-market dynamics, this decline has been anywhere between 25-40%. However, values have remained steady over the last quarter, showing no significant decline.

Interestingly, while rental values have remained steady, capital values are beginning to strengthen and the yield has started to compress more. This can be attributed to the fact that a number of office space owners began selling their holdings a couple of quarters ago in response to the liquidity crunch. There has been a significant improvement on the liquidity front of late; Mumbai was the first to witness this, followed by Delhi and Bangalore. The result of the improved fiscal situation has resulted in fresh access to debt for developers and investors, enabling them to assume a holding position on their properties.

DEMAND

In the current context, we note an indubitable improvement of overall sentiments in the commercial space sector. In clearer terms, we are now looking at a significant increase in demand, which is a decisive change from the scenario just a few months ago. The pattern that emerges is one of multinational occupiers beginning to look more favourably at a market where values have rationalized by 25-40% over the last 12 months. These occupiers justifiably anticipate that values are likely to strengthen again over the next 12-14 months, encouraging them to take a position in this market. They are now keen to lock the best of the available opportunities so that their firms can derive consummate value in the long term.

MICRO TRENDS

Of late, we have seen an emerging trend of Indian companies preferring to buy rather than lease space. Religare, the Stockholding Corporation and the National Stock Exchange have already made purchase decisions, and we anticipate that more companies will see the value that the actual possession of office space assets adds to their balance sheets going forward. As of now, multinationals are still displaying a degree of scepticism about taking a ‘buy’ position.

In terms of segments, there been no significant growth in the IT segment - most of the activity we are witnessing is on the corporate side, predominantly among multinationals with multiple offices in the same cities that are looking at consolidation. These entities are now actually signing deals. However, we have noted that most of these are pre-lease transactions, and not necessarily in context with ready buildings.

THE WAY FORWARD

It is critical that one understands that among all the asset classes, the one impacted most the by the global economy is office space. Residential demand has already made a remarkably fast comeback, and capital markets are opening up with the return of liquidity. Hotel rates are also beginning to firm up under the improving economy. However, the health of the Indian office space sector depends on how multinational occupiers fare at the global level. While the sentiments in country in terms of the economy in particular and the market in general are definitely positive now, it will take a while before India sees a significant surge in the rental and capital values of office buildings.

OVERSUPPLY?

There is also a large amount of supply coming in at the Tier 1, Tier 2 and Tier 3 city levels, and we must consider the possibility of an oversupply situation in certain markets. However, if we believe that the markets will make a comeback in next 12-18 months and factor in the consolidation approach by both foreign and Indian firms are taking as well as the expanded demand, there is a good probability that a large percentage of this excessive supply will be absorbed.

INDIAN REAL ESTATE'S REACTION TO THE BUDGET – AMBIVALENCE ALL THE WAY

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle Meghraj

POSITIVES

The fact that India Infrastructure Finance Company (IIFCL) will be given more flexibility and has been authorized to raise Rs 100,000 crore in for the development of the infrastructure sector is an indirect boon to the real estate industry. Of late, an increasing number of infrastructure projects have a real estate component by virtue of a cross-subsidization principle. Therefore, boosting infrastructure projects gives an impetus to real estate, as well.

The intended clearing of regulatory bottlenecks for infrastructure projects will help bring forward many pending projects, thereby boosting the construction sector.

The fact that allocation for the NHAI has been increased will mean improved and accelerated connectivity, raising the value of existing real estate along these routes and also opening up new areas for development.

Allocation for JNNURM has been substantially increased. This is good news for urban infrastructure in general. JNNURM has been instrumental in proving road and rail connectivity in urban and suburban areas, and this will give a significant boost to mass housing schemes on the fringes of the metros.

The increased allocations towards Rural Electrification Scheme, the Rural Housing Fund and Rural Road scheme may serve to improve the real estate markets in far-flung areas and may also help to reduce inward migration from the villages by providing industrial growth in the hinterlands. This may herald the beginning of organized real estate in the semi-urban and rural areas.

The increase of funding for the Commonwealth Games will vastly enhance development potential in the Delhi NCR region and have direct positive implications for the hotel industry in this sector.

The facts that manufacturers of prefabricated concrete slabs and will now have a tax relief and that goods made at construction sites now have their exemption reinstated spells good news for developers of lower income housing segment, who depend largely on low construction costs.

NEGATIVES

The increase in Income tax exemption limits is not sufficient to make a significant difference in buyers’ purchasing power, but may serve as a feel-good factor.

STPI units will have to bear a higher burden of Minimum Alternate Tax (MAT). This is an indirect endorsement of SEZs, and in line with the Government’s stance to phase out benefits to STPI projects, thereby encouraging migration into SEZs. However, the Government is silent on the cost implications on the commercial use of STPI units that have hitherto enjoyed higher FSI at no extra charge.

The allocation increase to the Rajiv Awaas Yojna will enhance the prospects of urban slum dwellers of getting better quality housing. This scheme under JNNURM is intended to promote support and property rights to people living in slum areas.

The Budget did not mention FDI into the real estate sector or REITs and REMFs. We are also disappointed about the lack of affirmative action on increasing tax exemptions on housing loans, principal repayment and interest.

No mention was made on the undoing of service tax on rentals which were introduced in the previous budget. This is not going to improve the status in terms of commercial and retail leasing.

There is a lack of measures in terms of end user facilitation, boosting of buyer sentiments and the growth of mass housing.

Jones Lang LaSalle Ranked #1 Corporate Real Estate Services Provider

INDIA, July 2 2009 — Jones Lang LaSalle (NYSE:JLL) has been recognized as the best overall provider of corporate real estate services by the Watkins 2009 Survey of Corporate Real Estate Service Providers. Of the 19 providers evaluated by the largest users of commercial real estate services, Jones Lang LaSalle was rated #1 in every category, including delivery of results, adaptability of services, pricing, reputation and financial strength.

The survey, conducted every two years by the Watkins Research Group Inc., in a joint project with Flaspöhler Research Group, interviewed 204 corporate real estate (CRE) decision-makers from 182 companies, representing North America’s largest users of CRE services—including 59 Fortune 500 companies, 37 Financial Times Global 500 companies and eight government agencies.

Not only did Jones Lang LaSalle receive the highest overall rating among all firms, but it also was rated #1 for each of the 10 considerations respondents listed as most important in selecting CRE providers. These considerations, which were characterized as adding to clients’ bottom lines or demonstrating strong client orientation, are listed below in order of importance:

1. Delivers results on time and within agreed-upon budget (JLL #1)

2. Is business savvy (JLL #1)

3. Adapts services to fit firm (JLL #1)

4. Understands and avoids conflicts of interest (JLL #1)

5. Has rational pricing (JLL #1)

6. Has a strong reputation and is respected in the industry (JLL #1)

7. Is financially strong (JLL #1)

8. Has offices in all the major markets where needed (JLL #1)

9. Monitors performance with metrics (JLL #1)

10. Uses state-of-the-art technology (JLL #1)

“The Watkins survey is a clear indicator of what companies require and value,” said John Forrest , CEO of Jones Lang LaSalle’s Corporate Solutions business in Asia Pacific. “Real estate is often the third largest cost for many companies. Many are seeking to outsource these functions to reduce costs whilst maintaining similar or higher levels of service delivery.

“This recognition demonstrates that our continued investment in our global platform delivers in the areas that our clients consistently tell us they value – including quality service delivery, reputation for integrity and financial strength as a company.

“Our ability to provide an integrated service means that we can streamline delivery and maximize cost efficiencies for our clients across all areas of corporate real estate. In Asia Pacific, this translates into consistent, high-quality service delivery across diverse markets. It also means that we can leverage global knowledge and best practice for clients locally.

“It is a combination of these things that enable us to maintain our position as a market leader in Asia Pacific. In fact, we are continuing to grow and in the first six months of 2009, we have expanded our portfolio under management by over 30 million sq ft with clients from the banking, technology, industrial and consumer goods industries,” said Mr Forrest.

About the Watkins Research Group Inc.

The WATKINS RESEARCH GROUP, INC. is a marketing research firm headquartered in Kansas City. Specializing in primary business-to-business research, the firm fields studies where the issues are more complex and/or the audiences more sophisticated. WRG is particularly regarded for gathering, analyzing and cogently presenting intelligence from very select audiences who represent the most sought after business in an industry. More at WatkinsResearchGroup.com.