Multinational companies are increasingly buying properties to set up their offices instead of leasing offices as they preferred for years, marking a strategic shift that signals the growing importance of the Indian market and the long-term commitment of the global firms.
Foreign firms including GlaxoSmithKline Pharma, Sanofi Aventis, Adobe, Honeywell, SanDisk and Amazon have recently bought office space in India. MNCs accounted for 35% of total commercial asset sales in the country in the first three months of 2014, according to a report by real estate services firm Cushman & Wakefield. In 2012, MNCs contributed as much as 60% to the total commercial asset sales, backed by two deals of $100 million (about Rs 600 crore at current rates) during the year.
"Companies that have an established operation in India and are confident of their projections and potential in the country are now tailoring their real estate requirement so they can be more cost-effective," said Sanjay Dutt, executive managing director-South Asia, Cushman & Wakefield.
For many global organisations, the decision to buy or lease space is among the most important part of their strategy. "We extensively evaluated the option of leasing against outright purchase and analysis showed that outright purchase was a better option from financial perspective as well as the message about commitment to this market that it sends to employees and our extensive ecosystem of customers, partners and the broader community," said Naresh Gupta, senior vice president, print and publishing, and managing director, Adobe India.
The increase in outright purchases shows that many foreign firms are thinking along similar lines. According to the report, such transactions worth Rs 2,470 crore have taken place over the past two years.
The shift coincided with the steady rise in rentals from 2011 to 2013 in most of the prime markets where MNCs have leased office spaces. Rental values in Mumbai's Bandra-Kurla Complex, Bangalore's Whitefield, Hyderabad's Madhapur and Delhi's Connaught Place rose 11-34% during this period, the report showed. According to developers, easy funding and other long-term benefits are prompting these transactions.
"MNCs used to buy space in initial days but stopped as they did not want to invest more money. They are now again looking at setting up own campuses due to access to cheap funding. Also, buying own space is more cost-effective for them than leasing due to overall cost of funding. There is also value appreciation in the long run," said Irfan Razack, chairman and managing director of real estate developer Prestige Group.
Prestige Estates Projects has recently concluded three large transactions with Adobe, SanDisk and IT services company 24x7 Customer for office spaces that are currently under construction. An outright purchase of office also allows companies to manage the facility better and use the space more efficiently. "We get a firm control on building infrastructure and maintenance like facilities, security, transport, electricity etc.
We can optimally utilise the seat per square foot to house more people for expanding the business and create a favourable environment for the employees," said Praveen Upadhyay, head of administration and facilities, EHS India Operations at Virtusa Corporation. "Wholly owned facilities follow different levels of standardisation which helps an organisation like ours create an impact among the employees as well as in the market as a long-term player."