'Built-to-suit' may be the next big trend for corporates who are looking for office space, but is it really that simple to explain?
An overwhelming growth in IT and ITeS companies as well as the entry of multinationals has pushed the demand for office space to a real high. So where one does not see a mall or a residential apartment coming up, there is bound to be new office space being built.
Over the years, Indian IT/ITeS companies have grown and so have multinationals which, after entering India 5-10 years ago, now want larger office spaces to consolidate their work into a single large building.
This is what has led to the growth of built-to-suit office space in India. According to industry estimates, a large chunk or about 20-30 per cent of the overall office space supply today is built-to-suit.
According to real estate advisor DTZ, in 2006, 10.6 million sq ft of office space was absorbed in the NCR of which 4.6 million sq ft of space was pre-committed.
In a pure built-to-suit, the developer designs a standalone building exactly according to a clients requirements, whether leased or sold to the client. Unlike a few years ago, developers are asking clients to commit a minimum size, say 2 lakh sq ft or above, for them to do a built-to-suit, explains Pankaj Renjhen, regional director, Jones Lang LaSalle Meghraj.
In the beginning, Indian corporates used to do their own buildings, explains Kaustuv Roy, director, tenant strategies and solutions, at Cushman & Wakefield. Now MNCs tend to prefer leases, with exceptions like Microsoft in Hyderabad).
Among the early built-to-suit offices in the NCR region were the Nestle and Ericsson buildings done by DLF in Gurgaon. There are more examples since then -- Morgan Stanley's building in Mumbai four years ago, for instance, and the Ventura building in Pune.
In Bangalore, the pace of requirement is so quick that "corporates cannot wait for 18 months for the building to finish", says Roy. Here corporates enter into an arrangement with a semi-finished building to customise it to their needs. Ideally, corporates like to have a fully customised solution.
Imagine a situation where a developer builds an office space, the building is ready but is yet to be sold or leased out completely. Here, the developer is at a loss. What built-to-suit does is that it reduces the risk for a developer, as well as the client, in some ways.
For a developer, the property is leased out before the project is finished, an advance received, which in some cases, partially funds the construction cost. The only issue, still, is the credibility of a developer and the ability to deliver on time. The best part about built-to-suit, says Ashish Puravankara, chairman and MD, Puravankara Projects, is that "we get a customer on day one of the project".
The clients, on the other hand, can control the cost, get exactly what they want and in the timeline that they have in mind. They will also have a better hand in negotiating the deal.
A S Minocha, chairman, DLF Commercial Developers, informs that a lot of clients want to be part of a larger development. "Then there are some clients who want complete built-to-suit in a dedicated building but this costs money," he says.
The leasing cost for a complete built-to-suit is about 30-50 per cent higher than usual. For such DLF projects, the size commitment is usually large -- 3-5 lakh sq ft. About 30 per cent of DLF's office space business is BTS, says Minocha.
"The concept was not so encouraging five years ago," says Srinivas Anikipatti, regional director, Colliers International. He adds, "Not all developers delivered on time. Today, land clarity and all other approvals are in place. People usually sign deals with big developers. The grade of a developer is very important to crack built-to-suit."
Today, since the demand for office space is so heavy, developers are just starting to build, even without any pre-commitments, trusting the market to get them business with time.
"Apart from customised buildings for clients, in many cases, we also do the shell with a large open floor plate (with very few columns) and the external facade. Clients who lease properties later can customise them as per their needs," informs Puravankara.
But on the other hand, pre-commitments too are growing tremendously. "The majority demand from the tech sector are pre-commitments. Most DLF buildings getting finished in Gurgaon have all been pre-committed," explains Roy. In Hyderabad, there is no office space available before quarter three in 2008.
According to Vivek Dahiya, director, DTZ, pre-commitments is quite beneficial for the client. "In a pre-commitment, you have frozen the lease rental at the current rate." For example, in Gurgaon a building pre-committed about a year and a half ago might have been leased at Rs 40 when the current rentals are over Rs 100.
Another model started by large Indian IT companies is that of doing campuses on their own. "Many IT companies are doing their own campuses. The occupancy owns the land and does a number of buildings of maybe 2 lakh sq ft each, hiring a construction company," says Roy.
The more interesting trend is that in some way office buildings across the board are getting standardised. "To negate risk, developers are building in a universal way which can be used by multiple tenants effectively, with just a little tweaking," says Renjhen.
Roy agrees that there is a lot of standardisation in the market. "Developers now know what corporates want, and corporates now know that they can trust the larger developers," he explains.
There are negatives too inbuilt-to-suit, says Dahiya. "It can create an artificial supply gap in the market," he says. In Gurgaon, 40 per cent of the supply is already pre-committed, one of the many reasons for the huge jump in rates in the Delhi suburb.