E commerce companies fuel growth in brick and mortar real estate
As global investors bankroll India's online consumption story, the e-commerce sector seems to be having a positive spin-off on both commercial real estate and warehousing demand
Mar 16, 2015
Source : The Times of India

 

New Delhi: For companies that do their business online, e-commerce giants are spending a lot on brick and mortar. Just 12 hours before the country rang in the New Year, cab service provider Ola signed on 20,000 sq ft of prime office space at Embassy Golf Links (EGL), a premium Grade A business park located just 20 minutes away from Bengaluru's city center of MG Road.

That was the last available office space at the 21-office block EGL campus, which charges tenants approximately Rs 100 per sq ft per month as rent.

While the office transaction is minuscule in the context of India's over 400 million sq ft leased office market, the deal signaled the coming of age of the country's new sunrise sector. Consumer internet firms clearly, are competing for marquee office spaces with Fortune 500 companies who have, for the longest time, dominated India's tenanted office market.

Ola, which took up the 20,000 sq ft at EGL to house its technology division, picked to work alongside the likes of ANZ, Goldman Sachs, IBM, Microsoft, and PricewaterhouseCoopers, among others. Just 60-days before the lease deal, Ola had raised $210 million in funding.

In October last year, Indian e-commerce's poster boy Flipkart signed a record lease of 3-million sq ft of office space in Bengaluru, months after it raised $1 billion in funding. It was the largest office lease deal in a decade. In 2004, San Jose-based Cisco Systems leased 3.2 million sq ft of office space in Bengaluru, which is the biggest office space transaction in the country till date.

As global investors bankroll India's online consumption story, the e-commerce sector seems to be having a positive spin-off on both commercial real estate and warehousing demand. Says Pankaj Kapoor, MD of Liases Foras, a real estate research firm, "In recent times, e-commerce has been one of the biggest drivers of commercial office absorption."

Amazon India, which has already leased over 5-lakh sq ft of office space in the country, is close to signing on 1.3 million sq ft in Bengaluru as it fights Flipkart for market leadership. Amazon's global business unit, which has its back-office operations in India, is also looking to take up an additional half a million sq ft in the country.

This heightened level of office demand by consumer internet firms — only to be seen in the IT/ITeS industry — is being driven by the rapid deployment of human resource capital which in turn is fueling growth. Interestingly, the backbone of mobile and internet commerce is engineering talent, similar to the IT/technology industry.

Early this month, Mumbai witnessed its biggest office lease deal of 2015 when real estate portal Housing.com, leased 1.50 lakh sq ft spread over two buildings at the Hiranandani complex in Powai. The five-year lease transaction was concluded at around Rs 100 per sq ft.

In the country's capital too, the real estate action is hotting up with Azim Premji and Rata Tata backed e-commerce player Snapdeal scouring the market for half-a-million sq ft of office space. Fashion e-tailer Jabong, part of the listed German startup incubator Rocket Internet, has just taken up a fully-fitted out 1-lakh sq ft office space in NCR, which is double its existing office space.

In three years, Radhika Aggarwal, co-founder and CMO of e-tailer Shopclues, recollects the company's growth in terms of real estate: from a small office housing 10 staff members to working out of a full building that houses 550 employees. "We plan to open one more office in Delhi-NCR," she says.

Even as demand for office space has picked across the country on account of positive macro-economic sentiments, Shirshir Baijal, chairman and MD of property consultancy firm Knight Frank India adds, "E-commerce supported by local consumption has infused a fresh lease of life into commercial realty."

Anshul Jain, chief executive of DTZ India, a property consultancy, noted that in a short span of three to four years, no other sector had such a visible impact on commercial real estate as e-commerce. However, in the long run he expects e-commerce to only contribute about 5% to 10% of net office space absorption in the country, while the IT/ITeS industry would continue to dominate with a 55% share.

Jain's estimate is relatively small as compared to the current absorption trends because the biggest impact that e-commerce will have on real estate will be in the warehousing and logistics space.

"For every 500,000 sq ft to 1 million sq ft of commercial space that gets taken up, at least about 2 million to 2.5 million sq ft of warehousing space will be added," said Anshuman Magazine, chairman and MD, of property consultancy firm CBRE South Asia.

A recent CBRE research note reported that in 2014, e-tailers took up 1.7 million sq ft of warehousing space, representing 25% of the total 7 million sq ft of warehousing space absorbed across the top seven metros in the country. In fact, the e-commerce sector emerged as the largest demand driver of logistics/warehousing space in the country as of last calendar, outpacing traditional sectors like FMCG, pharmaceuticals, automotive components, food and beverage, and electronics.

"The warehousing sector will become increasingly vibrant as the e-commerce segment pivots itself on strong back-end support operations," said Anuj Puri, chairman and country head of consultancy firm JLL India.

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