Mr. Karan Khetan, Jones Lang
LaSalle India
Many factors influence decisions about buying or / leasing property.
Real estate costs represent a significant business expense. Not only
Fortune 500 companies but also mid & small-cap companies are undertaking
portfolio reviews, because these impact any future own-versus-lease decision.
Here are some key factors for occupiers in their decision-making:
Ø Flexibility..
Two things are desirable for an
occupier - first, taking advantage of the property cycle and second, having
assurance and comfort of critical functions remaining undisrupted by
end-of-lease tenures. This can be achieved by ensuring flexibility through a
combination of owned and leased assets with specified allocations to ownership
and short-term, medium-term and long-term leases.
This type of allocation ensures that occupiers can vacate sites with
near-term lease expirations at any time. Alternatively, some percentage of
ownership acts as a hedge against increasing leasing costs.
Ø Capital Allocation..
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| Mr. Karan Khetan, Jones Lang LaSalle India |
It is important to separate the
real estate capitalisation decision from the decision on business unit site
location. Often, business units are measured on a financial reporting basis and
skewed towards an ownership preference, based on the lower expense profile
associated with a long depreciable life and the low or / no cost of capital charge.
A more efficient approach is to charge business units with a fair cost
of capital on capital employed, and apply a suitable depreciable life.
In addition, occupiers also need to substantiate the following capital
allocation implications:
^ Is there sufficient cash
reserve on the balance sheet?
^ Is the short-term and
medium-term capital expenditure significant against reserves?
^ Is the hurdle rate
higher than property yields?
Ø Property Market Implication..
Timing plays a vital role in an
occupier’s decision to buy or lease. While cyclical lows in financial
indicators of rents and capital values support owning or leasing of commercial
assets, owning a property is typically for a longer holding period and the
cyclical peak discourages buying and supports short-term leasing with
renegotiation clauses.
The occupier’s decision to occupy or lease is influenced by the
following property market implications:
^ Is the micro-market
susceptible to significant property cycle risks?
^ Are there significant
environment management issues related to ownership?
^ Are there significant
restrictive covenants applicable?
In the period from 2Q10 to 3Q11, India’s office real estate provided a
strategic window of opportunity for both buying and leasing commercial real
estate, with both rents and capital values at their cyclical lows. From 2010 to
mid-2013, the country’s leasing and buying volumes together breached the 100
million sq ft mark, and this is forecast to cross 120 million sq ft by end 2013.
Market conditions are likely to remain generally neutral in the
short-term, although the latter part of 2013 is likely to see moderate increase
in rents and capital values in select locations and further strengthening is
expected post 2013. The Bangalore office market is expected to lead the
recovery, followed by Mumbai &
NCR-Delhi.
Moderately rising rents and capital values have so far given occupiers
in India an unusually long window for decision-making. With supply correction
in place, this window will not be available for long. Hence occupiers must take
their real estate decision sooner rather than later to secure the benefits of
the current situation.
About the author..
Mr. Karan Khetan is Senior Analyst (Research & REIS) at Jones Lang
LaSalle India
For Media Contact..
Arun Chitnis, Head – Corporate Communications & Media Relations
Jones Lang LaSalle India , Level 6, Amar Avinash Corporate Plaza
Bund Garden Road, Pune -
411001.
Tel: (020) 3093 0441 Fax: (020) 4019 6101, Mobil: +91 96571 29999
Website: www.joneslanglasalle.co.in
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