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INDIA’S BOOMING START-UP INDUSTRY

July 2016

Driven by aggressive government initiatives, the world’s third largest start-up base is redefining the dynamics of office real estate.

 

Data released by India’s National Association for Software and Services Companies (NASSCOM) reveals that by the end of 2015, India – with 4,500 start-ups – was the third largest start up base in the world, after only USA (48,000) and the UK (5,000), and ahead of Israel and China.

The recent success achieved by a handful of Indian start-ups that have made it to the ‘Unicorn List’, along with a thriving entrepreneurial spirit and huge market opportunity, have fostered the start-up culture in the country. Waking to the immense new potential, global and domestic investors have been actively participating in the sector, having invested INR 33,289 crore (USD 5 billion) in the past one year alone, registering an impressive 125% growth year-on-year.

The tier-1 cities of Bangalore, Delhi’s National Capital Region (NCR) and Mumbai are the top start-up destinations with nearly 65% of the total Indian start-up companies; followed by cities such as Hyderabad, Chennai, Pune, Jaipur and Ahmedabad – and the surge of these new businesses is creating a new demand for office spaces.

Era of entrepreneurship

The key factors for India’s emergence as the third largest base for start-ups are the strong macro-economic and demographic fundamentals of the country – a large young population base, thriving IT/ITES and e-commerce sectors, increased instances of funding, along with a cultural shift in the mindset of the average Indian entrepreneur displaying increasing willingness to commence individual operations.

India’s pro-reforms NDA government has identified entrepreneurship as a key economic driver and launched three major initiatives – Startup India, Digital India and Make In India, allocating financial resources and extending smart incentives to push the schemes. “The start-up eco-system in India has been a key contributor for rise in investments and job creation. Many start-ups that commenced operations in the later part of the previous decade have already become medium-sized or large companies, particularly if we look at some of the popular e-commerce companies in India today,” says Anuj Puri, Chairman & Country Head, JLL India, adding that from zero contribution to office space take-up, the e-commerce sector today contributes over 3% of the total office space absorption on an annual basis.

“We expect the growth in this sector to increase over time. The government is encouraging start-ups in IT, computing, manufacturing, life sciences & biotech, retail, etc. The response is tremendous as India is already a leading start-up destination,” says Puri.

Given India’s dominance in the IT/ITES sector and the recent boom in e-commerce, the initiative of Startup India, simultaneous with Digital India and Make In India campaign, are redefining the country’s commercial real estate market. “The three initiatives are major growth drivers, with many global giants already signing up with various stakeholders in India. Manufacturing is the sector that can give the much needed boost to the economy and the Make-In-India movement is expected to give a direct boost to the manufacturing sector with huge requirement of land for factories and industries, not to mention the secondary demand for warehousing and logistics space,” says Gulam Zia, Executive Director – Advisory at Knight Frank India. As a result of these drivers creating jobs all over the country, the need for housing and commercial space requirement is expected to increase multifold, Zia adds.

Changing landscapes

The vibrant start-up scene and the overall optimism in related sectors has attracted the attention of leading private equity funds, who are looking to invest or have already invested in the Indian real estate space. Some of the PE funds active in India’s emerging businesses are IL&FS, Fidelity International, Milestone Capital Advisors, Standard Chartered Private Equity, Everstone Capital and Kohlberg Kravis Roberts (KKR).

“100% FDI allowed in the sector under automatic route along with an expected IRR of about 16-20% has attracted many PE firms to look at this sector closely. Similarly, the wave of digitisation that is underway in India offers immense opportunities in the physical real estate space for development of large data centres,” says JLL’s Puri.

In the real estate space alone, many start-ups have led to improvement in the way the sector operates. More usage of technology in construction, architecture, information and brokerage have led to added transparency and efficiency in the system, which is positive for the sector. “With the Startup India programme, office space leasing is seeing an uptick from these companies. Startup India is also expected to provide support to e-commerce based start-ups which will positively impact leasing volumes on the logistics and warehousing side as well,” says Ram Chandnani, Managing Director – Transaction Services, CBRE South Asia.

Opportunities for investment

Emerging commercial clusters in cities such as Bangalore, Gurgaon, Navi Mumbai and Hyderabad are witnessing new up-takes from start-ups, and this trend is expected to continue for some time given the availability of large talent pool and relevant real estate space. “Investors must look for the right location and asset class in order to make the most of their investments. For bulk investors, choosing the right developer or investment partner is crucial,” advises JLL’s Puri.

In Q1 2016, buoyed by the uptake from start-ups, IT/ITES continued to emerge as the prime contributors in office space demand. With an improving economy, business growth plans are back on track while new platforms within IT such as e-commerce are augmenting the office space demand from IT occupiers as a whole.

In terms of appreciation, experts predict stable returns from commercial real estate in the key cities that are home to start-ups. “A steady growth of 6 to 8% in office demand is most likely, resulting in 40 to 50 million square feet of office space absorption per year. New inventory will remain under pressure for next two to three years which is bound to increase valuations in the next few years,” says Knight Frank’s Zia, adding that investors may find commercial real estate as a good entry option to India especially after the REITs’ opening in the country.

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