India gives California a run for its money

PUBLISHED : Sunday, 14 January, 2001, 12:00am
UPDATED : Sunday, 14 January, 2001, 12:00am

Silicon Valley has been in the news lately.

That is nothing new for an area considered to be the powerhouse of the new economy, but little of the coverage has been flattering.

The focus has been spiralling rents, unceasing traffic jams and the increasingly frequent electricity blackouts bedevilling the Palo Alto-San Jose area.

It is a list of complaints that would not be out of place in a Third World country. India, for example, is famed for its chaotic traffic and laissez-faire attitude towards regular electricity. And in Bangalore, India's own silicon valley, office rents are rising at a steady clip, consolidating the similarities between the two global high-technology centres.

Property provides as good a means as any to compare and contrast the silicon valleys of the west and east. In San Jose, commercial rents are sky-high. Topping US$100 per square foot they have begun to force companies out of the area to cheaper climes, which include Sacramento and Fremont.

Fremont, of course, is where India's largest software success story, Infosys International, has its United States' headquarters.

In addition the company has development centres in Canada, Britain, and Ireland. Their Indian 'campus' is a sprawling affair, the world's single largest facility among software services firms.

It is a notch above run of the mill, incorporating a fitness centre, amphitheatre and a number of restaurants.

The premises, on the outskirts of Bangalore in Electronics City, is the last word in modern office space.

The price Infosys paid for this mammoth development is, no doubt, trivial compared with the amount it forked out in Fremont. The land is owned rather than rented, an increasingly attractive option for the big information technology (IT) companies.

David Faulkner, director of international real estate advisers Insignia Brooke, believes the problems with Bangalore's infrastructure are a key reason for the glut of campus-style developments on the outskirts of the city.

'The basic infrastructure in India is pretty poor,' Mr Faulkner said. 'Generally, a lot of the local buildings are lacking.'

In such a scenario, companies such as Oracle and Cisco Systems can rid themselves of the hassles of dealing with traffic and power cuts by buying cheap land on the outskirts of the city and setting up a mini-city.

'You are likely to see more and more companies moving out of the city,' Mr Faulkner said.

'They tend to find the land they want and build the facilities they need on it.'

In this way companies can guarantee themselves electricity, and build all the optical-fibre cables they need for a fraction of the cost of property in the central business district.

Unsurprisingly, this approach has also proved popular in Northern California's Silicon Valley. Mr Faulkner, furthermore, believes there is only really one disadvantage of building outside the city.

'The only disadvantage is you are usually pretty far out of the city,' he said.

A recent report from Cushman & Wakefield details the difference in prices between the central business district in Bangalore and the secondary areas on the outskirts. The price disparity is considerable. Properties in the city centre will cost upwards of US$100 per square foot, but can be half that amount in the suburbs.

Oracle, for example, is rumoured to have paid about US$60 per sq ft for its new state-of-the-art 120,000 sq ft facility.

The same situation applies for rental costs. While rents in the main business area of M G Road can top US$1 per sq ft, suburban leases are significantly cheaper.

The Satyam Group leased 12,000 sq ft of office space at a gross effective rent of 50 US cents a sq ft.

By comparison with San Jose, the value of property in Bangalore is quite remarkable. The simple reason for this, of course, is the weakness of the Indian rupee against the US dollar.

The prevailing rate of 46 rupees for each dollar makes any concerns about US recession fairly irrelevant for a company such as Infosys. Listed on the Nasdaq and paying for property in rupees, it is little wonder the company recorded a 120 per cent increase in third-quarter earnings.

And while rents and prices for property in Bangalore may be rising, there is little chance they will test the astronomical levels of property value in Northern California.

A report by Insignia Brooke details how office rent in the Palo Alto-San Jose area has increased 142 per cent in the past year. Demand, according to the report, 'has completely devoured supply'.

This is in stark contrast to the state of Bangalore's property market.

After experiencing a property bubble during 1997, the Bangalore office market was hit badly by excess supply during 1998.

'The sluggish market was due to over-building,' Mr Faulkner said.

Few of these buildings, additionally, were able to attract top-notch IT companies due to poor design and facilities. That may all be changing, with Bangalore developers making real strides to try to tempt multinational IT firms into renting their property.

Kris Ramamoorthy, of Krishnan Real Estate in Bangalore, believes the coming year will see a new breed of IT-friendly office buildings vying for market share with suburban land. He cited the IT Park at Whitefields as one example.

'The IT Park is now experiencing 100 per cent occupancy,' he said.

'It has been very well received.'

Other projects that have either just reached the market, or will shortly, display the attempts of developers to attract IT firms. The Brigade Group of developers, for example, has a number of IT-friendly buildings ready for occupation.

There is the Brigade Software Park, an 'exclusive software facility' which includes high-speed leased lines, satellite hook-up and a rooftop swimming pool for relaxation.

Full power is, of course, guaranteed. Given the present parlous state of Northern California's power resources, that may elicit envious glances from IT firms in the Silicon Valley of the West.