With tales from Delhi of collapsing bridges, falling ceilings and an unfinished Commonwealth Games Athletes’ Village, it may seem odd to suggest that the UK’s struggling office development market could have lessons to learn from India.
While I was shocked by some of the building techniques I saw in my time there in the early 2000s, the Indian approach to development finance in the then-fledgling sub-continent commercial office market was clever, and might offer a way forward for our own market.
Facing a dearth of construction finance for anything other than long-term prelets to international tenants, innovative Indian developers satisfied the demands from Western offshoring by offering the tenant the option to fit out premises themselves (a “cold shell” finish) or negotiating a fitout package with the tenant that could be paid back in rent (a “warm shell” finish).
This approach facilitated the construction boom that has underpinned India’s emergence as a significant power in the global knowledge economy.
Today, many UK developers face the same scarcity of construction finance that will put a brake on the delivery of new offices other than those prelet to good covenants on long leases. Occupiers, meanwhile, have an eye on emerging accounting standards that are likely to make long leasing commitments even more unpopular.
Arguably, the Indian way allowed developers to focus on their strengths – site assembly, putting together the principal structure and utilities supply. Those were the long-lead items that occupiers saw as containing the most risk.
With fitout from a cold shell representing circa 60% of the total construction cost, this allowed the Indian developer to provide a flexible product funded largely through equity. For occupiers, it allowed fast-track construction, flexibility of building specification, low rents and short leases.
Indian developers rightly believed that international companies would not exercise breaks or fail to renew short leases after investing large sums in buildings and in hiring and training thousands of staff. Many corporations accepted that it was better to write off such capital than be faced with the liabilities of a long lease if the business venture failed.
In the UK, many occupiers will have much stronger balance sheets than their potential development partners and easier and cheaper access to finance for both categories of fitout. If shell structures were delivered to BCO standards (floor heights, windows, etc), occupiers could extend their usual fitout to include core items such as electrical distribution, boilers, air-conditioning and lifts, as well as the raised floors, lighting and ceilings.
Corporations already employ expert teams of professionals to design their building operating systems, so they may well be prepared to take on more risk.
Of course, while capital requirements for developers are reduced with the Indian approach, the same risks associated with location, product and timing apply.
I’m sure there are empty multi-storey structures with low ceilings and poor cladding in fields near Bangalore, but at least these cold shells are unlikely to be debt-financed.
Peter Copley, Corporate Property Advisers
