Growing eurozone crisis is affecting Indian real estate. Here's why

There’s a very interesting link between Indian office space prices and what’s happening in North America and Europe.

According to a recent report by Jones Lang Lasalle, a real estate consultancy, nearly 50 percent of the demand for investment grade office space in India is contributed by the information technology/information technology-enabled services sector.

More importantly, up to 90 percent of revenues of the IT and BPO (business process outsourcing ) sector come from North America and Europe, both of which are struggling economically. The US is still limping back to recovery, while Europe is trying to contain the spillover effects of the sovereign debt crisis.

[caption id=“attachment_140182” align=“alignleft” width=“380” caption=“There’s a very interesting link between Indian office space prices and what’s happening in North America and Europe. Sherwin Crasto/Reuters”]  [/caption]

Furthermore, the real estate consultancy noted that over 70 percent of the demand for investment grade office space is contributed by firms that are headquartered overseas. “Many of them thrive on domestic demand. However, demand contraction in those countries will definitely force them to exercise caution,” the note added.

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The inevitable conclusion: demand for office space is expected to remain muted in 2012.

Himadri Mayank, senior manager - research and REIS, Jones Lang Lasalle India, pointed out that a slowdown in leasing is already visible and that companies are only leasing space that they consider absolutely essential.

That has meant smaller deal sizes, he said.“Deal sizes, which used to be around Rs 30,000-35,000 per square feet have now come down to Rs 25,000 per square feet.”

Certainly, growth in demand will be nowhere close to what it was in 2010.In 2009, about 19.6 million square feet of office space was leased across the top seven cities in India, according to Jones Lang Lasalle. That figure soared to around 31 million square feet in 2010, Mayank said.

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In 2011, the consultancy expects 35-36 million square feet of office space to be leased.

However, the ongoing turmoil in Europe, the slowdown in the US economy and a depreciating rupee will curb the enthusiasm of IT companies for expanding office spaces. “In 2012, we expect about 31 million square feet of office space to be leased,” predicted Mayank.

Of course, a short-term devaluation of the rupee (the currency hit a record 52.73 against the dollar earlier this week) could give a boost to exports and lift the fortunes of the IT/ITes industry over the next six to nine months. But that’s still a big ‘if’.

At the moment, the speed at which the currency is falling is throwing all forex calculations of IT companies to the wind. No one is sure that a depreciating rupee will boost the fortunes of software companies anymore.

Looks like a lot of us will be stuck in that cubicle a little while longer.