IT's hard drive

Information technology and services has become a key driver of growth for real estate.

If you read pink newspapers, you would know how the growth of the information technology (IT) and IT-enabled services (ITeS) sectors have transformed the Indian economy in the past decade. Here is another amazing statistic of how the boom in the new economy of click-and-portal is closely linked to the growth of the old economy of brick-and-mortar. Out of every 1,000 sq ft of new office space developed across the country today, almost 700 sq ft is gobbled up by the IT-ITeS sector. That means of the 60 million sq ft of office space created in 2006, 42 million sq ft was cornered by IT and ITeS companies.

If this percentage of office space taken up by the IT-ITeS sector raises eyebrows, it is also because these offices are very different from the run-of-the-mill workplaces. These are not workplaces where an employee walks in at 9 am and closes shop at 5.30 pm. 24x7 schedules requires offices that have multi-cuisine cafeterias, gymnasiums, swimming pools, even auditoriums and creches for toddlers. All this has increased the average space required per worker. While an ordinary office requires an average of about 60-70 sq ft of space per employee, an IT-ITeS workplace needs about 150 sq ft. So IT section is setting new standards in both quantity and quality of real estate it requires.

This is as far as the commercial property is concerned. Every 100 sq ft of office space occupied by IT and ITeS companies generates a demand for at least 700 sq ft of residential accommodation. With high disposable incomes, IT and ITeS employees form a sizeable chunk of new home buyers. “Almost 25% of employees in the IT industry look to owning their house,” says Anshuman Magazine, managing director, CB Richard Ellis (South Asia).

A Crisil-Nasscom study found housing to be the biggest head of expenditure for IT-ITeS workers. In 2005-6 more than 20% of the total earnings of the 16 lakh workers in this sector went into housing-related expenditure. This spending was either in the form of rent or as home loan EMIs. Either way, it gives impetus to residential property.

IT-ITeS workers not only need bigger offices but even bigger homes. The average house size of the IT professional is 40-50% bigger than those occupied by workers in other sectors. For instance, in Gurgaon in the National Capital Region, the average house size is 800 sq ft. But the average house occupied by IT professionals is 1,200 sq ft. “Pay packages are significantly higher in IT-ITeS than in other sectors. This is pushing up the demand for premium residential projects,” says Magazine.

The IT-ITeS growth story is not confined to metros. As real estate costs go up, the cost of maintaining the workforce shoots up and IT-ITeS companies look for geographical de-risking. As a result the IT-led boom is reaching tier-II cities (see chart). Infosys is a case in point. Starting off from Pune as its second location after Bangalore, the company now owns almost 20 million sq ft office space in over 10 locations across the country.

“Real estate potential of a location is always a factor of job creation. Since IT companies are the biggest employers today, no doubt its employees are one of the largest consumers of the real estate,” says Pankaj Bajaj, managing director of Eldeco Group.

What does that mean for people like you and me? Well, for investors in real estate, buying a house near an upcoming or proposed IT-ITeS hub could mean never having to worry about finding tenants with deep pockets. Also the value of such properties is likely to appreciate significantly over the years. Those looking to buy a house for own use should not get unduly worried about the rise in property prices. IT companies usually set up offices in suburbs where rates are generally lower than the main city. IT companies don’t move into an area overnight. They do so gradually, and so does the price of property in the area. So, you have enough time to weigh your choices.

There’s good news for tenants too. One can expect the woodwork to be complete with add-ons such as an inverter thrown in to attract quality-conscious IT clients. A big advantage of staying close to an IT hub is that the infrastructure— roads, power and water supply—is likely to be good because often the state government steps in to offer better facilities.

Will the IT-ITeS juggernaut slow down in the future? It seems unlikely that this party will get over soon. The sector is growing at 30% a year and according to a Nasscom estimate, will grow at least 15% every year for the next five years. With 1,00,000 new recruits joining the ranks every year, that’s about 25,000 new home buyers and about double that number of tenants queuing up.