Pharmaceutical companies are slowly edging out banks to occupy landmark buildings in the country's major financial hubs as banking operations are undergoing a change, wherein front office operations do not require much of expansion.
Pharmaceutical companies are slowly edging out banks to occupy landmark buildings in the country’s major financial hubs as banking operations are undergoing a change, wherein front office operations do not require much of expansion. Over the last couple of years, pharma and healthcare companies have paid top dollars to move into Grade A office buildings. The shift started in 2015, when the US-based company, Abbott Laboratories bought its approximately 500,000 sq ft office at Bandra Kurla Complex from Godrej Properties. Since then a slew of transactions ensued. For instance, Israeli firm,Teva Pharma signed up 150,000 sq ft spread across five floors in Oberoi Realty’s Commerz II building in Goregaon, Mumbai.
In yet another transaction, Swiss firm, Novartis is believed to be in talks to move into a 1,00,000 sq ft office space at BKC. Smaller companies such as Sun Pharma, Galpha Laboratories and Southside Healthcare Solutions are among those that have moved into new offices in the last one year.
“About 30% transactions are consolidations, which means it is resulting from movement and not entirely fresh demand. While banks have already gone through the consolidation phase a few years back, pharmaceuticals and healthcare are in nascent stage in comparison,” Sanjay Dutt, CEO of Ascendus, India said.
Experts agree pointing that consolidation immediately results in cost saving by an estimated 15%. “Large pharma companies have deep pockets and the necessary reserves and surpluses to invest in land for research and development and also purchase front end offices for their headquarters,” said Ravi Ahuja, executive director at Colliers, India. In fact, repatriation will make these companies liable to a high tax so real estate investment makes sense, especially when companies want to have a long term business plan, Ahuja explained.
The demand from pharma and healthcare companies has followed a series of acquisitions. However, banking and financial services (BFSI) continues to be a prominent office occupier, contributing approximately 11-12% of the total annual office absorption, according to a report published by Colliers India. This is because while core banking might not be growing, financial services such as non- banking financial institutions (NBFCs), insurance companies etc still are, explained Dutt.
According to a report although banking and financial services account for a big share in Mumbai leasing, a major shift was observed this year. From accounting for 5% of the city’s total absorption three years back, the share now is 12%. In both cases, absorption in Mumbai totaled 3 million sq ft.
Pharmaceutical companies might have absorbed the gap that banks have left to the extent of 15%, Ahuja added. The main market that has benefited from pharmaceutical and healthcare demand is Mumbai followed by Bangalore and the national capital region (NCR) of Delhi. Not only has it resulted in large sized transactions to house front-end operations but also land purchases to set up research and development facilities in more cost efficient, suburban areas like Thane Belapur Road, Mahape and Navi Mumbai. Of course, since banks are also expanding their back-end operations, it is a more level playing field where demand for suburban corridors are concerned.