Should or should not Indian real estate companies build special economic zones (SEZ)?

(This entry was originally posted in April 2009 and it is based on the information and background of that time.)

India’s reality sector is now badly hit by the economic recession. Due to decline in funding and low demand, top realty companies are shutting down their projects. Pre-recession, India was an attractive outsourcing hub. Many of the top American IT companies had their offices in India and more were looking for spaces. Over the years, the prospering IT sector saw the creation of many IT & ITES SEZs. Now, economic melt down and Obama’s anti-outsourcing activities discouraged both the developers and clients.

Realtors are surrendering SEZs:

Recently, DLF Building India, one of the top Indian realtors, requested the Indian commerce ministry to derecognize five of its nine IT & ITES SEZs. After the news came out, National Stock Exchange officials, on April 16, 2009, asked for more information. On the other hand, commerce ministry officials said that they received an application from DLF with a request to surrender five of its nine SEZs. DLF officials did not comment on the matter either.

The five SEZs also include DLF’s Rs.85 billion SEZ in Gandhinagar, Gujarat. This is the second SEZ Gujarat lost. The MOU for the SEZ was signed during the Vibrant Gujarat Global Investors’ IT Summit (VGGIIT) in 2006. The SEZ was notified in 2008 and it was supposed to be completed in 18 months. Had it been completed, it would have created jobs for 30,000 people.

Parsvnath Developers Ltd. another top Indian real estate company has put on hold its plan to develop 12 SEZs.

Ray of hope still exists:

However, not all is bad. There is still demand for SEZs. President Barack Obama offered tax incentives to those companies that would keep their jobs in USA. Still, India remains a major outsourcing destination due to the major cost difference. According to the latest statistics of the commerce ministry, there are 274 notified SEZs eligible for tax benefits under the SEZ act of 2005. Due to fund shortage and decrease in the number of potential clients, these projects are now being put on hold.

Tapan Sangal, Senior Manager, Pricewaterhouse Coopers, said that in the past two weeks, he had received many queries on IT related SEZs and engineering zones. Investors are still looking for projects that are potential and many real estate experts also observed some immediate demand for SEZ in the National Capital Region in the past few days. Rajiv Chugh, partner, Ernst and Young, said that they see a mismatch between demand and supply especially in Northern India. There is a large pool of talented IT workers which is why several foreign companies are looking forward to set up their operations in the region.

High demand in Chennai and Mumbai:

Chennai has 5.8 million SEZ space available and out of them only 0.6 million is vacant. As many projects are kept on hold many developers who have completed their projects will be able to attract customers.

In Mumbai, the peripheral and suburban areas have become very attractive for setting up IT & ITES SEZs for their lower price. Anshuman Magazine, Chairman and Managing Director, CB Richard Ellis, South Asia branch, said that a quarterly report of the company showed that central areas of Mumbai business districts have become less attractive due to the global economic recession but demands of lands in peripheral areas of Mumbai are becoming higher as they are low priced. Building SEZs in these areas will further open up opportuities for retail and residences.

Bottomline:

In the wake of the global economic melt down IT companies are looking to find out cost effective business locations.

Related articles:

Times of India

The Economic Times

Business Standard

DNA India