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Facilities management is the next big thing in real estate space

>> Friday, 9 September 2011

 Mumbai/Bangalore: When Jasmer Puri started his company 16 years ago, he used to shy away from telling his friends about his business. Having built Dusters Hospitality Services Pvt. Ltd into a Rs100 crore facilities management services firm, Puri no longer has reason to be embarrassed.

Facilities management refers to the maintenance and care of commercial or institutional buildings such as hotels, resorts, schools, hospitals or office complexes. The services include maintenance of electric fittings such as air conditioners and lighting systems, plumbing, cleaning, housekeeping and security.

With overseas companies increasing their presence in India, the real estate sector undergoing a revival and a growing emphasis on urban development and modernization of office spaces, the business is set for rapid growth, making it attractive for investors.

India’s facilities management market is valued at an annual $3.3 billion (Rs15,411 crore) and is expected to grow at a yearly rate of 25-30% over the next three-four years, according to consulting firm Netscribes (India) Pvt. Ltd.

“It is the biggest growth business in real estate spectrum in years to come,” says Anurag Mathur, managing director of Cushman and Wakefield India Pvt. Ltd, a commercial real estate services firm.

Dusters Hospitality Services counts the Taj and Marriott hotel chains, Four Seasons Hotel and JPMorganChase and Co. among its clients and has a presence in 15 Indian cities. Last month, the firm received Rs35 crore in funding from private equity firm TVS Capital Funds Ltd.

Other investments in this space include India Equity Partners and Beacon India Private Equity Fund’s investment of $33 million in A2Z Maintenance and Engineering Services Pvt. Ltd in October.

“As the property market grows, it will be difficult for the in-house management to handle FMS (facilities management services),” says Naushad Panjwani, executive director, facilities management, and project management, Knight Frank India Pvt. Ltd.

Such activities as housekeeping and maintenance services would be increasingly outsourced to service providers that are able to offer economies of scale and a cost advantage. FMS firms also deploy their own machines and equipment, ruling out the need for a client to buy anything, says Hanmant R. Gaikwad, founder of BVG India Ltd, an FMS firm.

“The advantage of outsourcing the FMS to these organizations is that they can service my needs all the time and I don’t need to worry about replacing people when they are on annual leave or they quit,” says Ranjit Deval, manager of administration at the Pfizer India Ltd office in Mumbai, which outsources its FMS to Knight Frank.

BVG, which received Rs40 crore from the Kotak Private Equity Group (KPEG) in February 2008, handles the facilities management for Rashtrapati Bhavan, Tarapore nuclear power plant and Hindustan Unilever Ltd.

“We were looking at infrastructure-services-related firms as a play and we clearly saw an opportunity in who was going to maintain all these places. We started looking at all the players in the FMS space and zeroed in on BVG,” says Nitin Deshmukh, chief executive, KPEG.

To be sure, FMS firms have no shortage of competition in a sector where entry barriers are low. Around 1,000 firms are competing for a share of the market in India, according to Netscribes. Local service providers often do not comply with statutory regulations, giving them a cost advantage over the organized sector, according to the consulting firm.

Meanwhile, realty firms are beginning to see FMS as a part of their main business. Anuradha Gandhi, business head, Property Solutions India Pvt. Ltd, the FMS business division of real estate firm Kalpataru Group, says, FMS is a natural extension of the core business of property development.

“It adds value and brings great edge to a company. If a property is not maintained well, its value goes down on its own,” says Gandhi.The real estate sector has underperformed the Sensex by 16% in the past one month on concerns of the Reserve Bank of India’s (RBI) hawkish stance towards the sector and likely increases in mortgage rates. Our analysis of Mumbai’s apartment registrations data reveals that demand remains strong despite 5-30% rise in prices in the past five months. Thus, while prices in many pockets in the city are at their lifetime highs, registrations in October were the highest in almost two years. This leads us to believe that residential demand in metros has strong tailwinds and is unlikely to be affected materially by a small increase in mortgage rates. Our top picks are DLF Ltd and Housing Development and Infrastructure Ltd.

RBI increased the risk weightage on commercial real estate lending by 100 basis points (bps), which is likely to result in a 50-100bps increase in borrowing costs. Mortgage rates could also come under pressure, owing to inflation-related concerns. Headwinds of higher prices and mortgage rates are likely to weigh on real estate demand.

However, October was the strongest month in almost two years: Apartment registrations turned in strong numbers for the fourth straight month in October. Registrations during July-October were the highest since January-April 2007.

We believe a 50bps increase in mortgage rates will have marginal impact on affordability. This, in our opinion, is unlikely to have a meaningful impact on demand. We prefer developers with city-centre-oriented projects in Mumbai and the National Capital Region—the two metros that have recorded the strongest revival in demand.



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