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Serious difference of opinions between global financial behemoth Goldman Sachs and the Kalyani Group, a real estate developer based here, threatens to delay one of the largest leasing transactions in India.
Goldman had reached an agreement with Kalyani Tech Park 18 months earlier to lease as much as 1.6 million sq ft of office space in this city. The capacity is about 10,000 employees. Goldman currently employs around 5,000 employees across various locations in Bangalore and had planned to move into an integrated campus, spread over 14 acres at Varthur here, sometime during 2017.
According to information available, Goldman Sachs had agreed to a lease rental of around Rs 60 crore a year for one million sq ft, making this one of the largest transactions in the segment. However, it appears, Kalyani Developers is understood to have told bankers that the transaction was going slow "due to some delay on the client (Goldman Sachs) side."
Goldman acknowledged differences in developing the campus but hoped it would be resolved. "Goldman Sachs continues to anticipate and have every expectation that our partners for this development will resolve and deliver on all agreements. Ultimately, the firm's strategy and commitment for the build-out of our continuously growing Bangalore office remains unchanged," it said in response to a query from Business Standard. Kalyani Developers could not be reached for a comment.
According to analysts in the know, the differences are due to Goldman insisting on global standards for its campus and "they will not budge from those norms".
Background
This setback for India's largest real estate leasing deal comes after the office space demand slowed in the first quarter of 2014, with around 6.3 mn sq ft getting absorbed across the leading cities, as against 6.6 mn sq ft in the same quarter of 2013, a drop of about five per cent. According to real estate advisory firm CBRE, the commercial real estate market in India saw sluggish transaction activity and a low level of new completions during the first quarter. "Leading cities across the country continued to see heightened caution from corporate occupiers, resulting in subdued leasing activity during the first three months of the year," the report said.
Analysts noted another significant trend, particularly in Bangalore. This is the emergence of a new corporate user-investor, buying office space. "Key transactions during the first half of 2014 seem to have been the trendsetters for what looks like an emerging practice in the city's corporate real estate market. This revival of a practice that was previously witnessed prior to the economic downturn in 2008-09 may be attributed to a number of reasons, including the utilisation of surplus cash by multinational companies reducing opex and trading capex, among other factors. The opportunity for corporate end-users to reduce occupancy costs and operational issues by buying space makes for a persuasive case. Cash flow studies also reveal that buying office property often proves to be a more prudent option in the long term over leasing," Anshuman Magazine, chairman, CBRE South Asia, wrote in a recent report.
On Bangalore being the centre of such purchasing practices, the reason is said to be more rational commercial property values and abundant quality investment-grade office space-at a fraction of the cost of the other major metropolitan cities of Mumbai and the National Capital Region. This has seen the city emerging as a budget-friendly option for corporate end-users purchasing their own offices.
FACE-OFF
- 1.6 million sq ft Office space for which Goldman and Kalyani Tech Park had signed a deal 18 months ago
- 10,000 No. of employees involved in the deal
- Rs 60 crore a year for one million sq ft: Lease rental that Goldman Sachs had agreed to
