Cushman & Wakefield: Multinational Firms Turn to India, China for Office Needs

An increasing number of multinational companies are buying office space in India and China rather than leasing, according to a new Cushman & Wakefield report.

Taking the opportunity to better control costs and take advantage of tax breaks not available in the United States, an increasing number of multinational companies are buying office space in India and China rather than leasing, according to a new Cushman & Wakefield report.

The Global Real Estate Consultancy report noted that pharmaceutical companies along with firms in the banking, financial services and insurance sectors are among those multinational corporations deciding to purchase office properties in Asian cities including Shanghai and Mumbai.

Sigrid Zialcita

Sigrid Zialcita

“Companies that have well-established operations in China and India are increasingly confident of their future in the country and are now tailoring their real estate requirements with a longer term view, creating cost efficiencies due to their strong commitment which is resulting in some significant economies of scale,” Sigrid Zialcita, managing director of research for Asia-Pacific, Cushman & Wakefield, said in a news release.

“Specific sectors such as pharmaceuticals and IT may often consolidate their research and development divisions with their front-end operations in a single location,” she added. “Such strategies enable occupiers to procure real estate that is cost effective but also reduces the risk of significant rental hikes in the future.”

Michael Stacy, head of commercial, Shanghai, said in the release that several pharmaceutical companies are doing that in Shanghai.

Michael Stacy

Michael Stacy

“These facilities are investment and time-intensive,” Stacy said. “In order to better control the future costs, multinational companies are increasingly examining the option of purchasing versus leasing their facilities, especially if the business is established and stable.”

Stacy said several companies such as Pfizer Hai Zheng, the Chinese partner of Pfizer, and Novartis, have recently bought space in business parks outside the CBDs, including Caohejing Hi-Tech Park, Fenglin Life Sciences Park and Zhangjiang Hi-Tech Park. He noted that multinational companies can save up to 30 percent in some cases by buying space at these business parks because space is limited in the CBDs.

Space is limited and expensive in Hong Kong and Singapore so fewer companies are opting to buy in those cities, according to the report. However, there have been some big multinational deals. Citibank recently paid $700 million for a 21-story, Class A office tower in Hong Kong, the Cushman & Wakefield report stated. Last year, Canadian life insurance company Manulife acquired an office property in Hong Kong for $580 million.

Multinational companies have also been active in the office market in India, where Cushman & Wakefield noted there was $430 million in office transactions in the past two years. Companies that have bought properties in India include Glaxo SmithKline Pharma, Sanofi Aventis, Adobe and Amazon.

Sanjay Dutt

Sanjay Dutt

“With the new pro-business government there is an expected positive sentiment in the market and this would be further reflected in the buying pattern of foreign companies,” Sanjay Dutt, executive managing director, South Asia, for Cushman & Wakefield,” said in the news release.

Cushman & Wakefield projects there will be future growth of office properties in Vietnam and the Philippines as costs rise in India and China.

“In both of these countries, the economic cycle is nascent compared to India and poses great opportunity for global giants,” the report stated.

U.S. corporate taxes are one reason many multinational companies are investing in properties overseas.

“Another factor compelling U.S.-based companies to switch from their real estate ‘leasing strategy’ to a ‘buying strategy’ is that corporate profits earned outside the U.S. are not subject to federal taxes unless they are brought back home,” Zialcita said. “These companies are re-deploying profits earned back in the emerging markets into their international operations.”

The issue has recently become a hot button topic in the U.S. as several large corporations have sought to move their legal addresses outside the U.S. to escape the high corporate taxes. Burger King Worldwide, which is buying Tim Horton’s Inc. of Canada for $11.4 billion, is the most recent multinational corporation to take advantage of this tax loophole known as inversion. The U.S.-based fast food giant would move its headquarters to Canada after the deal closes.

Last month, President Barack Obama spoke out against this growing trend and said he has asked the U.S. Treasury Department to see if it can change its interpretation of the tax laws to slow the inversion problem because Congress has been deadlocked on the issue.