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Thursday, August 16, 2007

The cost spiral

When DLF buys out DCM Shriram Consolidated (DSCL) Mill land in Delhi for over Rs 16 b ($400 m) on Thursday, it will be the largest private sector land deal in the country and will give DLF access to about 38 acres of prime land, at a distance of just about 4-5 km from the capital’s central business district, Connaught Place.
Interestingly, the company had bought about 25 acres of land next to the DSCL plot in 2005. DLF already has an in-principle approval to develop an IT SEZ on this land. Also, this will probably be the first integrated township of its kind, combining an IT SEZ with a massive housing supply for those working in the SEZ.

That brings us to the question of affordability.

The deal puts a cost of Rs.9,640 per sq.ft. This being an IT SEZ, with ample luxurious amenities, parking and open spaces, the cost of construction could be easily another 40%. That brings the total cost of ownership to Rs.13,500 per sq.ft. For a modest 1,000 sq.ft. apartment, the cost will be upwards of Rs.13.4 m. Now if a software engineer has to live and work here, how much will be his cost of ownership plus living in the lap of such luxury? If he has to afford that, how much will be his cost to the company?

Did you say labor arbitrage…? Talk of our IT vendors having to compete with IBM, Accenture, EDS, HP and the like… San Francisco pales in comparison.

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