The Indian Real Estate Market

India Investments Vs. The Other BRIC Countries

Interest from international real estate investors in Indian real estate has been limited in 2012.  India has witnessed 6% q-o-q growth in direct commercial real estate in Q1 2012, as compared to China which has seen negative growth of -45%, however China performed better in Q2 2012 on the back of one mega deal. In Brazil, investment volumes seem to be reaching a more 'normalised', sustainable pace following the supercharged 2010-2011 period.

Broadly, India has seen roughly 18 Billion US$ being invested in RE over the past 7 years. With 3.4 Billion US$ of exits, Indian real estate performance has not seen exciting for the foreign investor with average multiple of 1.25. However, India remains an attractive investment opportunity and foreign investors are definitely still participating in situations that offer higher risk adjusted returns like buying stabilized leased assets and providing receivable-based 'mezz' financing against housing sales. Also, foreign investors are looking at putting capital behind successful investment managers and are many also directly investing in India on a selective basis.

The Challenges And Outlook For Indian Realty

The challenges that I see for Indian real estate, now and in the near future, are the expensiveness of liquidity for real estate, the lack of availability of serviced urban land, continuing procedural delays in approvals, the slow pace of infrastructural growth and the fact that the country still has relatively low transparency in real estate terms.

In terms of commercial real estate outlook, there has been a demand contraction of about 15% with reference to absorption in 2011. We expect an supply correction for 2013 and 2014, but supply for 2012 is by and large on track. The market will continue to be under stress for another four quarters, with vacancies going up, but rents are unlikely to fall further as they are already at the bottom.

In retail real estate, we are seeing a process of polarization - superior malls are with low vacancy and high rents, while inferior malls are failing to lease despite heavy rental discounts. Many new malls that are now completed or are under construction are superior, which is a definite sign of the market maturing.

The Indian residential property market is behaving like a swinging pendulum. Sale velocity has been rising and falling over the last two or three quarters, and now capital values are going up because of increased input costs. I can see a definite slowdown in new launches already, and this is likely to continue for the interim.

The Global Economy's Effect On The Indian Property Market

Of the three primary real estate sectors, commercial property is most closely linked with global economic dynamics. We are already seeing the impact of these dynamics in the reduced absorption of commercial spaces in India. It is taking longer to close deals. Multinational companies are increasingly cautious about committing because their home countries are not doing well, and even domestic companies are in wait-and-watch mode. Developers in India are under pressure, and this is giving scope to occupiers to squeeze them even harder despite the fact that rents are already at all-time lows.

In residential real estate, Mumbai and Delhi have emerged as chart-busters. In these cities, residential rates have already crossed and surpassed the peak levels. However, the inherent demand for residential properties in these cities is very high and supply is constrained. There have been fewer launches of late, and developers' input costs have gone up, reducing their profit margins. It is not likely that residential prices in Mumbai and Delhi will fall in the foreseeable future. On a more general note, there is a possibility in residential corrections in some cities, depending on the level of stress project developers are under at a company level, rather than at a project level. When it comes to projects, there is a likelihood of price rationalizations in large townships in the extended suburbs, because absorption of residential spaces takes much longer in such projects.

Retail real estate demand is only indirectly related to the global economic fluctuations. Retail health derives from consumer demand, which again is covered by domestic factors such as high inflation and reduced agricultural performance. We will know more by the end of the year, which is the time when salaries are usually revised. If salaries are not revised upwards or remain stagnant, there will be a reduction in consumption power, which will

Is There A Bubble?

A bubble implies that there is a lot of absorption and therefore a lot of development happening, and that prices are rising in tandem up to a point where nobody is buying anymore. That is not the case in India. Supply on the market has already been constrained because of various factors such as low absorption, higher costs of development and borrowing, and so on. I do not see a bubble happening in Indian residential real estate. In retail and commercial real estate, there are price corrections at the level of projects, depending on the amount of pain the developer is experiencing.

This is not the same as a city-wide bubble. Leasing of commercial projects will take much longer and demand has contracted by 15%, and it could go down by another 5% by end of this year. However, the market has already responded to the current dynamics with fewer launches. Commercial rates will not go up, and neither will occupancy, so there will be lower rates but this is not representative of a bubble.

Jones Lang LaSalle India's Expansion Plans

We are currently very focused on Ahmedabad. Gujarat is one of the most progressive states, with proactive governance, conducive business environment, top-class infrastructure and uninterrupted power. It is also the only state to have an industrial gas supply network, a strong NRI community investing back in their home state, an exponentially growing manufacturing sector - and a dream of creating a financial centre on par with Mumbai.

Real Estate Concerns Of Our Corporate Clients

- One concern is about ageing portfolios - occupiers who had taken office spaces 7-9 years back are evaluating their portfolios and are concerned about the building infrastructure and health and safety of their employees, and also want to improve operational efficiencies. Our Development Advisory and Facilities Management teams are offering such clients various auditing services and are actively advising them on the kind or retrofits they should undertake.

- Also, many of our clients - especially IT/ITEs companies - want to look at reducing costs by moving to less expensive tier II and III locations. Some of their reasons are the availability of local talent and lower attrition rates. However, they are concerned about the availability of quality real estate options and reliable vendors and utilities in some of these cities. We have undertaken various location advisory and cost arbitrage studies to advise our clients on the next upcoming locations, as well as the real cost benefits that they can expect when moving to these cities.

- Many of our clients are now evaluating the Lease vs. Buy conundrum. Many large MNC corporates who typically leased their offices are seriously studying the benefits of owning real estate in the wake of the proposed lease accounting changes. Our clients want to understand various challenges and risks that are involved in constructing and owning their own offices in India. We have been doing Lease vs. Buy studies for them so that they can understand the economics of both these options, and also to bring out the impact that each option will have on their balance sheets and competitive positions.

- A number of our Indian clients are asking for advice on alternative workplace strategies. They are concerned about the long commuting hours and the increasing operating costs. They want to reduce operating costs and improve operational efficiencies. We have already begun work on undertaking client-specific studies, giving recommendations and helping them to implement these changes to bring out the desired results.

- Finally, there is now considerable demand for 'Mark to Market' analyses. Large occupiers having multiple facilities in different cities want to compare their rental outflows with prevailing market rents.  These clients want to understand how they should time their renewals and consolidations, keeping in view the future rental outlook. We are undertaking detailed portfolio evaluation exercises to identify opportunities where our clients can make substantial savings by renegotiating, consolidating or relocating to more cost-effective locations.

Courtesy : moneycontrol.com

Real Estate in India

The Indian real estate sector is being recognised as an infrastructure service, helping in the economic growth of the country, according to industry experts.

As per a report released by the McKinsey Global Institute (MGI)–India's urban awakening: Building inclusive cities, sustaining economic growth–on April 2010, the country's urban population will soar to 590 million by 2030, from 340 million in 2008. India's cities could generate 70 percent of the net new jobs created by 2030, produce more than 70 percent of the country's gross domestic product (GDP), and stimulate a near four-fold increase in per capita income. It also says that India needs to invest US$ 1.2 trillion over next 20 years to modernise urban infrastructure and keep pace with the growing urbanisation.

Further, growth prospects and price stability of smaller cities are attracting large real-estate developers in such cities in the recent past, according to a report titled 'Real(i)ty Next: Beyond the Top 10 Cities of India', released by Crisil Research. The report estimates that the sale of new residential apartments in 10 such smaller cities at around US$ 4 billion in 2012.

The Government of India’s recent decision to allow 51 per cent FDI in multi-brand retail is also expected to benefit the real estate business in the country, in terms of boosting development of new shopping malls. In fact, India is named among top 20 destinations in the world with the strongest retail real estate momentum, according to international property consultant Jones Lang LaSalle.

SECTOR FACTS

• FDI flows into construction development (including townships, housing, built-up infrastructure) in April-June 2012-13 stood at US$ 348 million, according to the Department of Industrial Policy and Promotion (DIPP)
• Construction development sector attracted a cumulative FDI worth US$ 21.1 billion from April 2000 to June 2012

Investment Opportunities

Non-resident Indians (NRIs) and foreign citizens who are Persons of Indian Origin (PIO) are allowed to purchase immoveable property in India. Residential property prices have stabilised now and are deemed attractive for the NRI home buyer. Industry experts feel that with attractive pricing and innovation in construction technology and variety of designs, NRIs are taking a fresh look at India as a unique market in which they can invest.

NRIs are looking forward to investing in real estate in India with the dollar appreciating in value compared to the rupee in the recent times. "Generally, NRIs are looking at this period as an extremely advantageous one for realty investments. The Government has been making proactive policy changes clearly aimed at routing more NRI investments into India," says Om Ahuja, CEO - Residential Services, Jones Lang LaSalle India.

Meanwhile, Indian realtors participated in an India Property show in Singapore. The show was organised to attract Indian diaspora living in Singapore to invest into India’s booming real estate market. “The appreciation of the Singapore dollar, the Comprehensive Economic Cooperation Agreement and the RBI’s liberalised policies are all progressive steps for expats, NRIs and Singaporeans to invest in India’s booming real estate market. The reputation of the realtors and the variety of properties available make it a reliable and convenient investment opportunity for the Indian expats and Singaporeans alike,” said Mr R. Dhinakaran, nominated Member of Parliament and vice-president, Institute of Certified Public Accountants of Singapore.

Investment Policy Updates

The Government has proposed one per cent TDS (tax deduction at source) on transfer of immovable property if the sale value exceeds Rs 50 lakh in urban centres and Rs 20 lakh in other areas in the Union Budget 2012-13.

The Reserve Bank of India (RBI) has granted permission to foreign citizens of Indian origin to purchase property in India for residential or commercial purposes. The purchase consideration should be met either out of inward remittances in foreign exchange through normal banking channels or out of funds from NRE/FCNR accounts maintained with a bank in India.

According to the latest reforms,

• FDI up to 100 per cent under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) is allowed subject to the following guidelines (also for investment by NRIs)
• The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/ Municipal/ Local Body concerned
• The investor/ investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/ bye-laws/ regulations of the State Government/ Municipal/ Local Body concerned
• The State Government/ Municipal/ Local Body concerned, which approves the building/ development plans, would monitor compliance of the above conditions by the developer

Courtesy : oifc.in

Construction and Real Estate Sector

Next to Agriculture, Real Estate is the second largest employer in the economy. It comprises of four sub-sectors – housing, retail, hospitality, and commercial. While housing contributes to five-six percent of the country’s GDP, the remaining three sub-sectors are also growing at a rapid pace, meeting the increase in infrastructural needs.

Responsible for 7-8 percent of global cement production, India is the second largest cement market in the world, and also an exporter to 30 countries. According to the Cement Manufacturers’ Association (CMA), there are 39 large cement plants and 365 mini and white cement plants in the country.

Overview

With a market size of USD 66.8bn, the Real Estate sector contributes around 5 percent to the nation’s GDP. While the market is growing, there remains a housing shortage across both urban and rural areas, estimated to be 20.5 million and 26 million respectively. This demand for residential space is projected to grow sharply at a CAGR of 19 percent in 2010-2014. Currently, there are few big players like DLF and Unitech that drive this segment.

Commercial space demand is arising from metro cities like Delhi-NCR, Mumbai and Bengaluru, and will see an upward trend at a CAGR of 7 percent between 2010 and 2014. Few large players dominate the market and hold pan-India presence. However, the overall business in this domain is witnessing a shift from sales to lease and maintenance.

Though retail space accounts for a small portion of the overall real estate market and organised retailers are few, increasing collaborations between international retail brands and Indian partners is likely to promote a strong growth in the retail space.

Hospitality market comprises hotels, service apartments and convention centres. NCR and Mumbai remain the biggest hospitality markets in India.

The cement industry in India is divided into five geographical segments, wherein the North and South regions are the leading suppliers of cement. The East, West and Central regions face deficit of cement, thereby relying on purchases from the North and South. Leading players in this sector (by market share) are Shree Chem, Ultratech, Ambuja, Binani, ACC, India Cem, Dalmia Cem, Madras Cem, Lafarge, and OCL India.

Factors that will drive growth in this sector

• Robust economic growth is driving the demand for commercial property. Urbanisation and growing household income is boosting demand for residential real estate.
• Hospitality space is gaining from increased flow of foreign tourists to the country (CAGR of 6.6 percent during 2005-10).
• FDI in real estate and construction is on an uptrend, accounting for 22 percent of total FDI. 110 deals were closed in the sector between 2001 – mid 2011.
• Housing segment growth is leading to higher demand for cement for homebuilding.
• Government’s 12th Five Year Plan focuses on increasing infrastructure (upgraded airports, ports, railway expansion, etc.) to drive construction activity.
• Rise in commercial and retail spaces, along with hotels in near future, will account for increased demand for cement.

Government initiatives

Introduction of few policies by the Government is allowing the growth of the real estate and construction sector:

• Housing finances are becoming feasible with the housing loan limit being raised to US $52080 for priority sector lending.
• US$ 625 million have been allocated for the Rural Housing Fund to provide homes to economically weaker sections.
• FDI up to 100 per cent is allowed with government permission for developing townships and settlements. FDI up to 100 per cent is also allowed in hotel and tourism sector through automatic route.

Demand for professionals

CMA predicts that cement production of one million tonnes will generate downstream employment for 50,000 people. According to the 'Real Estate and Construction Professionals in India by 2020' study by Royal Institute of Chartered Surveyors (RICS) in November 2011, there is a demand-supply gap in the order of 82-86 percent in the number of professionals and the skill sets for the core, namely civil engineering, architecture and planning. The study indicates a supply-demand gap of 44 million core professionals by 2020.

Courtesy - shine.com