By Ramesh Nair, CEO & Country Head, JLL India
These trends will shape – or reshape – the Indian real estate sector in 2017 and beyond:
Global capital flow into Indian real estate will increase further
India is ranked fourth in developing Asia for FDI inflows as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. That is endorsement at the highest levels – and real estate saw equity investment on a very visible return journey to India last year. Indian real estate has attracted $32 billion in private equity so far.The global capital flow into Indian real estate in 2016 stood at $5.7 billion.
Though the historic high of 2007 (in terms of total PE inflows) was not breached, last year proved to be the second-best year so far. Despite Brexit and uncertainty around the new US President’s outsourcing and visa-related policies, private equity activity also looks healthy in 2017 – thanks to a strengthening and modernising economy, and the growing reputation of India as an attractive investment destination.
India’s Tier-I cities moved up to the 36th rank in JLL’s 2016 bi-annual Global Real Estate Transparency Index. The catalysing factors for this were improvements in structural reforms and the more liberalised foreign direct investment (FDI) regime. Increased transparency brings higher investments into such real estate markets.
Throughout 2016, the number of new residential project launches was lower than units sold. With all states staring at the approaching deadline to implement their versions of the Real Estate Regulation & Development Act (RERA), most of them will definitely fall in line. This landmark law will enforce hitherto unprecedented transparency and accountability requirements for developers into the system, and do a lot to increase consumer confidence. Consumer activism, which has already been making news in recent times, will increase in distressed ongoing projects.
And it’s not only RERA that the Indian real estate sector anticipates with bated breath.
Currently, the residential property market is dominated by end-users – speculative investors are making a beeline out of real estate as an investment category. Residential demand is expected to pick up only towards the end of 2017 – but the recovery will be sustainable and based on much sounder market fundamentals than transient sentiment.
Co-working spaces are popping up across Indian metros as well as Tier-II cities, providing start-ups with flexible working options at affordable rents. At last count, there were more than 100 operators in this space across India, though there is still very limited supply of co-working spaces available.
However, this segment is slowly but surely moving into boom mode across India, given the many advantages that such spaces offer:
*Employee motivation and retention
*Firms focused on agility who house their innovation teams in co-working spaces can induce a quicker learning curve to integrate them into the entrepreneurial ecosystem
*The perfect option for companies who need their client servicing teams close to their respective client sites in locations with low office vacancy
Certain co-working operators will prefer leasing out parts of or the entire areas of their co-working office spaces ‘anchor tenant’ corporates. In other words, co-working operators and corporates will move into a ‘hybrid’ sort of space and increasingly rely on each other.
Affordable housing in India is finally set to get the much-coveted infrastructure status. One crore houses are to be built in rural India by 2019, and this vital segment will now see cheaper sources of finance – including external commercial borrowings (ECBs). Re-financing of housing loans by National Housing Banks (NHBs) can give a further boost to the sector.
Office sector transformation: From REIT to complete
The first REIT listing is expected within the next few months, and prominent private equity funds such as Blackstone will likely be the first movers. REITs will attract institutional and smaller investors alike because of their inherent nature to provide regular dividends at relatively low risk.
a. Indian REITs will prefer to invest in commercial space developments – specifically the highest quality or Grade-A properties – because of the higher rental yields in this asset class; and
b. Only 20% of an Indian REIT’s monies can be invested in development, which is the riskiest aspect. The remaining 80% of a REIT’s assets must be invested in income-producing property.
The REIT potential in India is huge, with around 229 million sq. ft. of office space currently being REIT-compliant. Even if 50% of this space is listed in the next few years, we are looking at a total REIT listing worth $18.5 billion. Moreover, India’s stock of Grade A commercial assets is increasing, with REITs acting as a sure-fire growth catalyst.
Slowing sales and lack of financial prudence among several developers is leading to a fairly obvious conclusion – consolidation. The overcrowded real estate sector is going to become a lot leaner and meaner, with consolidation happening by ways of joint developments and joint ventures between landowners and/or small developers with bigger, better-organised players, smaller developers being bought out by larger players,and struggling developers cashing in their land banks by selling them to players with stronger balance sheets and appetite for growth.
The pace at which this happens will depend on how much equity gets infused into the sector by the larger PE investors, and the strategy that foreign and domestic developers adopt. Some foreign developers have already entered the country, setting up base and obviously playing for keeps.