Today, the world sees India
as a land of opportunity for business and investment. RBI head Raghuram
Rajan said in mid-September that while fellow BRICs have deep problems,
India appears to be an island of relative calm in an ocean of turmoil.
This scenario continues; as per recent government data, economic growth
reached 7.4% in the second quarter of the current financial year, riding
on a spike in manufacturing and a pickup in investment demand.
Globally positioning India as an
investment destination and improving India’s diplomatic and trade
relation, Prime Minister Narendra Modi’s foreign jaunts have helped
India attract more FDI. From the nations he visited during the financial
year 2014-15, India received FDI of USD 19.78 billion. Moreover,
foreign direct investment (FDI) in India increased by 27% in 2014-15 to
USD 30.93 billion.
In other fronts as well, it is time to retrospect on how 2015 was for the real estate sector, and to crystal-gaze into 2016.
Commercial Real Estate
India’s office space
absorption during 2015 stood at 35 million sq ft – the second-highest
figure in the country’s history after 2011. The demand for office space
in 2011 came from occupiers taking advantage of low rents after the
global financial crisis. This time, however, it was the result of
corporates implementing their growth plans.
While pan-India vacancy still stands at
16%, realistic vacancy actually stands around 8-9% – the total vacant
supply is not always relevant for corporate occupiers. This is because
most of them do not consider Grade-A buildings that are strata-sold or
located in areas with inherent disadvantages and connectivity issues, or
have been vacated from recent occupier exits and no longer match
Grade-A requirements.
Cities such as Pune, Bangalore,
Hyderabad and Chennai have a vacancy rate of just 5-10%, prompting the
need for fresh supply to meet growing demand. Developers have been
shying away from commercial projects because, though land and
construction costs have been rising, rents have not reached a point
where developers can get about 20% IRR. However, as rents climb faster,
developers will start constructing – at least in the good markets.
Rents rose across Indian cities in 2015.
The pace was faster in the secondary business districts (SBDs) and
certain peripheral business districts (PBDs) of tier-I cities than in
the established central business districts (CBDs). The micro-markets
seeing more leasing activity in different cities in 2015 will continue
to see action in 2016, while lesser-preferred locations will see a
higher vacancy rate. As and when supply dries up and vacancy drops
further, occupiers will start taking up spaces in these locations, as
well.
In 2015, office space demand was mainly
driven by IT/ ITeS, e-commerce, start-ups and large consulting firms.
Players in many other sectors like FMCG, BFSI (front office),
manufacturing, telecom and pharma did not come into the market –
however, this should happen in 2016 and 2017. Next year will also see
demand for built-to-suit (BTS) properties, especially from the larger IT
occupiers. While the absorption in 2015 is similar to 2011, it is
distributed across new and old buildings; previously, it was largely in
newly completed buildings.
Demand will remain consistent over most
of 2016, with occupiers showing a positive bias. Given the low supply
and continued demand for commercial spaces, corporate occupiers will
continue to firm up their expansion plans. While 2016 will bring
continued demand for leased spaces, quality supply will be lower. This
means that unmet demand will reflect in higher occupancy of Grade-B
office spaces.
After the opening up of real estate
sector to FDI, the profile of developers, as well as ownership patterns,
will start changing. This will lead to a drop of ownership requirements
by Indian developers and a rise in ownership by PE funds and MNC
developers.
Office Space: Supply & Demand
Industrial & Warehousing
2015 saw the wheels in
motion for the industrial / manufacturing sector to get seriously
rolling in 2016. Under the ‘Make in India’ programme, states can come up
with advanced policies, which will help them fuel their industrial
growth.
Maharashtra, Gujarat and Andhra Pradesh
have historically been front-runners in attracting industrial
investments. Under the ‘Make in India’ initiative, states like Punjab,
Haryana and Karnataka are also taking bold steps towards better
industrial policies. Online, time-bound approvals are expected to
further improve the ease of doing business in India.
The warehousing sector is reaching an
inflection point and will take a huge leap forward once the goods and
services tax (GST) is rolled out next year. Apart from GST, e-commerce
is expected to significantly drive the demand for warehouses in India in
the near future. With nearly 25% of all warehousing absorption being
driven by e-commerce players, it is currently the biggest demand driver
for the sector. This industry is expected to invest an additional USD
2-3 billion into warehousing over the next 2-3 years.
Indian warehousing is seeing a higher
supply of organised Grade-A and B warehouses than in the past. In 2015,
the cumulative warehousing supply (Grade-A and B) across eight Indian
cities stood at around 97 million sq ft, as against 79 million sq ft
last year. This supply is expected to reach 116 million sq ft in 2016.
With industrial corridors like Delhi-Mumbai industrial corridor (DMIC)
and the expansion and improvement of road network, things are indeed
looking up for the industrial and warehousing sectors.
Cumulative Grade-A & B Warehouse Space In Eight Cities
Hospitality
India’s hotel real estate sector
landscape is evolving from being largely development-driven to becoming
more transaction-driven. Early signs of improvement in hotel operating
performances seen in 2015 – following a six-year period of intense
economic downward pressures exacerbated by steady hotel supply increases
– have rendered the hotel real estate market ripe for acquisition and
consolidation.
2015 alone saw nine hotel transactions
(excluding partial equity stake buyouts or refinance) equal to the
combined number seen in the last two years. Most of these were in the
luxury and upscale hotel segments – a major change from previous years.
Another key highlight of year 2015 was the transaction of eight
operational hotels (nearly twice the number of 2012, the next-highest
year.)
The year 2015 stands out due to the
nature of deals recorded. The year 2016 is expected to carry on from the
momentum garnered in the year 2015 predicated on the U-shaped recovery
in the economy and the current state of the hotel sector.
Healthcare & Education
The education and healthcare sectors in
India are presently facing a huge shortfall of supply which is may soon
be met by various international and national players. This will boost
the growth of relevant real estate in the time to come. Growing and
emerging residential nodes will enable growth in the healthcare and
education sectors, with downstream investments likely come into both
sectors from domestic as well as international players.
The education industry, which crossed
USD 70 billion by 2015, will require an additional 16 million sq ft of
relevant real estate in the next four years. It is poised to see major
growth in the future, as India will have the world’s largest population
in the 18-24 age group and second-largest graduate talent pipeline
globally by the end of 2020.
2016 is likely to bring various new
transactions in the education space across the country, primarily
related to elementary and K12 schools, and technical institutes.
The healthcare sector is expected to
nearly double in value from the current USD 144 billion to USD 280
billion by 2020. More than 150 hospitals could start operations in the
next four years, and this will by itself account for about 22.5 million
square feet (i.e. 45,000-50,000 beds) of healthcare-related real estate.
Currently, the bed-to-population ratio in India is 0.9 beds per
thousand populations, which is way below the global standards of 4.0
beds per thousand population. India requires 600,000 to 700,000
additional beds over the next 5-6 years to meet the demand for
healthcare facilities, apart from improvement in quality of existing
beds. Given this demand for capital, the number of transactions in the
healthcare space is expected to witness an increase in near future.
Regulatory Framework
A lot of groundwork has been done with the central government’s initiatives:
- Once ‘Housing for All by 2022’, the Smart Cities mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), etc. begin to roll in earnest, we will see significantly heightened activity in infrastructure and related sectors.
- Norms for FDI in the real estate sector have been eased. The government has relaxed FDI norms in 15 sectors including real estate, defence, single-brand retail, construction development and civil aviation. Under these new rules, non-repatriable investments by NRIs as also PIOs will be treated as domestic investments and not be subject to foreign direct investment caps.
- In order to attract larger investments which are only possible through incorporated entities, the special dispensation of NRIs has now been also extended to companies, trusts and partnership firms which are incorporated outside India and owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.
- Licencing norms have been relaxed in states like Haryana, which will help release land for affordable housing. Currently, unavailability of land is the biggest challenge to affordable housing.
- The Indian Parliament is likely to pass the Real Estate (Regulation and Development) Bill soon. This will bring efficiency, transparency and accountability into the real estate sector, as will the introduction of new financing instruments that have immense potential to improve India’s transparency.
- Despite REITs opening up late last year, not a single REIT got listed in 2015. In the current real estate taxation environment, there are not enough attractive returns available retail investors. However, 2016 may see some REITs to get launched on the back of reduced interest rates and rise in rental income from office real estate.
Looking Forward
India is an underserved economy in terms
of real estate requirements. There is a wedge between demand and supply
of housing, largely as a result of information asymmetry. However, with
increased market transparency, this demand/supply mismatch can offer
immense opportunities for developers and investors alike.
The real estate industry is maturing.
Until 2014, it was unregulated, fragmented and highly inefficient.
Though 2016 will bring in regulation, it will remain fragmented and
moderately inefficient. We could see it become a well-regulated,
consolidated and moderately efficient industry by around 2020. Growth in
the Indian economy will definitely see favourable reflection in the
real estate sector, as well.
By: Anuj Puri, Chairman and Country Head at JLL India.
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