Realty market’s journey from crisis to strength
Attractively-priced and well-located mid and upper-mid category residential projects will continue to lure investors in 2015
The financial crisis of 2008-09 played an important role in enhancing t he maturity of all stakeholders in the Indian real estate space. During the crisis, when poorly designed and planned projects failed, investors and developers realised the importance of adhering to basic market principles and fundamentals that help sustain growth. Today, investors are using metrics such as financial leverage position, transparency level and corporate governance to evaluate developer performance. In that sense, I must say that the crisis was an absolutely necessary evil.
A recent study done by JLL India Research ranks office and residential developers on the basis of individual project performances. This exhaustive exercise, in which the leading 20 developers across major cities were considered and their combined 1,900 projects were evaluated, revealed many interesting facts.
For the first time, developers were comprehensively evaluated for their market performance using parameters such as project sales velocity, CV appreciation and premium charged over prevailing sub- market CVs/rent. Similarly, in the office space, parameters such as rental premium and vacancy were used to differentiate the successful developers from the not-sosuccessful ones. The exercise helped us look at quantitative differentiators between the good and the average, and these are factors which typically match with the wish list of every home buyer and office occupier.
Impact on fund houses
Over the last couple of years, real estate developers have garnered an estimated US$6.4 billion worth of debt ( bank and PE debts combined as of February 2015), as a result of which institutional investors became cautious i n f unding realty projects. Even the RBI had issued a directive to all scheduled banks in India around that time to reduce exposure to real estate, considered to be a high risk sector then. As a consequence, many projects had to either suffer from lack of funds or high rate of borrowing, typically upwards of 18% to 20%.
In recent quarters, however, the property market is again beginning to look good as hopes of economic recovery are rising. Consider the office market scenario, which has begun to recover from a long hiatus as compared to the residential sector that recovered rather quickly. During 2014, close to 30 million sq ft of Grade-A office space was absorbed across the top seven cities in India, growing by over 11% year-on-year. Grade-B offices also saw absorption improving considerably in 2014 from levels witnessed last year.
It is during these times of excitement that learnings from the past can be put to best use. In response to slowing demand for office space since 2012, Indian developers had reduced office supply considerably in 2014. Improving occupancy levels and business sentiment provide developers the opportunity to revive their investments and regain lost momentum.
Good developers would typically seek funding to expand market share, purchase new assets, or acquire non-performing projects of other developers. It is important for investors to ascertain the basic premise on which the borrowing option is being explored by the developer.
Current market situation
With the Indian economy reviving post the general elections of May 2014, the real estate sector is warming up to the possibility of a new investment cycle. On the other hand, barring the US, the global economy continues