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

HT Estates - - HTESTATES - Anuj Puri

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

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