Build­ing blocks: The In­dian real es­tate sec­tor is wit­ness­ing an eased in­vestor en­vi­ron­ment in 2017

HT Estates - - FRONT PAGE - An­shu­man Mag­a­zine feed­back@hin­dus­tan­

NEW DELHI: In 2016, In­dia’s real es­tate in­dus­try wit­nessed en­hanced level of in­vest­ment ac­tiv­ity con­cen­trated in the of­fice, res­i­den­tial and re­tail sec­tors. At the same time, in­vestors showed in­ter­est in the ware­hous­ing and hos­pi­tal­ity sec­tors as well. The past year was also par­tic­u­larly pos­i­tive from an in­vest­ment reg­u­la­tory per­spec­tive, with ini­tia­tives such as RERA, Eas­ing of FDI norms, de­mon­e­ti­za­tion, andREITguide­lines –all ex­pected to in­crease trans­parency and en­hance con­sumer and in­vestor con­fi­dence in the real es­tate sec­tor.

This cou­pled with the fact that as­set val­u­a­tions are at their most at­trac­tive lev­els is re­sult­ing in a re­newed in­ter­est from off­shore eq­uity in­vestors, large In­dian cor­po­rates and HNIs who feel that fi­nally the in­dus­try has reached a level play­ing field, of­fer­ing at­trac­tive re­turns. This sen­ti­ment was fur­ther en­dorsed by a cycli­cal de­cline in in­ter­est rates in 2016, which has re­duced the cost of do­ing busi­ness for all in­vestor classes. Even ‘struc­tured debt’ has evolved from be­ing a “high- cost source of fund­ing” to be­ing a very vi­able source of fund­ing with suc­ces­sive in­ter­est rate cuts.

The fol­low­ing sec­tions high­lights the in­vest­ment out­look for each real es­tate seg­ment in 2017: With a strong thrust pro­vided to af­ford­able hous­ing in the Union Bud­get, we are see­ing an in­crease in de­mand from end users in this seg­ment. In the sec­ond half of 2017, we ex­pect to see the sup­ply side also strengthen as more pri­vate play­ers foray into the seg­ment. With the govern­ment also in­tro­duc­ing meas- ures to ease tax­a­tion for res­i­den­tial real es­tate as a whole, in­clud­ing re­duc­tion in the hold­ing time for long term cap­i­tal gains, we ex­pect to see eas­ier mon­e­ti­za­tion of his­tor­i­cally-held as­sets.

The com­bined ef­fect of the var­i­ous pol­icy ini­tia­tives is ex­pected to re­sult in an im­prove­ment in cor­po­rate gover­nance which in turn will at­tract more eq­uity in­vestors.

While in­vestors con­tinue to in­vest in com­pleted as­sets, a key trend has been the fo­cus on de­vel­op­ment eq­uity. Lead­ing pri­vate eq­uity play­ers have been rais­ing funds for green­field projects, a trend that we ex­pect will pick up pace this year as well. Also, de­vel­op­ers are par­tic­u­larly keen on the com­mer­cial seg­ment and have been dis­play­ing in­creased in­ter­est in com­mer­cial projects. This is not without rea­son as in 2017, the of­fice sec­tor is likely to main­tain its growth mo­men­tum with an an­tic­i­pated ab­sorp­tion of 40 mil­lion sq. ft. With the avail­abil­ity of well leased as­sets across core lo­ca­tions, pri­vate eq­uity fund­ing in these as­sets is likely to con­tinue. Go­ing for­ward, we ex­pect a slight com­pres­sion in rental yields in the short term, how­ever de­spite the com­pres­sion, core as­sets will con­tinue to re­main at­trac­tive for in­vestors.

The re­tail land­scape in In­dia wit­nessed a sig­nif­i­cant rise in pri­vate eq­uity in­vest­ments by for­eign funds in 2016. Given the sta­ble eco­nomic and po­lit­i­cal en­vi­ron­ment, active leas­ing by re­tail­ers, and ris­ing con­sumer de­mand; the in­vestor com­mu­nity con­tin­ues to re­main bullish about In­dia’s re­tail real es­tate land­scape. As the launch of REITs gets closer, we ex­pect to wit­ness a greater in­ter­est of pri­vate eq­uity play­ers in core re­tail as­sets. With a sup­ply pipe­line of al­most 7 mil­lion sq. ft. of qual­ity re­tail ex­pected in 2017, we hope to see more in­vest­ments/buy­outs go­ing for­ward. With global as well as do­mes­tic e-com­merce play­ers look­ing to take up big box, qual­ity spa­ces, and pri­vate eq­uity play­ers want­ing to part­ner with lo­cal de­vel­op­ers to in­vest in the seg­ment, the cur­rent scarcity of qual­ity ware­hous­ing space across the coun­try has been a key chal­lenge. With GST to be im­ple­mented from July, 1, 2017, In­dia’s ware­hous­ing sec­tor will move to­wards amoresys­tem­atic mode of oper­a­tion, thereby pro­vid­ing the nec­es­sary con­fi­dence for in­vestors to re-look at the seg­ment. In the long run we can ex­pect the in­flow of in­sti­tu­tional fund­ing and for­mal sources of cap­i­tal. We also ex­pect that with the emer­gence of lo­cal and na­tional play­ers in the ware­hous­ing seg­ment; de­ploy­ment of cap­i­tal in these fewer, bet­ter qual­ity as­sets is likely to be­come eas­ier. While some may ar­gue that re­form may prove to be detri­men­tal for the smaller play­ers, in our opin­ion it is likely to al­low the smaller play­ers to de­velop bet­ter qual­ity as­sets or en­ter into joint ven­tures with larger play­ers.

Dur­ing 2017 and be­yond the key driv­ers for the in­vest­ments mar­ket in In­dia will con­tinue to be at­trac­tive as­set val­u­a­tions, im­prov­ing trans­parency, im­prove­ment in qual­ity of as­sets, ra­tio­nal­ized cost of struc­tured debt and con­sol­i­da­tion of de­vel­op­ers. We ex­pect to see an in­ter­est of pa­tient cap­i­tal from large sov­er­eign and for­eign in­sti­tu­tional play­ers. The pol­icy thrust of the govern­ment in 2016 to ease the fund­ing an­d­op­er­at­ing en­vi­ron­ment in the coun­try is ex­pected to work in favour of spurring or­ga­nized sources of cap­i­tal into real es­tate in the long term.

RERA will play a fun­da­men­tal role in de­ter­min­ing the eco­nomic frame­work of de­mand and sup­ply in the real es­tate in­dus­try. Sup­ply will re­duce be­cause de­vel­op­ers will now launch only those projects which they are likely to com­plete within the promised time­frame. (Post RERA, the penalty for time over-runs by de­vel­op­ers are huge.) De­mand will re­main ro­bust but wit­ness a re­dis­tri­bu­tion. Since risk on res­i­den­tial in­vest­ments will be mit­i­gated, so will re­ward. This is why we will wit­ness the in­ci­dence of high risk- high re­turns in­vestors thin­ning down on the ground. In­vestors will also be low-key be­cause they need to see in­crease in prices ac­com­pa­ny­ing in­crease in sales - some­thing they have not wit­nessed of late.

In­stead, there will be more end-users in the mar­ket, as con­sumers’ con­fi­dence in de­vel­op­ers is a crit­i­cal com­po­nent of mar­ket sen­ti­ment and these are the pri­mary ben­e­fi­cia­ries of greater trans­parency.

These end users will largely hail from the mid­dle-in­come and low-in­come cat­e­gories who will look closely at af­ford­able hous­ing.


Apart from the de­mand and sup­ply dy­nam­ics, the hold­ing cost for de­vel­op­ers is likely to go up. Es­sen­tially, no new projects can now be launched be­fore all ap­provals are in place. The window of price es­ca­la­tion be­tween ‘pre-launch’ and ‘of­fi­cial launch’ which was ear­lier avail­able to de­vel­op­ers is now shut. This ad­di­tional hold­ing cost will po­ten­tially be passed on to buy­ers, adding to their over­all cost of pur­chase.

The cost of land will go up within city lim­its as post de­mon­e­ti­za­tion, there will be no lee­way for di­ver­sion of sur­plus cash from other busi­nesses to­wards pur­chase of land. The force- fed trans­parency post RERA will fur­ther make it nec­es­sary for de­vel­op­ers to use le­gal funds to pur­chase land. This will add to their over­all in­put costs and there­fore lead to in­creased end prod­uct prices.

On the pos­i­tive side, end-user de­mand is sta­ble and some re­cent re­duc­tions in home loan rates by banks will see that the trend con­tin­ues.

Over­all, we an­tic­i­pate a mar­ginal up­ward in­crease in pric­ing for res­i­den­tial units in a mar­ket backed by gen­uine buy­ers and a lower yet pre­dictable and good qual­ity sup­ply pipe­line.



The re­tail land­scape in In­dia wit­nessed a sig­nif­i­cant rise in pri­vate eq­uity in­vest­ments by for­eign funds in 2016

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.