2018 - A Wa­ter­shed Year

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The year 2017 was one of short-term dis­rup­tions for the In­dian econ­omy. Now var­i­ous global and In­dian think tanks and multi lat­eral in­sti­tu­tions have pro­jected rel­a­tively stronger growth in 2018. In the long run, the In­dian real es­tate is ex­pected to see greater in­vest­ment flows across sec­tors, as CBRE Re­search re­ports.

The in­vest­ment mar­ket was buoyed by sev­eral govern­ment ini­tia­tives in 2017, as the new poli­cies were ex­pected to in­crease trans­parency and en­hance con­sumer and in­vestor con­fi­dence in the real es­tate sec­tor, there by re­sult­ing in sig­nif­i­cant in­ter­est from off shore eq­uity in­vestors, large In­dian cor­po­rates and high net­wor­thin­di­vid­u­als (HNI). With val­u­a­tions re­main­ing at­trac­tive and qual­ity as­sets be­ing avail­able in core and core-plus lo­ca­tions, in­vest­ment ac­tiv­ity in the seg­ment has re­mained hec­tic. The com­ing year is only go­ing to build upon the step­ping stones that 2017 has pro­vided, with more money ex­pected for ex­ist­ing as well as newer as­set classes. Qual­ity is likely to re­main the over­rid­ing theme as good qual­ity as­sets would con­tinue to at­tract a ma­jor­ity of this money. As fewer as­sets com­pete for these in­vest­ments, the mar­ket is likely to wit­ness in­creased con­sol­i­da­tion among de­vel­op­ers as well as large landown­ers. While the past two years have wit­nessed nu­mer­ous steps to ease the in­vest­ment en­vi­ron­ment, fur­ther stream­lin­ing of the reg­u­la­tory en­vi­ron­ment would be key to at­tract­ing and sus­tain­ing in­vestor in­ter­est and con­fi­dence.

Of­fice seg­ment

The of­fice mar­ket in 2017 con­tin­ued to breach the 40-mil­lion mark in terms of space take-up, de­spite a dip in­sup­ply across key mar­kets dur­ing the year. Leas­ing ac­tiv­ity was dom­i­nated by the three cities of Delhi-ncr, Ban­ga­lore and Hy­der­abad. De­spite the cau­tion­ary trends per­me­at­ing the of­fice sec­tor, we ex­pect 2018 to be a pos­i­tive year, witha healthy play be­tween sup­ply and de­mand. Flex­i­bil­ity in work spa­ces is ex­pected to emerge stronger, with land­lords ex­pected to bet­ter align spa­ces with the needs of oc­cu­piers. As avail­abil­ity of ready-to-move-in spa­ces re­mains con­strained (par­tic­u­larly in core lo­ca­tions) amid sus­tained rental growth, pre-com­mit­ment ac­tiv­ity is likely to re­main strong, es­pe­cially in cities such as Ban­ga­lore. What to Ex­pect: • In­fra­struc­ture ini­tia­tives are likely to play a sig­nif­i­cant role in in­flu­enc­ing de­mand-sup­ply dy­nam­ics, lead­ing to rental growth • De­vel­op­ers would in­creas­ingly cus­tomise sup­ply to meet in­di­vid­ual oc­cu­pier needs • Ow­ing to dis­rup­tions in the tech sec­tor, leas­ing ac­tiv­ity might dip marginally, but would be com­pen­sated by de­mand from other sec­tors • Oc­cu­piers are ex­pected to con­tinue to de­ploy modern work­place strate­gies – ef­fi­cient space util­i­sa­tion, flex­i­ble work­ing and op­ti­mum hir­ing • Ad­vances in tech­nol­ogy are likely to im­pact both oc­cu­pier and de­vel­oper de­ci­sions • Of­fice prop­er­ties would re­main high on in­vestor radar, with PE and in­sti­tu­tional firms in­creas­ingly ac­quir­ing/ex­pand­ing real es­tate port­fo­lios to hold qual­ity of­fice as­sets

re­tail sec­tor

The re­tail sec­tor re­mained sta­ble in 2017 with the ad­di­tion of about 3.4 mil­lion sq. ft. of sup­ply across sev­enkey cities – al­most in line with the sup­ply in 2016. A ma­jor­ity of the sup­ply was con­cen­trated in Mum­bai, Delhi-ncr, Pune, Ban­ga­lore and Kolkata. In terms of new global en­trants, 2017 wit­nessed the en­try of al­most 15 global brands. In 2018, we ex­pect sup­ply to be led by the south­ern cities of Hy­der­abad and Ban­ga­lore. While tra­di­tional fac­tors (such as avail­abil­ity of new sup­ply, govern­ment ini­tia­tives and sup­ply-de­mand gap) would con­tinue to shape the re­tail seg­ment, newage de­vel­op­ments (rise of shar­ing econ­omy, flex­i­ble leases, etc.) would re­sult in a bet­ter align­ment with global trends. What to Ex­pect: • Nearly 6 mil­lion sq. ft. of re­tail sup­ply is ex­pected to be added across the key seven cities, with Hy­der­abad and Ban­ga­lore lead­ing the way • Sev­eral na­tional re­tail play­ers would look at tier II and III cities for ex­pan­sion due to the lack of qual­ity mall sup­ply and ex­pan­sion op­por­tu­ni­ties in tier I cities • Re­tail would be ev­ery­where; the qual­ity of re­tail in tran­sit spots is likely to move be­yond kiosks to for­mal re­tail and full-fledged stores • Omni-re­tail is likely to be more com­mon place; re­tail­ers are ex­pected to adopt IOT and AI to pro­vide a phys­i­cal shop­ping ex­pe­ri­ence with a dig­i­tal fil­ter

lo­gis­tics seg­ment

The lo­gis­tics sec­tor con­tin­ued to tread on a strong growth tra­jec­tory, with leas­ing ac­tiv­ity reach­ing an all-time high of ap­prox­i­mately 17 mil­lion sq. ft. in 2017. We ex­pect this mo­men­tum to con­tinue into 2018 as ex­ist­ing and new oc­cu­piers con­sol­i­date/ex­pand their op­er­a­tions across the coun­try. Sus­tained de­mand from sec­tors such as third party lo­gis­tics (3PL), e-com­merce, FMCG, re­tail, and en­gi­neer­ing and man­u­fac­tur­ing is ex­pected to drive trans­ac­tion ac­tiv­ity. The govern­ment’s im­pe­tus to for­malise the sec­tor by grant­ing it in­fra­struc­ture sta­tus aswell as the im­ple­men­ta­tion of the GST have also pro­pelled in­vest­ments / sup­ply cre­ation in the sec­tor. This new in­vest­ment-grade sup­ply by prom­i­nent In­dian and global play­ers is ex­pected to start get­ting op­er­a­tional from mid-2018. It is likely to have a pos­i­tive im­pact on trans­ac­tion ac­tiv­ity and pro­pel leas­ing vol­umes even fur­ther in 2018. What to Ex­pect: • De­mand for ware­hous­ing space is an­tic­i­pated to re­main ro­bust in 2018 as ex­ist­ing play­ers ex­pand op­er­a­tions and new­play­ers en­ter the mar­ket • While large ur­ban cen­tres such as Delhi-ncr, Mum­bai and Ban­ga­lore are ex­pected to con­tinue dom­i­nat­ing trans­ac­tion ac­tiv­ity, the real growth would be

The In­ter­na­tional Mone­tary Fund (IMF) ex­pects In­dia’s real GDP growth to reach 7.4% in 2018 and 7.8% in 2019, thereby re­in­stat­ing the coun­try as the world’s fastest grow­ing ma­jor econ­omy.

• wit­nessed in smaller cities such as Chen­nai, Pune, Hy­der­abad and Kolkata • As lead­ing real es­tate de­vel­op­ers ac­quire large land parcels for devel­op­ment of ware­hous­ing fa­cil­i­ties, the sup­ply of modern ware­houses and in­dus­trial parks is ex­pected to in­crease • Rental growth is ex­pected to di­verge across mar­kets. The north­ern cor­ri­dor of Hy­der­abad and western / eastern cor­ri­dor of Ban­ga­lore are likely to lead growth

res­i­den­tial sec­tor

The res­i­den­tial seg­ment was seen reel­ing un­der the im­pact of de­mon­eti­sa­tion and im­ple­men­ta­tion of the Real Es­tate Reg­u­la­tory Act (RERA), as sales and new project launches de­clined to his­toric lows in 2017. Al­though home­buyer sen­ti­ments im­proved marginally in select cities such as Ban­ga­lore, Hy­der­abad, Chen­nai, Mum­bai and Pune, the sec­tor con­tin­ued to suf­fer from sub­dued sales and select / in­ter­mit­tent sup­ply ad­di­tion. As the de­vel­oper com­mu­nity gets used to RERA, we ex­pect the res­i­den­tial seg­ment to show some signs of re­cov­ery in 2018. Af­ford­able hous­ing as a seg­ment is also ex­pected to see greater in­ter­est, as in­cen­tives of­fered by the govern­ment are likely to re­sult in bet­ter end-user and de­vel­oper par­tic­i­pa­tion. Over­all, in 2018 we ex­pect the mar­ket to un­dergo a siev­ing process, with cred­i­ble and sus­tain­able de­vel­op­ers dif­fer­en­ti­at­ing them­selves from other play­ers, and the fo­cus steadily mov­ing to­wards end users. What to Ex­pect: • De­spite RERA, read-to-move-in prop­er­ties are likely to re­main high on the radar of home­buy­ers • Con­sol­i­da­tion among de­vel­op­ers and landown­ers as well as more joint ven­tures are ex­pected • Pri­vate par­tic­i­pa­tion in af­ford­able hous­ing is likely to pick up pace; how­ever, land avail­abil­ity for af­ford­able hous­ing projects in key mar­kets would re­main the chief con­cern • Tech­nol­ogy would im­prove buyer ex­pe­ri­ence and trans­form de­vel­op­ers’ mar­ket­ing strate­gies as the use of on­line sales chan­nels, mo­bile apps and vir­tual tours grows • Over­all in­vestor con­fi­dence is likely to im­prove, re­sult­ing in the in­flow of in­sti­tu­tional cap­i­tal • In­creased fund in­flows would ra­tio­nalise cost of cap­i­tal, as RERA would re­duce the risk per­cep­tion as­so­ci­ated with real es­tate in In­dia

cap­i­tal Mar­kets

With the avail­abil­ity of well leased as­sets across core lo­ca­tions, PE in­vest­ments in core as­sets are likely to con­tinue. Yields are ex­pected to re­main sta­ble, re­sult­ing in the con­tin­ued at­trac­tive­ness of core as­sets for in­vestors. Also, de­vel­op­ers are par­tic­u­larly keen on the com­mer­cial seg­ment and have been dis­play­ing in­creased in­ter­est in com­mer­cial projects. The rea­son be­hind this is that the of­fice sec­tor is likely to main­tain its growth mo­men­tum in 2018 with an an­tic­i­pated ab­sorp­tion of 40 mil­lion sq. ft. The com­bined ef­fect of RERA and REITS is likely to re­sult in bet­ter com­pli­ance as well as stan­dard­i­s­a­tion of space, re­sult­ing in the emer­gence of more in­vest­ment­grade of­fice space. While in­vestors con­tinue to in­vest in com­pleted as­sets, a key trend over the past year or so has been se­lec­tive devel­op­ment eq­uity. Fur­ther con­sol­i­da­tion ex­pected – Con­sol­i­da­tion among de­vel­op­ers as well as large land own­ers is likely due to sub­dued mar­ket con­di­tions, with smaller play­ers ex­pected to look for av­enues for fund­ing or re­sort to as­set mon­eti­sa­tion. Cred­i­ble de­vel­op­ers are likely to ben­e­fit the most as a ma­jor­ity of land own­ers (and smaller de­vel­op­ers) are en­ter­ing into joint devel­op­ment agree­ments and devel­op­ment man­age­ment struc­tures with well-cap­i­talised/ cred­i­ble de­vel­op­ers and cor­po­rate play­ers. Cor­po­rates keen on mon­etis­ing their land as­sets and smaller de­vel­op­ers look­ing to re­tire debt are also bring­ing at­trac­tive land deals to the mar­ket. In ad­di­tion to transactions for the res­i­den­tial seg­ment, the land mar­ket are of­fer­ing op­por­tu­ni­ties for of­fice, re­tail and in­dus­trial de­vel­op­ments. What to Ex­pect: • En­hanced trans­parency is likely to re­sult in a more se­cure en­vi­ron­ment for in­vestors and bet­ter exit op­por­tu­ni­ties • Av­er­age ticket size of in­vest­ments is ex­pected to in­crease. The of­fice seg­ment would con­tinue to at­tract in­ter­est, while ware­hous­ing and re­tail seg­ments would also gain mo­men­tum • Fo­cus on cor­po­rate gov­er­nance would be key to at­tract­ing fund­ing; eq­uity to wit­ness in­cre­men­tal in­ter­est In­vestor fo­cus is ex­pected to re­main on qual­ity of as­sets; core and core plus as­sets would also gen­er­ate sig­nif­i­cant in­ter­est • Eas­ing and stream­lin­ing of reg­u­la­tory en­vi­ron­ment would be key to at­tract­ing and sus­tain­ing in­vestor in­ter­est and con­fi­dence

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