Britain’s ‘leave’ call unlikely to have much effect on India

REAL ESTATE

INVESTORS WILL now be in a risk-off mode, meaning more number of investors would either pull out investments or stay put without investing further until clarity emerges. Until Friday, year 2016 was looking seemingly positive for real estate sector in terms of investment inflows (read PE or FDI inflows), but now that is somewhat at risk.

The real estate sector in India will continue recovering on the back of a resilient Indian economy and strong capital inflows. Brexit will not disturb that recovery much, since India’s office market leasing is dependent only by 5-7 per cent on Uk-headquartered companies, and investments and activity of PE Funds from EU countries is more in India than in the UK.

Investors in the UK looking to invest in residential properties outside UK will have to compare returns and risk assessments for real estate in India versus real estate in the EU. After exiting EU, locations like Greece, Spain and Portugal may not remain as attractive to UK investors, and India may benefit from that. However, investors will refrain from making plays for some time as they will want to develop a good understanding of the comparative risk- return scenario.

The first reaction of investors to a situation like this is to exit from sectors that are perceived risky. Given the Indian stock markets’ recent performance, real estate was considered risky until recently; it had only begun to emerge out on the back of policy reforms like RERA and other factors providing a positive market momentum. Given a risk-off sentiment, realty stocks could witness selling pressure as investors scramble for safe-haven sectors such as FMCG or pharmaceuticals.

Several major IT firms such as Infosys, TCS and HCL Tech earn a third of their revenues from the EU. A possibility of EU slowing down will have an adverse impact on their revenues. The IT sector is a leading occupier of office space in India every year.

Year 2015 saw many European retailers entering India as part of their expansion strategy to new markets. We had anticipated this trend to continue in 2016. However, if the EU economic outlook weakens, their expansion strategies may be reconsidered.

India could be an anchor of stability, given the ongoing reforms at a satisfactory pace and that its inflation has remained controlled over the last one year or so. Also, given a normal monsoon forecast for this year, even food inflation could be kept in control in the nearto-medium term while triggering a healthy growth of agriculture and rural economy.

Given that BREXIT has happened, we foresee US Federal Reserve to defer their decision to hike interest rates, which is positive for the emerging world, including India.

India’s bilateral trade with Great Britain is export surplus, which is good for India. However, compliance cost for India’s exports will rise. At the same time, India can negotiate more favourable trade terms with Britain. After losing out to free trade with the EU, Britain will be under pressure to look for balanced trade with big emerging economies like India, which is the fastestgrowing economy.

(The writer is Chairman & Country Head, JLL India)

PTI Brokers watch stock prices in Kolkata on Friday.