1. Global capital flow into Indian real estate will increase further
India was ranked fourth in developing Asia for FDI inflows, as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. The real estate industry also saw a visible return of equity investment into India, last year. Indian real estate has attracted around USD 32 billion in private equity so far. The global capital flow into Indian real estate in 2016 stood at approximately USD 5.7 billion.
Although the historic high of 2007 (in terms of total PE inflows) was not breached, 2016 proved to be the second-best year so far.
Despite Brexit and uncertainty around the new US president’s outsourcing and visa-related policies, private equity activity looks healthy in 2017, thanks to a strengthening and modernising economy and the growing reputation of India as an attractive investment destination.
India’s tier-1 cities moved up to the 36th rank in JLL’s 2016 bi-annual Global Real Estate Transparency Index. The catalysing factors for this, were improvements in structural reforms and the more liberalised foreign direct investment (FDI) regime. Increased transparency brings higher investments into such real estate markets.
Owing to changes in its regulatory framework, India is now way more attractive to both, global and Indian investors. Increased consolidation and transparency and the launch of REITs (Real Estate Investment Trusts) this year, will encourage them to get a piece of the Indian real estate pie.
2. Developers will revamp their business models
Throughout 2016, the number of new residential project launches was lower than the units sold. States in India are also approaching the deadline to implement their versions of the Real Estate (Regulation and Development) Act (RERA). This landmark law will enforce hitherto unprecedented transparency and accountability requirements on developers and do a lot to increase consumer confidence. Consumer activism, which has already been making news in recent times, will increase in distressed ongoing projects.
The Goods and Services Tax (GST) and the Benami Property Act, will also have a major impact on how developers run their businesses. While demonetisation shook up the market, it did not affect developers, who had the right products targeted at the working masses. The rest have realised that it is time to revamp their existing business models, if they want to remain in the business.
Currently, the residential property market is dominated by end-users, as speculative investors are making a beeline out of real estate. Residential demand is expected to pick up only towards the end of 2017. However, the recovery will be sustainable and based on much sounder market fundamentals, rather than transient sentiments.
The commercial office space sector will get a strong shot in the arm with REITs. It will have a long-term impact on developers and present them with the choice of either ‘corporatising’ their business, or risking take-over by their bigger and better-organised counterparts. The pressure from funding agencies will simply be too strong to ignore.
Corporate developers like Tata, Godrej, L&T, Bharti, Mahindra, etc., will acquire more projects and corporate houses like Birla are gearing up for their maiden innings in real estate development. Institutional funding will increase.
3. Co-working: More of India Inc will move into ‘hybrid’ spaces
Co-working spaces are popping up across Indian metros as well as tier-2 cities, providing start-ups with flexible working options at affordable rents. At last count, there were more than 100 operators in this space across India, although there is still very limited supply of co-working spaces available. However, this segment is slowly but surely growing across India, given the many advantages that such spaces offer:
- Employee motivation and retention.
- Boosted productivity.
- Firms focused on agility who house their innovation teams in co-working spaces, can induce a quicker learning curve to integrate them into the entrepreneurial ecosystem.
- The perfect option for companies who need their client servicing teams close to their respective clients’ sites, in locations with low office vacancy.
Co-working operators may also prefer leasing out parts of or the entire areas of their office spaces to ‘anchor tenant’ corporates. In other words, co-working operators and corporates, will move into a ‘hybrid’ sort of space and increasingly rely on each other.
4. The sun rises on affordable housing
Affordable housing in India is finally set to get infrastructure status.
One crore houses are to be built in rural India by 2019 and this vital segment will now see cheaper sources of finance – including external commercial borrowings (ECBs). Re-financing of housing loans by the National Housing Bank (NHB) can give a further boost to the sector.
A new credit-linked subsidy scheme (CLSS) for the mid-income group, with a provision of Rs 1,000 crores in 2017-18, was announced even before Budget 2017-18. Tenure of loans under the CLSS of Pradhan Mantri Awas Yojana (PMAY) was extended from 15 to 20 years and the budget also increased the allocation for the PMAY from Rs 15,000 crores to Rs 23,000 crores in the rural areas.
The qualifying criteria for affordable housing were also revised to 30 sq metres and 60 sq metres of carpet area, rather than saleable area, in the four main metros and non-metros, respectively. This effectively increases the size of the affordable housing market across India. Moreover, the demonetisation of high-value currency notes will cause land prices to ease in the next few years, especially in far-flung areas around Indian metros and the tier-2 and tier-3 cities.
5. Office sector transformation
The first REIT listing is expected within the next few months and prominent private equity funds such as Blackstone will likely be the first movers.
REITs will attract institutional and smaller investors alike, because of their inherent nature to provide regular dividends at relatively low risk.
Smaller investors are especially excited at this new and easier investment opportunity because:
- Indian REITs will prefer to invest in commercial space developments – specifically, the highest quality or Grade-A properties, because of the higher rental yields in this asset class.
- Only 20% of an Indian REIT’s monies can be invested in development, which is the riskiest aspect. The remaining 80% of a REIT’s assets, must be invested in income-producing property.
The REIT potential in India is huge, with around 229 million sq ft of office space currently being REIT-compliant. Even if 50% of this space is listed in the next few years, we are looking at a total REIT listing worth USD 18.5 billion. Moreover, India’s stock of Grade A commercial assets is increasing, with REITs acting as a sure-fire growth catalyst.
6. More industry consolidation
Slowing sales and lack of financial prudence among several developers, is leading to a fairly obvious conclusion – consolidation.
The overcrowded real estate sector is going to become a lot leaner and meaner, with consolidation happening by way of joint developments and joint ventures between landowners and/or small developers with bigger and better organised players, smaller developers being bought out by larger players, and struggling developers cashing-in their land banks by selling them to players with stronger balance sheets and appetite for growth.
The pace at which this happens, will depend on how much equity gets infused into the sector by the larger PE investors and the strategy that foreign and domestic developers adopt. Some foreign developers have already entered the country. While some investors and developers will take the plunge into the market now, others will prefer to wait for a while, Nevertheless, consolidation will be a major trend, over the next five years. Larger players will peak in strength by around 2021 and smaller players will be eroded. Equity investment, or the lack of it, will play a deciding role.
(The writer is CEO and country head, JLL India)