CAUTIOUS OPTIMISM ON INDIAN PROPERTY

Several property experts share their opinions on the hottest real estate issues to come out of India. They are:

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1. What are the most fundamental changes in Indian real estate since the last investment cycle?

SM: The markets have matured. There is a lot more information available online about projects and the retail customer therefore has become much more savvy. P.E.s and financial institutions, having burnt their fingers the last time have become more cautious and do not look at investments with rose-tinted glasses. More importantly, with the new government in charge, there is a perception that the economy is picking up and the new policies will deliver a more sound economic platform.

AP: The level of maturity among developers and investors has improved substantially compared to a decade ago. The return expectations by investors have come down to realistic levels and the focus is on developers with a good track record. Transparency is on the rise and a large set of developers are adhering to ethical business standards with the aim of creating long-term value. On the other hand, investors are more diligent and thoughtfully putting their money in the right places. Reckless exuberance and unrealistic returns have paved way for sensible business decisions. In the last 8-10 years, we have matured as an industry to a great extent.

MM: One fundamental change I have perceived is that investors are no longer riding on just market beta, and are relying on the alpha to protect their returns – i.e. choosing the right assets basis location, composition of returns, quality of construction, and most importantly, the reliability of the developer and construction risks thereof. Buyers are vexed by shenanigans who haven’t been able to honour their commitments to them. This paradigm shift is leading to a more matured industry, which would consolidate towards developers with a strong brand and commitment to delivery.

indiaRT: Investors deploying capital towards Indian real estate projects have been cautious and there has been a flight to safety. Capital preservation has been the primary focus, hence most transactions since the GFC have been in the form of structured debt transactions. This is where the investor has been protected by being provided a security package including a mortgage on the underlying land and asset, a share pledge of the borrowing SPV as well as corporate and personal guarantees.

SR: Indian real estate has seen increasing regulatory efforts to improve transparency, provision of incentives for affordable housing, and consolidation and easing of regulations to attract foreign investments. The sector has seen the increasing role of Real estate Private Equity as primary source for a capital-starved industry. Special economic zones lost its attractiveness while Tier-2 cities are not yet attractive investment destinations. Demand in the Residential sector rose steadily across metros in the past 5 years, resulting in prices rising past the 2008 levels.

2. How are ‘new’ international investors likely to invest in India?

SM: While debt remains the preferred mode of investment, there is today a greater appetite to invest in equity especially if the developer has a strong track record. There are a number of international funds looking at income yielding assets due to the advent of the REIT regulation.

AP: Since Mr Modi-led BJP has won the general elections in May 2014, international investors’ view towards India has improved. While the debt investment will still constitute a high proportion of funding (in non-core assets), we expect equity investment to restart; which had taken a backseat since the past few years, provided valuations reach realistic levels.

MM: While globally, there is a significant rise in investor interest in real estate and specifically towards India, investors are cautious of who manages their money and how it is allocated. Based on the last cycle, they understand that real estate in India is still in a development phase and it is more prudent to rely on developer-managed funds rather than third party GPs. This trend is witnessed as many LPs have formed fund partnership with developers over the last few years.

SR: International investors today have a lot of investment opportunities in India. The avenue of investing in income yielding assets will open up with launch of REITs. Another option of investing in debt structures with identified pool is also available. The most preferred option is banking up with performance managers with clearly carved out strategy of Blind pools.

3. What will stimulate the recovery of the residential market in Delhi and Mumbai? And what are the likely timeframes?

SM: Price correction is required to stimulate the market. New projects in Gurgaon launched at below market prices are seeing a good response. There are still a lot of people looking to invest in residential real estate, however the closure ratio from qualified leads to conversion is still very low. Increase in sales volume will result in more investor confidence in the market.

AP: The answer to this question does not have a one-dose solution. Compared to the same time last year, Indian economy has shown signs of improvement be it GDP, inflation or job market sentiment. These all will play a role in overall recovery of residential market in India. As per JLL REIS, the sales rate (sales rate = sales during the period/inventory till date) for Delhi – NCR in 1H 2015 has dropped to just 8% compared to 26% for 2014. If the situation doesn’t improve in next 4 – 6 quarters, we expect investors to reduce their expectations considerably creating a big gap between developer and investors quoted price.

india2A little price push from the developers, reduction in the lending rates from the government, controlled supply of new inventory and a little increase in the absorption rate will break the inertia. The important part is an orchestrated push on all fronts and not sequential unplanned individual series of events. In Mumbai, while we are expecting recovery in sales, it will not be a sharp recovery. Extremely low levels of finished but unsold inventory clearly show demand but low risk appetite in the city. With limited options available for buyers, we expect the ball to roll, but at a slow and constant speed.

MM: An interplay of the aforementioned drivers would provide the impetus. A stable government at the centre and its emphasis on increased policy support to investments and simplifying the regulatory and approvals regime, which would continue to enhance economic growth. The RBI, having cut interest rates, is likely to do so again later in the year. If the rate cut continues, it would reduce EMIs for customers and would have positive impact.

The implementation of the Real Estate Regulation Bill will instill further confidence in prospective buyers. Specific drivers would be the unlocking of land for residential developments after a long hiatus in Delhi (through land pooling and relaxation in land use conversion), progress of key infrastructure and most importantly, developers will have to offer attractive value propositions to buyers, leaving enough value on the table for them, so that their investments yield the desired returns.

RT: In a word, Execution. Developers in Delhi and Mumbai have to focus on execution and deliver the existing projects that have been delayed over the past several months. The reasons for the market’s current poor performance is the excessive speculation, unusual price rise and oversupply in key micro markets, in the past. The residential market is going through a consolidation phase, which might continue for another 12-24 months, but there is a silver lining, as office leasing has picked up and generally residential sales velocity follows with a lag.

SR: Enhanced income creation opportunities, interest rate reduction by 50-75 bps coupled with 10-15% correction in prices will improve affordability and lead to recovery in residential demand in NCR (Delhi) and MMR (Mumbai) over a period of next 12 months.

4. Outside of Delhi and Mumbai, which city and which sector are you most bullish about over the next 12 months?

SM: I am bullish on Hyderabad residential and commercial real estate markets. I am also bullish about second homes markets and retirement homes. Overall, commercial real estate is picking up. There is also a lot of action in the capital markets.

AP: Considering stable demand and manageable property price rise, Bangalore has been seeing investor interest in residential and office space. Going forward, we expect Pune and Chennai to witness an increase in investor interest followed by Kolkata and Hyderabad. In terms of asset classes, apart from residential and office, we expect retail to start seeing investor interest. With Goods and Service Tax (GST) expected to see light of the day, warehousing and logistic sector is set to improve and will see considerable jump in investor interest.

MM: Bangalore’s residential and commercial are the sectors that I am bullish on, considering the city’s robust economic base, end user demand, low inventory overhang and vacancy.

RT: The Bengaluru (Bangalore) market has been the most resilient during this slowdown, both in terms of residential sales and office leasing absorption.

Office leasing has been outperforming over the last 12-18 months and should continue to do well through 2016, as there is a growing demand and undersupply in the large cities like Mumbai, Delhi NCR and Bengaluru.

SR: Bangalore is expected to lead commercial office space growth driven by IT /ITeS and E-Commerce start-ups. This growth in jobs and incomes will keep demand for residential segment robust. Similarly, Pune is likely to benefit from growth in IT /ITeS industry and availability of homes in mid-value segment.

india35. Which infrastructure projects in India are likely to have the most positive knock-on effects for real estate?

SM: Immediate impact is likely to come from Make-in-India and uniformity in GST, which will encourage development of industrial parks and large warehousing spaces. In the medium term, the REIT regulation and “Housing for All by 2022” will positively impact the commercial and residential segments. In the longer run, we should see a lot of impact from the SMART City initiatives and the initiative to revitalize 500 cities; especially in terms of infrastructure upgrades.

AP: Infrastructure projects like Delhi Mumbai Industrial Corridor (DMIC), Trans Harbour link, Smart Cities, Coastal Road, Navi Mumbai Airport are a few of the key infrastructure projects which, once completed, will have material positive impact on real estate. These projects will play a major part in emergence of new land development area and will add sizable meaningful supply.

RT: The Navi Mumbai Airport in Panvel, Mumbai and the Taj International Airport on the Taj Expressway corridor near Greater Noida, Delhi NCR will be big growth drivers for the micro markets in proximity to the proposed airports.

The expansion of the metro network in Delhi NCR and Mumbai is helping to improve connectivity and has already resulted in price appreciation in real estate values in the neighbourhoods where the metro expansion is proposed. The average daily passenger ridership is about 2.2 million for the Delhi Metro and about 300,000 for the Mumbai Metro which is poised to more than double over the next 5 years.

SR: Metro-Railway projects in various cities are expected to redefine growth in real estate. The inclusion of Tier-II cities under the “Smart City” programme is likely to be next growth booster

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