Real Estate Investment in India Vs. The Other BRIC Countries
Indian real estate has been limited in 2012 in terms of attention from international investors. Indian Real Estare has witnessed 6% q-o-q growth in direct commercial real estate in Q1 2012, as compared to China which has seen negative growth of -45%, however China performed better in Q2 2012 on the back of one mega deal. In Brazil, investment volumes seem to be reaching a more ‘normalised’, sustainable pace following the supercharged 2010-2011 period.
Broadly, India has seen roughly 18 Billion US$ being invested in RE over the past 7 years. With 3.4 Billion US$ of exits, Indian real estate performance has not seen exciting for the foreign investor with average multiple of 1.25. However, India remains an attractive investment opportunity and foreign investors are definitely still participating in situations that offer higher risk adjusted returns like buying stabilized leased assets and providing receivable-based ‘mezz’ financing against housing sales. Also, foreign investors are looking at putting capital behind successful investment managers and are many also directly investing in India on a selective basis.
The Challenges And Outlook For Indian Realty
The challenges that I see for Indian real estate, now and in the near future, are the expensiveness of liquidity for real estate, the lack of availability of serviced urban land, continuing procedural delays in approvals, the slow pace of infrastructural growth and the fact that the country still has relatively low transparency in real estate terms.
In terms of commercial real estate outlook, there has been a demand contraction of about 15% with reference to absorption in 2011. We expect an supply correction for 2013 and 2014, but supply for 2012 is by and large on track. The market will continue to be under stress for another four quarters, with vacancies going up, but rents are unlikely to fall further as they are already at the bottom.
In retail real estate, we are seeing a process of polarization – superior malls are with low vacancy and high rents, while inferior malls are failing to lease despite heavy rental discounts. Many new malls that are now completed or are under construction are superior, which is a definite sign of the market maturing.
The Indian residential property market is behaving like a swinging pendulum. Sale velocity has been rising and falling over the last two or three quarters, and now capital values are going up because of increased input costs. I can see a definite slowdown in new launches already, and this is likely to continue for the interim.
The Global Economy’s Effect On The Indian Property Market
Of the three primary real estate sectors, commercial property is most closely linked with global economic dynamics. We are already seeing the impact of these dynamics in the reduced absorption of commercial spaces in India. It is taking longer to close deals. Multinational companies are increasingly cautious about committing because their home countries are not doing well, and even domestic companies are in wait-and-watch mode. Developers in India are under pressure, and this is giving scope to occupiers to squeeze them even harder despite the fact that rents are already at all-time lows.
In residential real estate, Mumbai and Delhi have emerged as chart-busters. In these cities, residential rates have already crossed and surpassed the peak levels. However, the inherent demand for residential properties in these cities is very high and supply is constrained. There have been fewer launches of late, and developers’ input costs have gone up, reducing their profit margins. It is not likely that residential prices in Mumbai and Delhi will fall in the foreseeable future. On a more general note, there is a possibility in residential corrections in some cities, depending on the level of stress project developers are under at a company level, rather than at a project level. When it comes to projects, there is a likelihood of price rationalizations in large townships in the extended suburbs, because absorption of residential spaces takes much longer in such projects.
Retail real estate demand is only indirectly related to the global economic fluctuations. Retail health derives from consumer demand, which again is covered by domestic factors such as high inflation and reduced agricultural performance.
Is There A Bubble?
A bubble implies that there is a lot of absorption and therefore a lot of development happening, and that prices are rising in tandem up to a point where nobody is buying anymore. That is not the case in India. Supply on the market has already been constrained because of various factors such as low absorption, higher costs of development and borrowing, and so on. I do not see a bubble happening in Indian residential real estate. In retail and commercial real estate, there are price corrections at the level of projects, depending on the amount of pain the developer is experiencing.
This is not the same as a city-wide bubble. Leasing of commercial projects will take much longer and demand has contracted by 15%, and it could go down by another 5% by end of this year. However, the market has already responded to the current dynamics with fewer launches. Commercial rates will not go up, and neither will occupancy, so there will be lower rates but this is not representative of a bubble.
Author – Colin Dyer, Global CEO, Jones Lang LaSalle
Alok Kumar Upadhayay
Real Estate Professional