10 Jan 2013

Real Estate in India outlook 2013

Indian realty outlook for 2013

The year 2012 witnessed subdued interest in real estate due to inflationary pressures and rising interest rates in the country, coupled with the on-going economic crisis in the Eurozone and US.

GDP growth progressions for the country have been fairly narrow and revised lower continually over the last few months, with the economy expected to grow at an abysmal rate of just 5.3% – 5.5% in 2013. Additionally, disputes related to land acquisition, delays in regulatory processes and project clearances have weighed down the aggregate demand.

Some good news for the last quarter of this fiscal year could be a boost to infrastructure spending, as the government now appears close to launching the National Investment Board. Therefore, overall sentiment for 2013 is expected to be one of cautious optimism.

The Wholesale Price Index (WPI) indicates inflation in the country to have fallen to a 10-month low of 7.24% in November. Additionally, core inflation has declined to 4.49% in November as compared to 5.19% the previous month. Basis this development, some relief measures for both developers and investors can be expected in the form of decline in interest rates and increased liquidity in the near future. This could help stimulate demand for real estate and lead to better economic growth prospects.

However, outlook is likely to remain tempered in relation to growing concerns among investors that prime assets in several realty micro-markets are becoming overpriced. India hasn’t really delivered since 2005 on the promise that it held as an investment destination. With 20% internal returns promised by most PE funds in 2005-07, the current rate of return is only 8-10%, less than half of what the funds aimed to achieve.

Additionally, several funds are finding it extremely difficult to exit their investments. Even foreign direct investments (FDI) in real estate between April 2009 and December 2011 have declined by a drastic 92% and accounts for only 1.94% of the total FDI inflow.

Such diminished returns are prompting international investors to stay clear of the market, therefore most of the capital finding its way into the sector today is really domestic capital.

On a positive note, the recent move by the government to open multi-brand retail to FDI will go a long way in strengthening organized retail in the country. For long now, the retail sector in India has been facing numerous challenges with respect to processes, technology, supply chain, real estate, infrastructure etc., resulting in fewer investments in the sector as compared to others, which have seen growth occur at a much faster pace.

FDI in retail will be a powerful vehicle in bringing the retail sector on the trajectory of the much needed growth. This will have a positive spill over on real estate as well, as with multi-brand retailers entering the market, retail property will witness renewed demand and uptake along with improved investor confidence in the sector.

As we step into the New Year, it is advisable that industry players focus on achieving operational efficiencies to improve construction productivity, delivery of projects in hand with the help of technological advances and commitment to improve delivery capabilities including up-skilling of existing manpower.

Therefore, efficiency, innovation and cutting-edge technology such as BIM and assembly line mass housing solutions may well be the keys to success, in addition to improved project delivery and execution skills and addressing the rampant capacity constraints across the built environment.

Also, we do hope that the issues related to the Land Acquisition and Real Estate Regulation Bills are addressed in the winter session of parliament, where clear, concise and practical reforms which work to the benefit of all stakeholders and are relevant to market conditions are brought to order, which in turn will help bring in much needed efficiency, transparency and accountability in the sector.

Effect of the global economy on India’s property market


Real estate sentiment remained fragile through a major part of 2012, as the global economy continued to face strong and persistent headwinds. Economic activity in Europe is seen to be contracting, while growth in the US has been modest.

The Chinese economy has also slowed, and uncertainty about the country’s near-term prospects is greater than was the case some months ago. However, European property markets have been bearing the brunt of the economic malaise.

While it may not seem to be the case, Indian property markets have in fact fared better than several global counterparts and are expected to remain relatively stable in the immediate future, even as rates across several global realty markets may tumble by as much as 10-20%.

Thus, despite the economic and political sluggishness in India, it continues to remain a promising market. That said there have definitely been some visible effects of the global slowdown on India’s realty markets as well. Most noticeably in the commercial property segment, given it has a strong correlation with global economic factors and performance.

The office segment has seen a pronounced dip, with absorption levels in the two major markets of Mumbai and Delhi-NCR seeing a year-on-year slump of 47% and 26% respectively, as per industry sources.

In fact, given the market conditions where inflation has been on a steady rise over the course of the financial year and looming in the range of 9.60%, having reduced only marginally from double digit figures in previous months, we are seeing most MNCs being increasingly cautious about committing to investments and expansion plans, considering their home countries are not doing well. Even domestic companies are in wait-and-watch mode, as most of them are focused on upgrading and consolidation and exploring opportunities in more affordable markets.

The Q3 2012 RICS Global Commercial Property Survey paints a slightly positive picture, as demand seems to have stabilized in the Indian occupier market after having fallen in the previous quarter. In fact, India is seen to have improved seven places in the global rankings to 19 in Q3 as compared to 26 previously.

Rental expectations also stabilized in the country with rentals actually turning positive this quarter. In fact, India is seen to have improved 9 places to a ranking of 10, in the overall global rankings for rental expectations in Q3.

Overall, stringent lending norms to the sector have curtailed capital funds, with alternative sources of financing also unable to provide much needed respite to developers. With rising interest rates, inputs costs and pressurized margins the residential sector has also seen sluggish activity. With reduced absorption, supply is limited with less number of new projects entering the market.

Therefore, it seems unlikely that there will be any drastic price rationalization for existing housing stock. However, for new housing stock coming into the market, we may see some level of correction.

Even in the retail sector, there has been a drop of over 65% in the total supply causing the retailers in cities like Delhi-NCR, Mumbai and Bangalore to actively lease space in superior quality malls.


Time to think beyond traditional format in integrated townships


We all dream of living in a house of our own and often enough put in our lifelong savings investing in a home that has the best of both comfort and location. However, it can be a nightmare if your house is in a locality that requires a lot of effort in getting access to even the things of daily use or makes commuting to your workplace an ordeal. Even the posh areas of a metropolitan city are not free from this problem where you might have to walk quite a distance to get to the supermarket, travel from one corner of the city to other to reach malls and multiplexes, start early for workplace or drive for long to access a hospital in emergency.

If you are looking for a house that is well-planned and at the same time has all the amenities in close vicinity then here is something that could help you out – Welcome to the world of integrated township, a concept that has witnessed a tremendous growth in the past few years.

A new name for quality living and lifestyle – integrated township, in fact, is a community habitat where walking to the shopping centre and your workplace is possible, your kids can cycle to their school, and ancillary facilities such as hospitals, hotels and entertainment centers are just a stone throw away — not to mention other amenities such as non-stop water and power supply, wide roads, plenty of green spaces, security systems, swimming pools in the backyard, club houses, joggers parks, and children’s play areas.

Thus, while basic infrastructure like roads, power and water takes time to come up in municipal areas, one can live in peace in an integrated township as civic amenities are already in place. Adding to this, most of the integrated townships are designed as gated communities, which make them an ideal choice from the security perspective. No wonder, integrated townships are supposed to be the next big thing in the Indian real estate sector as they encompass all walks of life and have the ‘city within the city’ concept providing daily amenities and infrastructure to residents.

Today, when owning a home in the city has become extremely cumbersome and costly, the concept of integrated township is fast-catching up with the improving lifestyles and expanded knowledge of today’s discerning consumers on global trends that have made these new-generation property buyers even more conscious about the properties they want to invest in.

Moreover, with pressure on existing urban infrastructure and rapid urbanisation in key metros (Delhi, Mumbai, Chennai, Bengaluru, Pune), the trend of integrated townships has become quite popular in tier I and tier II cities. Integrated townships are now being seen as the most suitable residential solution to reduce pressure on the major urban centers across the country.

One of the biggest advantages of investing in integrated townships is that the cost of entry is low compared to investing in city projects. As most integrated townships are coming up at a distance from the city core, that gives the developer an advantage of lower land cost which is passed on to the buyers.

Suitable location is another big advantage of integrated townships as more and more developers are trying to develop townships close to software parks, industrial estates, and the like – making it possible for the professionals working in those places to have their dream home close to their workplaces. Moreover, most of these townships also have spaces for commercial use that includes offices and retail spaces.

The changing mindset of people has resulted in developers being more innovative with design and architecture of the residential buildings. Also, increased competition in the market through entry of national developers apart from the local developers has resulted in increased options for the buyers.

Integrated townships are also supposed to reduce the pressure on city infrastructure. The Government, therefore, is now encouraging the development of such townships to reduce pressure on urban areas and to improve infrastructure. Also, the amount of Foreign Direct Investment (FDI) in Townships in India is increasing and this has given a major boost to the sector. FDI makes overall economic sense as it helps to bring in the latest technology in the construction of townships and generates employment opportunities for the people of the country.

These projects also offer real estate developers an opportunity to cash in on the revival in demand for residential and commercial space. These projects are part of an effort by these developers to reduce risk in their business model, as one vertical provides a cushion to another in case of tepid demand.

It is, in fact, only because of their numerous advantages that integrated townships are now witnessing a quiet growth in the number of planned projects that blend in a lot of things to make ambitious projects really successful and sustainable. And lured by their growth and future prospects, developers across the country are exploring the township model and are going all out to develop little cities on the outskirts of big cities, particularly metros.

According to industry experts, the concept of integrated townships is here to stay with convenience, affordability and lifestyle being the priorities of a customer. Dozens of large townships are currently being set up across India and are due for completion over the next couple of years. Their demand is only set to head north in future. Whatever be the case, with residential conditions in our larger cities on a decline, integrated townships definitely seem to be the answer to India’s growing housing woes.

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