By Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India
Residential Real Estate
2013 Review
Lack Of Confidence Reduced Investor Interest, But Empowered End Users
The year 2013 was a drag for the Indian economy with poor macroeconomic conditions. Slowing income growth, sustained weakness in the rupee, sky-rocketing inflation and high borrowing rates combined to make consumers vary of spending. This reflected visibly in the Indian consumer confidence index, which has been falling consistently over the last three quarters. Housing absorption statistics the first three quarters of 2013 also reflect this trend in consumer sentiment - from a largely positive QoQ growth to largely negative growth as of 3Q13. Despite this, residential property prices continued to exhibit upward movement even as the weakening rupee steadily eroded purchasing power. Over the last four years (from the trough of 2Q09 up to 3Q13), taking into account the period of economic slowdown, apartment prices have risen by over 50% on an average across India. As a result, absorption remained subdued during 2013 (until 3Q13), falling further from the already tepid levels observed during the same period last year. 2013 saw a decisive shift of bargaining power in favour of buyers. Towards mid-year, a significant fall in the rupee against the US dollar gave NRIs and foreign investors an opportunity to earn incremental returns of 10-15% merely on the exchange rate movement (the rupee has partially recovered since then). Further, developers’ willingness to lower prices by 10-15% gave serious local buyers a chance to get genuine bargains on their property purchases. Therefore, the market presented good windows of opportunity (albeit small ones) at fairly regular intervals.
2014: Outlook
Time To Match Demand With Relevant Supply
While the India’s gripping urbanisation growth story has been fascinating global investors so far, an underlying truth gradually emerged in 2013 - economic growth, the consumption story and property prices may not rise consistently, and there could be intermittent hurdles or growth risks. The presently cautious market sentiment is likely to continue, as headwinds to growth will prevail at least until the first half of 2014. However, the second half is likely to witness gradual revival in absorption. Residential real estate capital values will increase in a subdued range of 10-12% y/y pan-India for the whole year.
Affordability Will Drive Growth In 2014
An emerging economy is never short of opportunities, and it is time that the Indian residential real estate industry realises where the opportunity lies. To date, the shortage of homes in India stands at around 19 million units, and 95% of this housing shortage is in the Economically Weaker Section (EWS) and Low Income Group (LIG) categories. In India, housing for EWS is defined by the Technical Group on Estimation of Housing Shortage as having a carpet area of 21-27 square meters; LIG housing includes units of 28-60 square meter carpet area. By Government definition, EWS housing falls in the range of INR 4-10 lakhs. This means that development of affordable housing will have to penetrate into the deeper suburbs of our cities, where such price points are feasible.
Redevelopment Activity To Increase
With scarce availability of land in the urban agglomeration, redevelopment will emerge as another growth driver in a scenario the cost-and-time-intensive complexities with regards to land acquisition brought forth by the LARR 2013 amendments. Indian cities present an exceptional opportunity for developers in this respect - as per the latest available census data on households, only 50% of the residential units are in good condition, while the remaining are either merely liveable or in dilapidated condition.
Rise In Bank Penetration As Demand Driver
The housing mortgage market in India is currently low at 9% (mortgage-to-GDP ratio) when compared to other emerging Asian economies such as Malaysia (31%), Thailand (19%) and China (17%). In developed economies, this ratio averages around 60% of the GDP, with countries such as Switzerland, Netherland and Denmark close to the 100% level. Deeper penetration of banks and innovative financial products would help the mortgage market to expand in India. As per RBI data, even in the highly progressive state of Maharashtra, bank offices are largely concentrated around metro cities (40% of total ~10,000 bank branches in the state). With the expected release of 12 new banking licences by the central bank during early 2014, we foresee deeper penetration of the banking sector. In fact, many banks are already aggressively enhancing their rural penetration to stay ahead of the anticipated rise in competition. We believe housing sector will benefit a lot from this development.
Policy-Induced Growth Opportunities
Policy paralysis has been one of the primary reasons for the slowdown in India over the last few years. The bad press which this garnered for the Indian economy began catalysing reforms on various fronts. Policy-based efforts are already under way to make the residential real estate sector more transparent. These efforts will continue in 2014, as well. India’s capital market regulator has reiterated the importance of Real Estate Investment Trusts (REITs) as a tool to attract large pools of money into the real estate sector at relatively cheaper cost. At present, participation in real estate growth is largely restricted to NRIs, HNIs and institutional investors. REITs could open up opportunities for small investors to diversify their asset structure. Since REITs are adept at searching for income-generating properties, it could result in extracting new growth opportunities through rental housing projects, affordable housing projects and senior citizen housing projects which will increase the depth of the industry. These factors can help the Indian real estate sector sustain its attractiveness.
Demand (And Price Growth) Likely To Revive In 2H 2014
Consumer confidence will remain subdued during the first two quarters of 2014, owing to uncertainties surrounding the general elections and macroeconomic condition (both global and domestic). However, post the elections, fence-sitting investors are likely to become active. The increase in absorption of residential units will help reduce the currently large inventory holdings of developers. A recently observed trend of a gradual fall in supply in response to the subdued demand will only reverse with a lag, helping prices to strengthen gradually in the second half. Therefore, pan-India residential real estate prices are likely to grow at 10-12% y/y, factoring in input-cost inflation and a gradual pick-up in demand. The risk to this growth estimate is largely on the upside, considering that post-elections, a great deal of uncertainty which currently exists will be put to rest.
Economic factors that influence office space demand broadly fall in the categories of domestic consumption, industrial production and/or exports, with each factor having strong inter-dependence. While economic activity declined since the start of 2012, readings of 2H-2013 suggest early signals of revival in industrial activity and exports. In 2013, the trend of subdued demand for office space continued from the previous year. Thus, rental value (RV) growth was slower than that observed in 2012 (with the exception of Mumbai, where growth was relatively faster). However, capital value (CV) growth was faster than rental value growth during 2013, resulting in a fall of market yields. Vacancy rate for 2013 signs off at around 18.2%, rising from 17.4% as of end-2012. Hyderabad and Delhi-NCR were the biggest contributors in terms of vacancy levels. This was largely due to increased new supply as against a fall in absorption. On the other hand, the ‘heavyweight’ cities of Mumbai and Bangalore witnessed marginal fall in vacancy. Both these cities saw reduction in the growth of new stock supply, while absorption of office space recovered. Overall, pan-India supply rose by 10.4% y/y in 2013, whereas the fall in absorption was less severe (-1.1%y/y) as against the fall of over 26% seen last year.
2014 Outlook
Early Signs Of Economic Growth Recovery, But Headwinds Prevail
Towards the close of 2013, the Indian economy has displayed a growth of 4.5% y/y. If we take into account the estimated growth in GDP for the full year FY2013-14 of close to 5.0% y/y, 2H-FY2014 should record a growth rate of over 5.0%, which is positive in the near-term. The recent state election results (giving clear mandates in almost all states), significant fall in trade deficit (owing to rise in exports) and partial recovery of the rupee have helped revive business sentiment to some extent. During 2H-2014, businesses are likely to show greater confidence in terms of investing in their expansion plans. This would result in increased office space absorption. Overall, it is reasonable to expect better growth in rental and capital values in 2014 as against the current year. However, yields are likely to compress further as capital growth may continue to rise a bit faster than rentals. Also, the current vacancy levels would rise marginally on the back of new stock completions.
Read the complete report
https://drive.google.com/file/d/0B1qe2pqR7mvXd2dMNlU4QnBPNmM/edit?usp=sharing
2013 Review
Lack Of Confidence Reduced Investor Interest, But Empowered End Users
The year 2013 was a drag for the Indian economy with poor macroeconomic conditions. Slowing income growth, sustained weakness in the rupee, sky-rocketing inflation and high borrowing rates combined to make consumers vary of spending. This reflected visibly in the Indian consumer confidence index, which has been falling consistently over the last three quarters. Housing absorption statistics the first three quarters of 2013 also reflect this trend in consumer sentiment - from a largely positive QoQ growth to largely negative growth as of 3Q13. Despite this, residential property prices continued to exhibit upward movement even as the weakening rupee steadily eroded purchasing power. Over the last four years (from the trough of 2Q09 up to 3Q13), taking into account the period of economic slowdown, apartment prices have risen by over 50% on an average across India. As a result, absorption remained subdued during 2013 (until 3Q13), falling further from the already tepid levels observed during the same period last year. 2013 saw a decisive shift of bargaining power in favour of buyers. Towards mid-year, a significant fall in the rupee against the US dollar gave NRIs and foreign investors an opportunity to earn incremental returns of 10-15% merely on the exchange rate movement (the rupee has partially recovered since then). Further, developers’ willingness to lower prices by 10-15% gave serious local buyers a chance to get genuine bargains on their property purchases. Therefore, the market presented good windows of opportunity (albeit small ones) at fairly regular intervals.
2014: Outlook
Time To Match Demand With Relevant Supply
While the India’s gripping urbanisation growth story has been fascinating global investors so far, an underlying truth gradually emerged in 2013 - economic growth, the consumption story and property prices may not rise consistently, and there could be intermittent hurdles or growth risks. The presently cautious market sentiment is likely to continue, as headwinds to growth will prevail at least until the first half of 2014. However, the second half is likely to witness gradual revival in absorption. Residential real estate capital values will increase in a subdued range of 10-12% y/y pan-India for the whole year.
Affordability Will Drive Growth In 2014
An emerging economy is never short of opportunities, and it is time that the Indian residential real estate industry realises where the opportunity lies. To date, the shortage of homes in India stands at around 19 million units, and 95% of this housing shortage is in the Economically Weaker Section (EWS) and Low Income Group (LIG) categories. In India, housing for EWS is defined by the Technical Group on Estimation of Housing Shortage as having a carpet area of 21-27 square meters; LIG housing includes units of 28-60 square meter carpet area. By Government definition, EWS housing falls in the range of INR 4-10 lakhs. This means that development of affordable housing will have to penetrate into the deeper suburbs of our cities, where such price points are feasible.
Redevelopment Activity To Increase
With scarce availability of land in the urban agglomeration, redevelopment will emerge as another growth driver in a scenario the cost-and-time-intensive complexities with regards to land acquisition brought forth by the LARR 2013 amendments. Indian cities present an exceptional opportunity for developers in this respect - as per the latest available census data on households, only 50% of the residential units are in good condition, while the remaining are either merely liveable or in dilapidated condition.
Rise In Bank Penetration As Demand Driver
The housing mortgage market in India is currently low at 9% (mortgage-to-GDP ratio) when compared to other emerging Asian economies such as Malaysia (31%), Thailand (19%) and China (17%). In developed economies, this ratio averages around 60% of the GDP, with countries such as Switzerland, Netherland and Denmark close to the 100% level. Deeper penetration of banks and innovative financial products would help the mortgage market to expand in India. As per RBI data, even in the highly progressive state of Maharashtra, bank offices are largely concentrated around metro cities (40% of total ~10,000 bank branches in the state). With the expected release of 12 new banking licences by the central bank during early 2014, we foresee deeper penetration of the banking sector. In fact, many banks are already aggressively enhancing their rural penetration to stay ahead of the anticipated rise in competition. We believe housing sector will benefit a lot from this development.
Policy-Induced Growth Opportunities
Policy paralysis has been one of the primary reasons for the slowdown in India over the last few years. The bad press which this garnered for the Indian economy began catalysing reforms on various fronts. Policy-based efforts are already under way to make the residential real estate sector more transparent. These efforts will continue in 2014, as well. India’s capital market regulator has reiterated the importance of Real Estate Investment Trusts (REITs) as a tool to attract large pools of money into the real estate sector at relatively cheaper cost. At present, participation in real estate growth is largely restricted to NRIs, HNIs and institutional investors. REITs could open up opportunities for small investors to diversify their asset structure. Since REITs are adept at searching for income-generating properties, it could result in extracting new growth opportunities through rental housing projects, affordable housing projects and senior citizen housing projects which will increase the depth of the industry. These factors can help the Indian real estate sector sustain its attractiveness.
Demand (And Price Growth) Likely To Revive In 2H 2014
Consumer confidence will remain subdued during the first two quarters of 2014, owing to uncertainties surrounding the general elections and macroeconomic condition (both global and domestic). However, post the elections, fence-sitting investors are likely to become active. The increase in absorption of residential units will help reduce the currently large inventory holdings of developers. A recently observed trend of a gradual fall in supply in response to the subdued demand will only reverse with a lag, helping prices to strengthen gradually in the second half. Therefore, pan-India residential real estate prices are likely to grow at 10-12% y/y, factoring in input-cost inflation and a gradual pick-up in demand. The risk to this growth estimate is largely on the upside, considering that post-elections, a great deal of uncertainty which currently exists will be put to rest.
Commercial Real Estate
Economic factors that influence office space demand broadly fall in the categories of domestic consumption, industrial production and/or exports, with each factor having strong inter-dependence. While economic activity declined since the start of 2012, readings of 2H-2013 suggest early signals of revival in industrial activity and exports. In 2013, the trend of subdued demand for office space continued from the previous year. Thus, rental value (RV) growth was slower than that observed in 2012 (with the exception of Mumbai, where growth was relatively faster). However, capital value (CV) growth was faster than rental value growth during 2013, resulting in a fall of market yields. Vacancy rate for 2013 signs off at around 18.2%, rising from 17.4% as of end-2012. Hyderabad and Delhi-NCR were the biggest contributors in terms of vacancy levels. This was largely due to increased new supply as against a fall in absorption. On the other hand, the ‘heavyweight’ cities of Mumbai and Bangalore witnessed marginal fall in vacancy. Both these cities saw reduction in the growth of new stock supply, while absorption of office space recovered. Overall, pan-India supply rose by 10.4% y/y in 2013, whereas the fall in absorption was less severe (-1.1%y/y) as against the fall of over 26% seen last year.
2014 Outlook
Early Signs Of Economic Growth Recovery, But Headwinds Prevail
Towards the close of 2013, the Indian economy has displayed a growth of 4.5% y/y. If we take into account the estimated growth in GDP for the full year FY2013-14 of close to 5.0% y/y, 2H-FY2014 should record a growth rate of over 5.0%, which is positive in the near-term. The recent state election results (giving clear mandates in almost all states), significant fall in trade deficit (owing to rise in exports) and partial recovery of the rupee have helped revive business sentiment to some extent. During 2H-2014, businesses are likely to show greater confidence in terms of investing in their expansion plans. This would result in increased office space absorption. Overall, it is reasonable to expect better growth in rental and capital values in 2014 as against the current year. However, yields are likely to compress further as capital growth may continue to rise a bit faster than rentals. Also, the current vacancy levels would rise marginally on the back of new stock completions.
Read the complete report
https://drive.google.com/file/d/0B1qe2pqR7mvXd2dMNlU4QnBPNmM/edit?usp=sharing