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Outlook for 2011

The Economic Times (Bangalore edition)

January 12, 2011


As India gears itself to the growth path, the importance of real estate sector need not be overstressed. After a period of gradual consolidation, the sector is now poised to take a giant leap in the years to come. The Credai has released a white paper brought out in association with property consultants, Jones Lang LaSalle. The year 2011 would usher a new decade of opportunities for Indian real estate and the winners would be the ones who balance caution with diligence evaluating at the potential opportunities with pragmatism.

On the commercial property front, the year 2011 should see more wealth being created across industries in the country, which will trickle down as demand for real estate. Absorption of office space across the top seven cities will grow nearly 1.8 times from 19.6 million sqft recorded in 2009 to 35.7 million sqft in 2011.

The sunset over STPI regulations on IT space has influenced the demand scenario for IT projects across cities. Healthy demand for IT SEZ space was already visible in the second half of 2010, post the clarification of the Union budget. The revised Direct Tax Code (DTC) which also puts a deadline to notification to SEZs in India will have a significant influence on office real estate in the coming years.

However, the traction for IT SEZ spaces is likely to remain during this year as the deadline for notifying a SEZ is March 2012 and operating out of the premises is March 2014. Developers, who are planning to build SEZs or have got approval for the same, should begin the construction to satisfy the March 2014 deadline for units to occupy spaces. Bangalore has a larger supply of IT projects and relatively fewer IT SEZ projects.

A rise in the share of outright purchases has been witnessed in the Indian market following the undervaluation of commercial markets relative to rental decline. The share of outright purchases in total transactions has increased from 4-5% in 1H08 to 13-15% in 2010. This trend is likely to continue in 2011 as well, as several private equity funds as well as occupiers evaluate the buy versus lease options and look ahead towards acquisition of office space at reasonable capital values.

With several prime central locations of the cities reeling under inadequate urban planning and outmoded architectural standards, refurbishment of office projects is expected in Indian cities. There are instances of retrofit during the past 2-3 years which is likely to continue as owners and occupiers see value in upgradation of their real estate holdings into the investment grade category.

Nearly 60-70% of the demand for office space during the past years has been contributed by the IT/ITES and banking, financial services and insurance (BFSI) sector. The latter has also been a key contributor to the demand for office space in the country. In fact 16-22% demand for office space came from the BFSI sector.

Since most of the markets are the IT destinations of Bangalore, Chennai, Pune, Hyderabad and Kolkata, the intercity competition to garner demand from the sector would be paramount in coming years. The key to success would be diversifying the occupier base into other sectors such as BFSI, manufacturing, logistics, consulting services among others.

Residential sector:
The residential sector continued its strong growth trajectory in 2010, which it has been treading from the second half of 2009. The year also saw an increased number of launches in the premium segment, mostly in Mumbai market. However, sale velocities of houses have dropped by end of the year and further hardening of interest rates along with high inflationary pressure can be a dampener for residential sales in the coming quarters.

Several infrastructure initiatives are under way to connect the leapfrogged locations with city centres and already developed office locations. In 2011, residential projects priced in the range of Rs 2,000 - Rs 3,000 per sqft would continue to get launched at these locations and should see increasing acceptance from the price sensitive home buyers.

The ultra low cost housing has not been fully embraced at a large scale by the private sector. However, due to large shortfall of housing units in this particular segment, the demand for housing units by the economically weaker sections (EWS) remains high and the segment is critical for increasing homeownership in India. The real estate sector is expected to soon harness the massive opportunities of scale and scope.

Rising real estate rates is a cause of concern for the money market regulators in India. The hardening of interest rates coupled with rise in property prices would impact the decision of the home buyer. If residential rates increase by 10% and interest rates rise by 100 bps, the affordability will reduce from 15% to 2% of the peak levels in 3Q08. Stabilisation and wilting of absorption rates have already been witnessed in certain markets.

In Bangalore, Hosur road and Bellary road have witnessed high residential activity during the past two years and are expected to remain active in the coming years. While Hosur road connects the city to electronic city, the Bellary road connects to the new international airport.

Sustainability, which is already prominent in the commercial sector, will gain focus in the residential space as well in the coming years. Indian Green Building Council (IGBC) recently rolled out green homes. The trend will continue in future as buyers become aware of the benefits of green buildings and in turn developers look forward to market their products with a green certification.

On the retail front, Bangalore and Kolkata have a retail stock of 3.8-3.9 million sqft each, followed by Hyderabad, Pune and Chennai. Sixty-five shopping centres encompassing a total retail space of 24 million sqft are expected to become operational during the next five quarters between 4Q10-2011 across the top seven metropolitan cities. Revenue sharing model is a form of collaboration between the retailers and developers, where they are sharing the successes together, while minimising the downside risk.