Mr. Colin Dyer,
President & CEO - Jones Lang LaSalle Inc. was recently in India for the
Firm’s General Executive Council Board of Directors meeting. Between sessions, Mr. Dyer took time out to
share his impressions of the Indian real estate market:
Ø Economic Markers..
India’s GDP (Gross
Domestic Production) stood at 4.4 % for
Q1 FY13-14, and the RBI projects it to reach at 5 % by end of FY 2013-14. This
slow growth projection can primarily be attributed to India’s depressed industrial
production and high interest rate environment. The effect of current credit
tightening by the RBI (Reserve Bank of India) is likely to control inflation by
this fiscal end. WPI inflation is expected to reach 5.3 % by end FY 2013-14
from the current 6.5 %.
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| Mr. Colin Dyer |
The current quarter
and 4Q FY 2013-14 are likely to demonstrate improved momentum on account of
agricultural prosperity thanks to a good monsoon and growth in the
infrastructure sector pushing up the performance of the industrial sector.
Another effect that the Indian economy will see in 1 H CY 2014 will be on
account of the general elections in May.
The last elections in
2009 brought an influx of INR 9,000 crore (USD 1.5 billion), of which the
Government spent INR 2,100 crore (USD 350 million) merely for conducting the
elections. If a similar expenditure happens next year, it is bound to lift the
country’s economy.
Ø
The Changing Landscape Of Private Equity..
Private equity (PE) funds focused on real estate started out
as pure equity players, with investments during the peaking period of 2005 to
2008 directed primarily towards the commercial office sector.
Although the funds
have kept away from organized retail formats since the beginning, the
commercial office sector has now moved down the pecking order from being the
favored asset to being a minor percentage of the investment pie. Investments
are now mostly directed towards preleased assets or operational assets with
healthy occupancy levels.
Since the aftermath
of GFC, the investment philosophy of PE firms has made a paradigm shift towards
the residential sector. Having realized the self-liquidating nature of the
residential segment, where returns flow in faster given the demand for housing
in India, private equity players have spurred their investments in this asset
class.
The way in which
geographic focus has changed is also interesting. The initial years of the
industry life-cycle saw the investment focus of most PE firms being restrictive
in nature, with exposure to only the Tier 1 cities of India.
However, with
maturity improving in Tier 2 cities, PE funds were keen to evaluate
transactions in other emerging real estate clusters of India.
Tier II cities,
especially those which had the potential to act as ‘spokes’ to the ‘hubs’ of
Tier I cities, saw an active interest from such players. In recent years, a
trend reversal has been observed wherein the geographic focus has shifted back
to Tier I cities as the PE funds tread cautiously during times of uncertainty.
Private Equity funds
are now increasingly looking at preferred returns structures that enable them
to take out their capital prior to the developer. This ultra-cautious approach
has emerged after the recessionary phase, which saw investments locked in
illiquid assets. Funds are looking at market level protection to ensure that
principal capital has sufficient safeguards.
About USD 50 crore
would have been raised since April 2012. There are also some sovereign funds
that are evaluating various deals. Nearly 45% to 50 % of the amounts raised
would have been invested to date. By 2Q 2014, most of the remaining amounts are
expected to get invested. While sovereign funds are also looking at core
assets, very few have so far actually been
The real estate
segment that has been attracting the highest magnitude of investments is the
residential sector. Funds are primarily looking at on-going projects by
credible developers with transparent completion timelines. The reason why
residential continues to be so attractive to funds is that despite the current
moderation in absorption, the underlying demand dynamics driving the
residential segment are still the highest.
Broadly speaking,
Mumbai, NCR & Bangalore have
attracted the maximum investments in recent times. These cities generate the
bulk of employment in India. It follows naturally that the demand for
commercial and residential real estate is also the highest in these three
cities. Axiomatically, whatever finance for real estate is now available is
almost exclusively focused on Mumbai, Delhi & Bangalore. Pune is also
notable - if not in magnitude of investments, then certainly in the consistency
of interest in this city by funds.
Ø Price Correction In Residential Real Estate..
Real estate prices in
many of the Indian metros have crossed sustainable limits. The real estate
development business may not be sustainable at the current exorbitant price
levels. Banks therefore perceive it as risky to lend to property developers.
Lending institutions have taken an unyieldingly hard stance and are attaching the
under-construction projects of defaulting developers / promoters.
As soon as prices
start becoming more rational, there will be a significant mitigation of risk
and banks will begin granting more loans to developers.
I definitely foresee
a correction in prices across many Indian cities. In fact, it is over-due.
However, corrections will depend on certain aspects. We are seeing a massive
inventory of unsold residential units in the larger cities, and the developers
with the larger shares of this inventory will have little choice but to yield
to the price pressures. It also depends on area specific demand-supply
condition or macro market. In areas where the demand exceeds supply, price
corrections may not happen. Moreover, properties bought for investment purposes
will see more corrections.
Since 4Q 12 in which
80,000 new units were launched across India, new launches have come down to
50,000 in 3Q 13. Sales have dipped from 50,000 top 40,000 in the same period
and the inventories have piled up. The majority of sales taking place are
during the project launch phase that corresponds to competitive pricing, sales
during the construction phase have dried up.
The average prices of
units in new launches have easily decreased by 15% to 25% with respect to
prevailing market pricing, and developers are luring buyers with unprecedented
offers. The new marketing theory appears to be to sell the maximum at the
launch stage itself, with attractive pricing to ensure cash flows (as good as
finance at zero cost) to sustain the project, and earning profits by selling a
small proportion of units towards the end at a hefty premium.
Ø To Summarize..
India's real estate
market is definitely experiencing its own share of turmoil, but the pain is not
wasted - every market must undergo pain in the process of maturing. If
anything, the Indian real estate market is extremely resilient and is growing
even in times of hard change. It is impossible to ignore such a market, either
at a domestic or international level. Cyclical highs and lows apart, I am
convinced that Indian real estate's best times are yet to come.
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