Indian Commercial Real Estate 2013: A Outlook

by Mr. Anuj Puri is Chairman & Country Head at Jones Lang LaSalle India

Indian Commercial Real Estate 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 (Gross Domestic Production)  for the full year FY 2013 -14 of close to 5% y / y, 2 H - FY 2014 should record a growth rate of over 5%, 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.

Mr. Anuj Puri

FY2013-14 GDP forecasts (YoY %) of various institutions

Institutions                                      GDP forecast     Forecast month

Asian Development Bank              4.7%                       Nov-13

World Bank                                      4.7%                     Oct-13

NCAER India                                   5.0%                      Nov-13

Reserve Bank India                       5.0%                        Oct-13

Source: JLL Research

However, as repeatedly highlighted by the RBI, inflation continues to remain a threat despite the index

falling gradually in the interim months during the year. As labour wages are directly linked to inflation,

any rise in generalised prices would mean further increases in the cost of construction.

Absolute cost of construction has already increased by 25% to 30% over the last 4 years across leading

cities, as against a 20 % rise in pan-India capital values. 

Also, the cost of finance has increased in the light of banks’ reluctance to fund what is currently perceived as a high-risk sector. Most private financial institutions have also switched from providing equity funding (thereby taking some risk against expectation of higher returns) to providing debt funding (usually at a high fixed interest rate).

Market Sentiment Expected To Improve During 2 H - 2014

The lukewarm absorption of office spaces is likely to remain until uncertainty over some of the abovementioned

headwinds dissipates. The US federal reserve’s decision on tapering (due early next year),

the Indian general elections (due in 2Q2014), and the RBI policy direction (based on the inflationgrowth

dynamics) are key factors to look out for in the coming 6 months.

However, 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.

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