Ashutosh Limaye – Head – Research
& Real Estate Intelligence Service India
The
year 2012 closed with a few notes of positivity as the inflation was below the
Reserve Bank of India’s (RBI’s) projected levels and the Index of Industrial
Production (IIP) growth increased in the last two months of the year, giving
new hopes for 2013.
Overall,
2012 remained inactive, affecting all the major sectors in real estate. Office
space absorption remained lower compared with 2011. Meanwhile, retail faced
challenges of quality supply, affecting the overall absorption. The residential
demand improved; however, developers continued to struggle with unsold
inventories. With the expected moderation in inflation and strengthening
policies, we have gathered few interesting insights for 2013 from real estate
experts.
1.
Economy – As per RBI, the policies will focus
towards growth in 2013, although risks of inflation will continue to remain.
Interest rates are expected to witness a downward correction of 100 to 150 bps
in 2013. The softening of interest rates is expected to reduce the home loan
rates, in turn increasing the buying of real estate assets. Increasing urbanization
and consumption despite the slowdown in GDP growth will be the key drivers of
the economy in 2013.
2.
Policies – The recent policy initiatives are
expected to improve the investment climate and business environment, and they
are likely to benefit the real estate sector in 2013. Few policies to look at
in 2013 are: the Real Estate Regulation Bill, likely to be tabled in the
upcoming winter session of the parliament; the real estate investment trusts
(REITs) or real estate mutual funds (REMFs), expected to get launched in 2013;
and the Land Acquisition and Rehabilitation and Resettlement Bill, likely to be
tabled in the upcoming budget session in 2013.
3.
Infrastructure – The infrastructure sector achieved
a substantial FDI of USD 2.8 billion, accounting for a notable 7.7% of the
total FDI inflow in FY 2012. In the year 2013, the relaxation of FDI policies
in multi-brand retail is expected to surge the investment in back-end infrastructure
development such as logistics. Moreover, an FDI of up to 100% is also permitted
under the automatic route in built-up infrastructure and is likely to surge the
development of the city and the regional level infrastructure in 2013.
4.
Office Real Estate – Office space absorption in 2013 is
likely to remain equal to that in 2012. Supply correction will lead to fewer
options for occupiers, and steady absorption will decrease vacancy levels.
Competition for space in prime buildings in prime locations is expected to
increase in 2013, and these spaces will start earning a premium. Rents are
expected to increase from 2H13 onwards as fewer new projects are being
launched, and vacant spaces are steadily filling up. Decisions on occupying
special economic zone (SEZ) spaces will be taken by occupiers who are sure of
taking a position in India as they have to go live by March 2014 to avail the
benefits.
5.
Retail Real Estate – The relaxation in FDI policies in
multi-brand retail interestingly has surged aggressive growth amongst Indian
retailers to take the first-mover advantage. This is expected to drive the
demand in 2013. However, as supply of retail malls remains a challenge,
retailers are likely to opt for built–to–suit (BTS) options or high-street properties.
As most developers are focusing on residential developments, the supply of
malls will reduce in the major cities over the year. In 2013, retailers will be
cautious and take more time to execute agreements as they will do a detailed
analysis before closing transactions. Retailers will commit to space only if
they see approvals in place and the construction of the space in progress.
6.
Residential Real Estate – REITs in
India allowing investments in rental housing is a new trend worth watching. The
framework and details of REITs, once formulated, are likely to drive the
investor demand across the prime cities in India in 2013. Another interesting
trend observed in the last two years was that the stock in the range of INR
2,000–3,000 per sq ft was fast sold out. In 2013, this range is likely to shift
to INR 3,000–5,000 per sq ft with the increase in inflation and construction
costs.
7.
Industrial Real Estate –
Sale-cum-leaseback of exiting industrial assets by existing companies is likely
to increase in 2013. MNCs testing the waters in India are likely to focus on
BTS industrial properties. Warehousing companies are now preparing for the
goods and services taxes (GST) and are slowly moving from godowns to
distribution centers. The growing trend in e-retailing and FDI in multi-brand
retail is expected to surge the demand for warehousing spaces in 2013.
8.
Education and Health Care – There
are aggressive growth plans in K-12 and skill-space educational institutions in
2013, particularly in the non-metro cities of India, where there are large
opportunities. In the health care segment, hospital chains, along with day care
centers, are expected to expand aggressively in 2013. Both these segments are
expected to attract private equity investment in 2013.
9.
Investment Sentiments – Debt
capital is likely to increase in 2013. Banks are expected to be more flexible
in lending. Most of the realty funds are close to their exit periods as they
were invested around 2006–2007. Therefore, the exit of real estate funds is
expected to increase in 2013. Meanwhile, interest on income-producing assets by
institutional investors is likely to increase over the year. However, the
availability of such assets will continue to remain a challenge. Assets will
witness a softening of yield rates amidst increased liquidity.
10.
Delhi – Most of the absorption in Delhi NCR
is likely to focus around Gurgaon and Noida, with the exception of Delhi
International Airport Limited (DIAL) and few select stand-alone Grade A
projects of Delhi. As the demand supply gap of quality office space is expected
to increase because of the supply constraints in select
precincts
of Delhi NCR, rents are expected to increase in certain micro-markets by 2H13.
Developers will focus on delivery of the products.
11.
Mumbai – Office absorption and residential
demand will continue to increase in Mumbai. The trend of completion of high-quality
new office projects pushing up Grade A office vacancy levels and providing
tenants with greater bargaining power will reduce in 2013. With banks
drastically reducing lending activities over the last two years, resulting in
debt remaining a constraint, not much of new commercial supply (except spillover
from 2012) is expected to be completed in 2013 and 2014. Residential launches
are expected to increase; however, price drop is unlikely to happen over the
year. Amidst constrained supply of quality retail malls, rental gap between
Grade A malls and Grade B malls will further widen in the year.
12.
Bangalore – In terms of office space, Outer
Ring Road will continue to be the sought-after destination in 2013. For
residential real estate, North Bangalore is expected to continue to remain as
the best performing region in the city with strong infrastructure development,
increased demand and price appreciation in 2013. Meanwhile, Whitefield will
continue to retain its sheen for both office and residential real estate
because of affordability, proximity to key work places and good social
infrastructure.
13.
Other Cities – Chennai, which witnessed a
historical high number of residential launches in 2012, is likely to slow down
in 2013. This trend is also expected in Pune. Meanwhile, Kolkata and Hyderabad
are likely to witness increased launches. Prices of residential units are
likely to increase in all the cities because of the increased
construction costs. Ahmedabad, Bhubaneswar Kochi and Coimbatore are other
cities in India that are likely to witness immense development activities in
2013.
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