As a landmark year for the real estate industry draws to a close, it’s time to review the major events of 2017 in Indian real estate and look at some upcoming trends in 2018.
For the real estate industry, 2017 was a watershed year, with the roll-out of game-changing policies such as GST and RERA. Demonetisation’s impact started to taper off slightly, while real estate investment trusts (REITs) did not take off this year as expected. Affordable housing came out of the shadows and affordably priced units have been selling like hot cakes in most cities.
REITs are set to provide investment opportunities to smaller investors next year.
India’s real estate markets are poised for growth in the medium-to-long term on the back of higher transparency and further consolidation.
India’s Tier 1 cities are expected to move up from their current 36th rank in JLL’s 2018 Global Real Estate Transparency Index (GRETI) on the back of continued improvements in structural reforms, implementation of RERA and GST aimed at making India a modern economy.
Let’s revisit the top trends in real estate in 2017 and examine what can transpire in 2018.
Office asset class
Vacancy levels remained largely unchanged through 2017, hovering at around 14% pan-India. Select markets saw lower vacancy levels and are expected to see a further decline in 2018. Overall vacancy levels will likely hover around 15% during 2018. Very low vacancy rate and continued demand in the prominent office corridors of Bengaluru, Gurgaon, Hyderabad and Pune will help better rental appreciation in 2018.
The net office space absorption for 2017 will be at around 32 million square feet if all supply expected to come in this year actually enters the market. In 2018-19, Bengaluru is likely to see highest absorption of office space, followed by NCR, Mumbai and Hyderabad. The future supply is expected to be higher in 2018-19 in NCR and healthy in Hyderabad and Mumbai, while it will be lower than expected in Chennai and Kolkata.
At a pan-India level, total office stock across the seven major cities is forecast to reach around 600 million square feet by end of 2019. In alternate office (or co-working) spaces, around 1.2 million square feet got absorbed across major Indian cities in 2017.
Co-working involves various individuals or start-ups sharing a common workplace environment. Companies can save as much as 15-20% by working in a co-working space, which provides an ultra-modern workplace along with plug-and-play amenities at par with those at Grade A offices.
Retail asset class
New retail space of 6.4 million square feet got completed in 2017 – making this year the second-best after 2011 in terms of net absorption (i.e. after withdrawal of 4.7 million square feet from failed malls). Shopping mall stock is projected to grow strongly in the next 3-4 years in these seven cities of India, as around 20 million square feet of supply is expected to come up by end of 2019. Out of this, around 11 million square feet of supply is expected in 2018, if completion delays are not accounted for.
As of now, the majority of stock is concentrated in Delhi NCR, Mumbai, and Bangalore. However, the percentage share of other cities is expected to rise in next few years. The supply-side analysis is critical for retail real estate investment, as it ensures that there is a pool of properties that can be considered for expanding portfolios, and also apprises about the prospective competitors in the long run.
Delhi-NCR saw eight malls being withdrawn in 2017 after 2016 when negative supply was first recorded in the history of Indian retail real estate. Prominent high street locations across India have limited availability of space, similar to premium malls. Fast fashion, F&B and entertainment operators again dominated leasing, with premium malls the main target for space.
International brands have been entering the country and expanding in the past couple of years, and more are expected to look for quality space across the country. In the past few months, increased private equity interest in key leasehold retail assets has been observed across the country. The upcoming REITs platform has attracted the attention of private equity players, who are now gearing up to expand their retail portfolio across Indian cities. While rental values have seen marginal appreciation, numerous retailers have started preferring the revenue-sharing model over the fixed-rent model in the last few years.
Residential asset class
GST applicable to the purchase of homes in under-construction projects caused homebuyers to either buy into completed projects or hold onto their purchase decisions. Also, developers halted sales in projects not registered under RERA across major cities. These combined factors led a quarterly sales decline in five of the top seven cities to an all-time low of 4.8% in 3Q17. This led to developers offering higher discounts to genuine buyers.
In 2017, capital values in cities such as Pune, Kolkata, and Hyderabad grew at a comparatively faster rate, thanks to their lower price base compared to the Tier 1 cities. New launches were slower in 2017, and are likely maintain the slow pace as developers assess market sentiment in the RERA-era. Prices are expected to remain stable in 2018 too.
The residential asset class cornered a large share of the total investments (a combination of debt and equity) through most of 2017, thanks to the growing confidence in this asset class.
[bctt tweet=”Implementation of major reforms such as RERA, GST, the Benami Property Act and demonetisation promise to make Indian residential real estate more transparent than ever before.” username=”RoofnFloor”]Steady investments will continue to be seen in this asset class in 2018.
Warehousing and industrial asset class
The warehousing and industrial asset class, which has been seeing big-ticket investments in India, had also seen the biggest-ever investment deal in the country’s logistics space in 2017. With JLL India as the transaction partner, the Canada Pension Plan Investment Board (CPPIB) acquired a majority stake in IndoSpace, the warehousing and logistics real estate arm of Everstone Group. As part of the USD 500 million deal, CPPIB will acquire 13 industrial and logistics parks totalling 14 million square feet.
It is pertinent to note here that even though CPPIB is the biggest deal in this space so far, investors from other nations – especially Asian countries like China, Japan and Korea – have shown considerable interest in developing industrial projects in India. In the GST era, warehousing is emerging as an attractive asset class for investors and private equity players. The stock of modern and better-managed warehouses is increasing, and the trend is set to continue in 2018 as well.
This article is contributed by Ramesh Nair – CEO & Country Head, JLL India
The views expressed here are solely those of the author and do not necessarily represent or reflect the views of RoofandFloor.