Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India
THE ECONOMY IN 2013
India’s
GDP was revised downward consistently in the last three quarters of
2012. In 2013, this trend will prevail – though the quantum of revision
will be lower. The country’s economic environment will certainly improve
in 2013, with a corresponding (though lagging) gain in momentum for
real estate. The most tangible benefits of economic improvements on the
Indian real estate space will be seen in 2H2013.
The
average inflation rate (based on the wholesale price index, or WPI)
moderated to 7.4% in 3Q12. This can be seen as sensibly low when
compared with the average CPI, which remained at 10.2%. As a result of
the slight moderation in WPI inflation, the Reserve Bank of India
started softening its cash reserve ratio to improve the credit
situation. Further easing of liquidity with the prime objective of
reviving the GDP is expected in the first half of 2013. Base rates,
which peaked in 3Q12, are likely to start falling in 4Q12 on the heels
of monetary easing by the RBI.
RESIDENTIAL REAL ESTATE IN 2013
Residential
property prices have breached affordability limits in cities like
Mumbai. Nevertheless, developers will have to factor in the ground
realities of the business while debating the lowering of prices to
catalyse sales in 2013. Obtaining the 57-odd permissions to begin
construction of a project can take as much as two years. During this
time, the cost of acquisition or even just holding the land for a
project rises. Builders are already beset with the increased costs of
license costs and cost of construction.
However,
it became evident in 2012 that homes are not selling at the current
price points, and developers do need to re-calibrate their bottom lines
while still remaining viable as businesses. It is extremely doubtful
that the previously offered freebies and other such incentives will
prove to be much of a booster in the current environment. Since the only
way to catalyse healthier sales at this point is offering buyers
tangible financial relief, we are likely to see drastic trimming of
frills in projects to make them more marketable from a pricing point of
view, and innovative payment schemes.
Developers
will also offer buyers attractive pre-launch benefits in a bid to
accelerate sales momentum in the initial months following a launch.
Developers with large-scale projects with a greater share of unsold
inventory will be under greater pressure to offer discounts than those
with smaller projects and limited inventories.
Although
most of the cities of India will see an increase in residential
launches in 2013, the southern cities of Bangalore and Chennai will
witness a decline in launches as compared to 2012YTD. It is important to
note that these two cities recorded a historical high in terms of the
number of launches during 2012.
To
illustrate - Pune has recorded an average of close to 6000 units per
quarter over the past three years (2010–2012YTD). This is more than
twice the average quarterly launches recorded during the period
2007-2009. As a market that has grown too fast in such a short time,
launches in Pune will be moderate in the near term.
COMMERCIAL REAL ESTATE IN 2013
The fact that the major cities of Mumbai, NCR-Delhi, Bangalore and Chennai saw
72.5% of the total commercial space absorption in 2012 is a telling
one, and indicates the forward path. These cities will grab the lion’s
share of contribution in total commercial space absorption in 2013,
certainly within the range of 74-76%.
In
terms of commercial real estate investment potential, Mumbai, Bangalore
and Delhi NCR will continue to be of highest interest to big ticket
investors focused on real estate in 2013. We also expect investor-driven
demand to remain upbeat in Chennai, Hyderabad and Pune. Mumbai will see
the highest share of commercial corporate property transactions from
companies focused on their own occupancy needs. The Delhi
NCR region, will be more popular with high net-worth and institutional
investors.
We
expect 2013 to bring a larger-than-usual number of NRI investors into
the commercial space arena. This is because NRIs are currently enthused
by the prevailing exchange rate benefits and the fact that commercial
real estate capital values are still 15-25% under their 2007-08 peak
levels.
RETAIL REAL ESTATE IN 2013
In
2013, new organized retail project completions will increase
significantly (by 109% y-o-y). Chennai, Hyderabad, Kolkata and Pune will
be among the major contributors to this increase, with a 53% share of
the country’s overall mall supply for 2013. The primary reason is that a
sizable amount of supply that was expected to reach completion in 2012
has been being pushed to 2013. Altogether,
India’s major cities like Mumbai, NCR-Delhi, Bangalore, Chennai, Pune,
Hyderabad and Kolkata will see the addition of close to 9.5 million
square feet of mall space in 2013. Mumbai,
NCR-Delhi, Bangalore and Chennai will together contribute 70% of the
total retail space absorption. Other cities like Pune, Hyderabad and
Kolkata will account for the remaining 30%.
The
Government’s nod to FDI in multi-brand retail will be a major driving
factor for increased activity in 2013. Since the policy opens the
portals to major MNC retail brands in India, the organised retail sector
will see a major transformation in terms of its overall contribution in
the mid-term. This, in turn, will positively impact the absorption of
retail space over the next 12–24 months. The absorption is forecast to
touch 6.8 million square feet and 7.1 million square feet in 2013 and
2014 respectively.
That
said, the benefits of the much-awaited FDI decision will not become
fully evident in 2013, as it will take mall developers at least two
years to incorporate the design elements and dimensions required to meet
global standards. Mall developers are expecting a massive increase in
demand for their projects in 2013; however, those whose shopping centres
do not meet the requirements of international brands in terms of
location, overall size, design, professionally managed operations will
fail to see any action.
POLICY
The
much-debated policy on FDI into the multi-brand retail sector was
finally implemented in September 2012. The policy now permits FDI of up
to 51.0% into this sector, which is likely to boost the retail real
estate market with the entry of international products, practices and
technologies into India. Back-end retail infrastructure such as
logistics and warehousing (both of which are critical growth catalysts
for the retail sector) will receive a significant boost from this
policy, as 50% of the total FDI into the retail sector is directed at
these segments.
The
power exchange and civil aviation (and also broadcasting) sectors have
been permitted FDI in a bid to improve efficiency and productivity. In a
time when liquidity is down and the performance of various sectors is
deteriorating, a shot in the arm for power and aviation will have
positive (albeit only over the long term) ramifications on the real
estate sector, as well.
The
Direct Tax Code (DTC) - a major evolutionary step in the country's
taxation system - will change the entire financial landscape of India.
As it spells major change, it will require a fairly in-depth study from
an occupier’s perspective before all its implications can be understood
and assimilated. The Government of India has deferred the implementation
of DTC from 2014 to 2015, which gives occupiers more time to capitalize
on their expansion decisions while carefully negotiating with
developers.
The
delay in the implementation of DTC has resulted in a good portion of
the office space demand for IT SEZs to spill over from 2013 to 2014.
With the demand for IT SEZ space to remain healthy in the next 12–18
months, we expect the developers of IT SEZs to focus on execution and
completion of projects for the duration, to ensure ready supply to match
the immediately upcoming demand.