A Little-Known But Increasingly Important Function

The lender’s engineer (LE) is a representative of lending institutions such as banks and NBFCs. His function is to audit a project from the technical standpoint when a developer seeks funding for it. This is a process which risk/compliance teams have, over time, hard-wired into funding proposals by developers.

The obvious intention behind this requirement is to identify, mitigate and hedge the lending institution’s risks with regards to the technical aspects of construction.

The key risks include:

• The developer’s potential inability to service the debt
• The potential use of the funds for purposes other than what they were allocated for
• Construction progress not keeping pace with disbursement

Currently, the RBI has not mandated any regulations in this regard. The requirement of a Lender’s Engineer is a factor of the risk and compliance parameters of individual lending institutions.

To safeguard the interests of all concerned, lenders have to ensure that the appointed LE has performed a sufficiently detailed review, provided the correct information and reviewed all the construction risks. Meanwhile, there is a recurring question in the minds of developers – what is the value they derive from paying for a lenders engineer? Is the mandatory rubber stamp all that they can expect?

The fact is that they can – and should – derive a lot more value than this from such professional services.

The True Lender Engineer Value Proposition

A knowledgeable, involved and neutral Lender Engineer can bring tangible and definite advantages that go beyond the stamp of approval to the developer’s table. The benefits of such a LE’s services in terms of project monitoring are, in fact, not limited to providing security to lending institutions – they are also an important component of risk management and value addition for the developer himself.

Backed by sound technical knowledge, the LE plays a vital role in overall project monitoring and coordination by providing steady technical feedback. These inputs can help developers to present a more accurate and convincing picture of the project’s progress at construction control meetings.

Also, these expert inputs can help reduce the chances of project failures due to:

• Conflict among the various project participants
• The project manager’s lack of information or knowledge
• Indecisiveness among project participants on key decisions

A professional project development and monitoring agency brings in best practices on processes which developers might not have adopted yet, and increased efficiency in the development process will always lead to a better product. Also, proactive identification of risks can lead to better planning / early value engineering, which can subsequently lead to savings upto 10% on the project costs.

It is recommended for lenders to involve a LE at the pre-investment stage, since this will ensure that risks like labour availability, uncovered project costs and overall specification and project cost can be identified in time. This is particularly relevant in light of the fact that new construction technologies are emerging constantly. Both the lending institution and the project developers must aware of these technologies and the cost benefit analysis before they can be leveraged for a more efficient project development.

Social factors like environmental, health and safety practices are factors which require far greater emphasis than they are currently being accorded in the Indian construction industry. Only a neutral, qualified person whose concerns extend beyond mere time and cost savings can provide impartial guidance on these concerns. In these areas, the LE can – by virtue of his function and expertise – is in a position to provide inputs that can have a significant impact.

To illustrate – in the case of a large residential construction, a LE helped a major developer to manage labour attrition by providing value-adding facilities such as on-site crèche and medical aid centre.

What To Look For In a Lender’s Engineer

• Ethics is the key quality. Innumerable areas in a construction project can remain invisible to the untrained eye and can only be identified with technical involvement. These areas must not only be brought to light but also brought to the notice of all stakeholders.
• A construction project has various components to success. The technical aspects range from geological factors, architectural design aspects, civil construction and the use of the most efficient mechanical and electrical equipment & services. The appointed LE must be able to understand these complexities and help ensure that the project has the benefit of an optimal mix of architects, civil engineers and mechanical and electrical engineers.
• A technical analysis is incomplete without use of technology. The LE must be proficient in the use of technology to be able to ensure sound risk management and progress mapping.
• The LE must be able to translate technical information into inputs that are relevant to the financial participants in the project – these could include payback period and factors that impact returns.
• The primary scope of a LE includes providing expert insights on the availability and applicability of statutory approvals for a project. The LE must have deep knowledge of statutory aspects and approvals, and must utilize a system to review such approvals through predefined checklists.

For all these reasons, professional Project Management firms with the benefit of global exposure translated into local implementation are best suited to provide Lender’s Engineer services.

Current Points Of Dilemma

The appointment of a LE is often a matter of some dispute, since the LE is appointed and paid by the developer but provides the report to the lending institution. Nevertheless, the appointment of a LE is a requirement and all the developer expects to get in return is a stamp of approval. This is a very limited – and, in the case of the developer, self-defeating – way of looking at the whole issue.

The LE needs to be considered as a partner in delivering a better product by both the project participants. This new level of awareness is already being witnessed in the case of private equity investors who have better technical monitoring service providers on board, because they have a stronger say in the project’s overall development process.

At the same time, lending institutions need to have a more scientific basis on which pre-qualification for lender’s engineers takes place. This will permit professional project management companies with better resources, capabilities, scientific risk analysis processes to provide better data and, above all, higher ethical practices to provide higher value. Lenders, as key project partners, should have a stronger say in identifying their representatives.

This will ensure that the project’s development focuses on a higher quality of real estate products which take into consideration the social aspects of construction – such as safety, health and environmental impact.

Pallav Saxena, Head – Development Advisory (Project & Development Service) Jones Lang LaSalle India

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It is true that going by all known market dynamics, a correction was inevitable. Lack of affordability over an extended period is a known catalyst for downward revisions in any market category, including real estate. Another globally accepted precursor of a property market correction is a surfeit of unsold inventory. If these two indicators would have held true in Mumbai, the city’s residential real estate market should have corrected three years ago. However…

Ground Reality

Residential property prices in Mumbai have increased steadily after the correction seen post the Lehman debacle. In the period from the second quarter of 2009 to the same quarter in 2013, residential real estate prices in Mumbai have increased by 66%. In Thane, the increase has been even higher at 70% while Navi Mumbai has seen a staggering escalation of 74%.

Even within Mumbai, some locations have crossed the 66% average increase in the same period. The Malad–Borivali belt has seen an increase of 85%. The cumulative price escalation figures for Mumbai, Thane and Navi Mumbai represent the highest among all cities in India. During the period in question (2Q 2009-2Q 2013), Gurgaon and Bangalore – undeniably two of the hottest real estate markets in India, saw increases of 52% and 46% respectively.

From an end-user’s perspective, Mumbai’s astronomical residential property price increase is undoubtedly irrational. Below the surface, however, there are market forces at work which cannot be mitigated.

Escalation Triggers

One of the primary reasons for Mumbai’s ‘unreal’ price movements is the limited supply of ‘clear’ land (land without encumbrances and with clear titles). Other factors at play are the reduction in new residential project launches over a 1.5 year period from 1Q 2011 to 2Q 2012 – caused largely by a slowdown in approvals for new residential projects – and the high interest rate scenario in 2010-2011. In this period, the Government – in its efforts to curb inflation – raised lending rates around 12 times.

Every time this happened, developers’ input costs for their projects rose in tandem. The matter was further compounded by the pressure on developers to give assured return to investors who had bought into their projects at the pre-launch stage. Meanwhile, there was a high rate of price volatility in other asset classes such as equity.

This, along with the increasingly high cost of debt, brought about a massive liquidity crunch – as a result, developers’ backs were to the wall when it came to purchasing the massively priced land parcels limiting new project launches. The historical title disputes attached to many of these plots did not help matters much, either.

In the midst of all this came the new DCR rules, which caused many residential projects to come to a grinding halt midway as developers and architects struggled to adapt projects at various stages of development to a completely new set of mandatory guidelines.

Finally, we need to consider the phenomenon that is, in degree if not in principle, more or less unique to Mumbai – that of developers as well as buyers adopting the dubious philosophy of benchmarking prices in an particular locality based on one or two high-profile transactions or over-hyped launches.

Demand Remains Steady

Through it all, the demand for investment residential properties and end-user homes in the country’s financial capital has remained stable. The ever-increasing number of second home buyers within the city and the firmly entrenched – and admittedly vindicated – mind-set that real estate prices in Mumbai will never go down will ensure that the stability of Mumbai residential real estate market will continue.

Ramesh Nair, Managing Director – West, Jones Lang LaSalle India 

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The Advantages

Integrated townships are, by nature, self-sufficient and self-supporting in most civic and social infrastructure aspects, and are patronized by an up-market segment of property buyers.

For these reasons, they also tend to have evolved and well-equipped medical care facilities within their premises, as well as linkages to healthcare facilities outside the townships. The existence of these medical facilities is a significant value-add for today’s health-conscious residential property buyers.

Apart from self-sufficient infrastructure, many of the townships in Pune also offer a walk-to-work concept since they tend of have a mix of office, retail and residential components. They tend to feature generous landscaping, serene environment, schools within the campus, big club houses, health club facilities for both indoor and outdoor sports, multiplexes in the vicinity, health care, restaurants and large swimming pools.

These are rather effective enticements for those who are evaluating the option of buying into a township against a smaller residential project.

Not All Easy Sailing

The development of integrated townships is a highly capital-intensive undertaking. They are launched in phases so that the development remains viable to the developers. Capital generated from sales of preceding phases funds the next phases.

As a result, many newer townships tend to have a work-in-progress aura about them. On-going construction can be an inconvenience in some cases. Townships take a long time to reach completion; residential property buyers and investors need to track progress closely. Only the overall absorption of finished units can give a reliable indicator of likely completion timelines for buildings still at the planning stage.

Buyers should also be aware that there is a 10-15% premium mark-up on the cost of homes in integrated townships, and that annual outgoings for maintenance also tend to be steeper than for normal properties.

Major Townships In Pune

The major existing townships in Pune are:

• Paranjape’s 120-acre Blue Ridge in Hinjewadi
• City Group’s 400-acre Amanora Park Town
• The 400-acre Magarpatta City (almost completely sold out)
• Kolte-Patil’s’ recently launched 450-acre Life Republic near Hinjewadi
• Kumar Builders’ recently launched 102-acre Kul Nation at Manjri
• Kumar Properties and Avinash Bhosale Industries Ltd (ABIL) 150-acre Megapolis at Hinjewadi (almost completely sold out)

A Note On Plots In Integrated Townships

Townships are planned communities, so there are usually specific norms about the size, configuration and architectural style that need to be followed. Plot owners will usually not be able to detract very far from the existing norms while constructing homes there, since the purpose of an integrated township is to provide a uniform, well-balanced neighborhood.

Sanjay Bajaj, Managing Director – Pune, Jones Lang LaSalle India

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A Strategically Timed Move To Capitalize On Improving CRE Sentiments

New Delhi, May 8 2013: Leading international property consultants Jones Lang LaSalle India announced today that the Firm has appointed veteran CRE (Corporate Real Estate) specialist Nitish Bhasin as Managing Director – Office Brokerage Business (Markets).

Prior to this appointment, Nitish Bhasin had consistently delivered a sterling performance as Managing Director for Jones Lang LaSalle India’s Delhi NCR operations. He brings to the table an impeccable track record and tremendous experience in office leasing and innovative deal structuring and is an expert in renegotiations, sale/purchase, sub-leasing, sale and lease-back transactions.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India, said, “Nitish Bhasin is fully equipped to strategize and execute end-to-end real estate solutions for our corporate real estate clients. His appointment in the key role of Managing Director – Office Brokerage Business is an important move by the Firm to drive best practices, further strengthen service efficiency and reinforce our commitment to our clients.

Nitish is fully wired into the commercial real estate markets in Delhi NCR, Bangalore, Hyderabad, Mumbai and beyond, and will play a pivotal role capturing the wealth of CRE business that once again defines these markets.”

“I agree that this appointment comes at an opportune time for all concerned – most significantly for our clients,” states Nitish Bhasin. “The commercial real estate market is currently at an important inflection point, and replete with opportunities. Capital valuations in Bangalore and many sub-markets of Mumbai and NCR are going to rise over the next six months.

Investment sentiments are improving visibly in markets like NCR and Mumbai, with most of the capital targeting prime office real estate. We will leverage the opportunities inherent in these market dynamics on behalf of our domestic and international clients.”

Nitish further explains that rental values are set to pick up in Hyderabad, Pune and select sub-markets of NCR and Mumbai.

“This is consistent with the latest average vacancy levels in these markets vis-à-vis the national average and other markets in India,” he says. “Across cities, there is a visible trend of commercial developers responding to demand contraction through supply correction, thereby reducing the historic supply overhang.

These are indeed exciting times for commercial real estate in India, and I look forward to the challenge of translating the adrenaline into real-time opportunities.”

As Managing Director of Jones Lang LaSalle’s India Office Brokerage business, Nitish Bhasin will focus on optimizing the real estate portfolios of the Firm’s clients and growing its market share across the various regions in India.

His expertise in scouting out latent transaction opportunities and innovative deal structuring, and his strong relationships with both the occupier and the developer communities across India will be invaluable in terms of the Firm’s constant drive to maintain and build upon its leadership position in the market.

(Download link for high resolution photo: http://db.tt/3KEfwMYB)

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Moreover, Kundli enjoys advantageous proximity to the upper-middle-class residential catchment of North Delhi. Against the backdrop of a landscape that is being increasingly defined by mega education, institutional and industrial projects as well as rapidly enhancing infrastructure, the prospects for the realty market within the Kundli-Sonipat belt remain upbeat.

While the TDI Group, with its land bank of over 1250 acres, remains the premier developer in the Kundli region, others like Parsvnath Developers, Ansal Properties, Omaxe, Parker Group, Raheja Malls, Eldeco County, Anant Raj, Tulip Infrastructure, Collage Group, Eros Group, AJS Builders, Divine Group, Big Jos, Shree Vardhman and Jindal Greens are all present with projects of varying magnitudes in this belt.

Investment Potential

So far, the Kundli-Sonipat belt has offered moderate-to-good returns on investment in absolute terms. However, the ROI on real estate is somewhat lower when compared to the appreciation witnessed in other regions of NCR such as Noida and Gurgaon. The average plot price today is in excess of Rs. 25000 per sq. yard; a few years ago, when projects were first being launched there, the price tag for plots was more in the region of Rs. 5000 per sq. yard.

On an average, there has been 30-40% appreciation in apartment rates since 2007-’08, implying that the annual property appreciation rate in the Kundli region has been in the range of 6-10% on an average. Residential property rates in other regions of NCR such as Noida and Gurgaon have more than doubled in the same period.

On the expectation of a boom on the residential property market and increased scope for commercial activities in the area, commercial properties at Kundli have witnessed handsome appreciation of more than 50% over the last 3-4 years. The current rates for commercial property in the area are upwards of Rs. 8000/sq.ft. and are likely to maintain growth, albeit at a slow pace.

Coming Down From The High

All said and done, it is evident that the initial euphoria and optimism about the Kundli-Sonipat region is waning. This can essentially be attributed to the extremely slow pace of progress on the many proposed infrastructure projects there. Due to the delay in the growth of the KMP Expressway, the property market in the region has not taken off with the initially anticipated speed.

Overall, the region lacks critical mass in terms of population, and it has yet to emerge as a preferred office destination for IT/ITeS organisations. The occupancy level in the existing projects is just around 25% and could even be lower.

Apart from this, basic infrastructure like schools and hospitals are yet to make a convincing appearance in the region. The affordability tag – which used to be a prominent driver for investors who were discouraged by the much higher ticket sizes in other NCR areas – is gradually losing relevance.

Prices have reached levels that place all good options beyond the financial appetite of retail investor. That said, the price points at Kundli are still lower when compared with other areas of NCR and do still fall in the affordable range.

To Summarize…

From a future investment perspective, this region will essentially continue to remain promising due to its proximity to North Delhi and the Delhi borders. Property investors with constrained budgets can still explore Kundli for its affordable options.

If the Government shows renewed commitment towards the proposed infrastructure and development initiatives, the Kundli real estate market can certainly get into higher gear. Investors should maintain an investment horizon of at least 3-5 years in order realize decent ROI, as it will take at least such a period for the region to develop sufficiently.

Santhosh Kumar, CEO – Operations, Jones Lang LaSalle India

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The performance of residential property as an asset class is doubtlessly dependent on the macro-economic factors that also dictate the performance of other asset classes, including gold. Nevertheless, the correlation between gold and real estate prices is not as distinct as one may at first assume.

Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors’ appetite for residential property.

In India, precious metals are an investment class that most people will consider after this basic desire is satisfied. Moreover, the prices of precious metals are not location-specific – they rise and fall uniformly. This is hardly the case with real estate, which performs differently at different times in different cities and micro-locations.

In a vast country like India, it stands to reason that various markets will display varying pricing dynamics. Real estate valuations also range from rational to irrational in different areas within the same cities, depending on the levels of supply, demand and investor activity. At the same time, other cities continue to remain uniformly rational because they are largely end-user driven.

How Good Is Residential Real Estate For Investment Today?

There is no one-size-fits-all formula for the viability of residential real estate as an asset class for investment. Different investors have different levels of expertise, experience, market knowledge and risk appetites when it comes to different asset classes. Those with insufficient expertise in stock trading are not likely to see satisfactory ROI from their activities on the stock market.

Likewise, investors who lack the requisite knowledge and research to make winning real estate investment decisions will not meet with much success in this vertical. Real Estate investors who have sufficient market knowledge or work with experienced real estate consultants will not fail to see lucrative returns on their investments.

Three parameters for successful investment in any asset class are when to invest, how much to invest and when to exit. In real estate, three additional variables are where to invest, into which size and configuration, and in which location.

Residential Real Estate Investment – Short-Term & Long-Term Outlook

In the short term, residential real estate prices in different cities will either remain steady see minor upward or downward fluctuations. In the long term, they will rise again. The fundamentals of the India real estate story are extremely strong. Even in this turbulent economic environment, India remains the cynosure of interest by global MNCs and investors who see the limitless potential of a young, growing economy, a wealth of highly trained workforces across the manufacturing, IT/ITeS and services industries. All this translates into assured job creation, and therefore demand on the residential real estate market.

However, Indian residential real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.

Of course, this applies for residential real estate, as well. However, thanks to a conservative banking system that makes ‘flipping’ extremely unattractive, residential property as an investment class is a very different ballgame in India. More and more regulations are being brought in to subdue the appetite for speculation in this sector. Also, the lowest entry point is definitely much higher than for gold. Finally, it requires a minimum ‘incubation’ period in order to bring ‘appreciable’ returns.

Even after one has satisfied all the basic investment criteria – good location, right size and configuration, right entry point and right entry price – one needs to stay invested for the mid-to-long term in order to garner the best possible returns. As a general yardstick, an investment horizon of 3-5 years is ideal.

So Where Does That Leave Gold? 

Exactly where it has always been – and where it will continue to be. Though gold prices are fluctuating rather wildly at the moment, gold is nevertheless an important component of a well-diversified long-term investment portfolio. It goes without saying that real estate – an asset class with rather different dynamics, is an equally important part of such a portfolio.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India

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 Real Estate Cost Optimization – The Road Less Traveled

The Jones Lang LaSalle India CFO survey aimed to understand various Real Estate cost saving strategies adopted by corporate India. Based on the survey findings, we have identified a few thought-provoking trends that are existing or inevitably going to occur in the future.

In today’s gradually changing world, the role of CFOs has evolved significantly. Following the uneven pace of recovery worldwide, CFOs are increasingly playing a critical role in shaping their organisations’ strategies and managing financial volatilities.

In India, few corporates have a dedicated corporate real estate team and in most cases, responsibility falls on the CFOs’ shoulders. Therefore, we have positioned our study based on responses from CFOs of major Indian corporates, who we believe are strong representatives of their respective industries.

Amid the changing business dynamics and tough macro-economic conditions, a diverse set of industry verticals were chosen to arrive at the right mix of survey participants. Over 40 CFOs of large listed organisations from different industries were shortlisted to carry out the analysis.

We have studied the pattern of leasing activity over past few years and identified key industry verticals, which were acting as the fundamental drivers of office space demand in India. The IT & ITES sector – which saw a sharp decline in its share, falling from 48% in 2005 to 23% in 2009 – has improved its share to 39% this year. Contribution from Banking, Financial Services and Insurance (BFSI) has been steadily declining from 23% in 2009 to a thin 7% during 2012.

Other sectors, including manufacturers and other professional service providers, have continued to make notable contributions to the total leasing transaction volumes. Our survey of 40 organisations comprises a proportionate mix of occupiers type from various industry verticals:

Please click here to download the Jones Lang LaSalle India CFO survey

Ashutosh Limaye, Head – Research & Real Estate Intelligence Services, Jones Lang LaSalle India

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With immediate effect, the minimum built-up area requirements to be met by SEZ developers will be 100,000 square meters for the seven major cities, 50,000 square meters for Category B cities and only 25,000 square meters for the remaining cities.

The first and most encouraging impact of these amendments to the previous requirements, which were a major hurdle, is that many more IT companies will now be able to launch their own SEZs. Previously, only the largest IT players could have their own IT SEZ’s given the capital required to buy 25 acres land.

Developers will now be able to aggregate smaller contiguous land parcels and turn them into SEZs. In cities such as Chennai and Bangalore (where the FSI for IT Parks is as high as 3.25-3.75, an SEZ development can now be developed on a land parcel as small as 7 acres.)

Further, some IT SEZ developers who have already met the 100,000 square meter built-up area criteria will now convert the balance land for residential use, giving the mixed-use edge while also making the formation of many more walk-to-work residential projects possible.

Real estate developers will now be able to divide up their land holdings and allocate smaller parts to IT companies to construct their own IT SEZs.

Another extremely important result of this ruling is that it will now become easier to exit from SEZs given that transfer of ownership of SEZ units – including sale – has now been allowed. Moreover, Real Estate Private Equity Funds with foreign capital will now be able to do more smaller deals, and this is bound to bring in more FDI into the sector.

The infusion of FDI into the real estate markets of smaller cities can also become a critical factor in IT/ITES companies deciding to move into these cities – with an obvious positive impact on their local economies and therefore the growth of their real estate markets across all segments.

Ramesh Nair, Managing Director – West, Jones Lang LaSalle India

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Big hypermarkets, cash-and-carry outlets, furniture dealers and designer wear stores often cannot find sufficiently large retail spaces within the city. Such stores tend to look for out-of-town retail properties in locations which are in line for anticipated growth as indicated by the directions in which the city is expanding.

This trend has given rise to some popular out-of-town weekend shopping destinations. Some of these are:

• Mehrauli-Gurgaon Road and Mahipalpur in Delhi
• Kharkhana and Trimulgiri in Hyderabad
• Marathahalli in Bangalore
• Parel in Mumbai
• Kundli in NCR
• Manesar in Gurgaon
• SG Highway in Ahmedabad

Out-of-town retail outlets tend to be located in areas close to operational factory outlets and are targeted by customers who are looking for a bigger bang for their buck.

Retailers That Seek Out-Of-Town Properties

The size of the Indian retail industry is estimated at Rs 20 trillion in sales. Of this, 40-48% comes from sales of branded products, which are part of the organised retail segment. 45% of such products are sold during discount sales or through factory outlets which offer a 15-40% discount throughout the year – and almost 70% discount twice a year – to unburden ‘out of season’ stocks from their shelves.

As old merchandise in retail stores continuously gives way to new stock at the end of every season, off-loading out-dated goods from retail stores is an on-going issue with retailers. In such a scenario, the need for ‘factory outlets’ is practically a given.

In fact, almost all of the leading domestic (and even some global) brands are active at out-of-town properties. Brands such as Mega store, Promart, Brand Factory, Loot Mart, Loot, Brands R Us and all branded factory outlet stores look for such kind of retail properties where they can sell at a discounted price throughout the year. Cash-and-carry outlets such as Best Price, Metro and Bookers are some of the international brands that specifically look for such spaces.

They typically look for retail real estate with low rents, large floor spaces and ceiling height, power back-up and sufficient parking. Easy approachability is important – such locations need to be connected to a national highway and immune to traffic snarls.

Once they locate such a property, retailers require their spaces to be built to suit their requirements. The entire premise of this business model is that if all these factors are met, customer will be willing to ‘go the extra mile’ to shop at discounted or wholesale prices.

Challenges

Opening a factory outlet is not that easy as opening exclusive brand outlets or a multi-brand stores. This is because EBOs and MBOs represent the regular and fresh stocks of the brand, whereas the product line which is sold in factory outlets is either damaged or out-of-date.

For instance, the footwear industry business is all about sizes and colours. As not all fresh arrivals are necessarily sold in a single season, the company has a constant need to off-load surplus stock. Similarly, the Indian apparel industry is witnessing rapid changes in seasonal styles and colours that need to be sold off one way or the other once they are ‘obsolete’.

Changing Landscape

As in all other segments of retail in India, customer preferences for out-of-town retail complexes are changing too. Despite their focus on savings, these are nonetheless aspirational people – college students, freshly-recruited executives, executives with family liabilities – and, of course, value shoppers who want branded, trendy products but cannot afford them at the regular prices.

While the Indian upper-middle-class shopper is definitely the profile of a typical department store customer, he or she is now seeking more value through cross-shopping at factory outlets. Given that the India growth story remains strong with the international business community, the attractive footfall rates and sales statistics of factory outlets ensure that even top-notch brands cannot afford to ignore them. This has fuelled the emergence of malls dedicated to such stores.

Today, discount malls have cropping up rapidly on outskirts of Faridabad, Mathura, Kundli, Pinjor, Manesar, Bhandup, Bangalore, Vishakapatnam and Ludhiana. And it isn’t just discounts that attract customers to factory outlets, although these are a big draw. The fact is that one is assured of discounted rates at such malls at any time of the year.

Thanks to these discount malls, retailers were able to continue with their expansion plans despite the significant dip in prime retail space supply across key cities last year. This positive sentiment is indicative of retailers taking a long-term view of the Indian economy despite the short-term challenges. The Government’s bold and welcome move of allowing FDI in retail has further contributed to this positive sentiment.

Most Popular Store Sizes For Out-Of-Town Retail

• Cash-and-carry outlets – 52500-60000 square feet.
• Factory outlets – 1500-2500 square feet per store

Rentals

Factory outlets are situated in out-of-the-way locations, along the highways, and in areas with low penetration of branded outlets. Sales depend on location and also vary from city to city. A factory outlet usually earns anywhere between Rs 35-40/sq.ft. per day.

The maximum that they tend to be willing to pay is Rs 70-90.sq.ft. per month. Cash-and-carry outlets can afford to pay between Rs 36-48/sq.ft., depending on the city and location. The approximate rental difference between in-city and out-of-town retail spaces would be nearly 40%.

Lease Arrangements

The lease agreement for out-of-town retail stores is similar to those for inner-city agreement and are governed by applicable bye laws, municipality rules and the specifics introduced by the retail property’s legal consultant. It can take the form of a basic agreement for conducting business, a leave and licence agreement, franchisee agreement, lease agreement or a simple rent agreement.

Bappaditya Basu, Senior Vice President – Retail and Leisure Advisory, Jones Lang LaSalle India

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Technically, studio apartments comprise of single large rooms that encompass the bedroom, living and dining areas, with compact kitchens and bathrooms attached. When they first made their appearance on the Indian residential landscape, studio apartments found favour largely with bachelors and small families who spend most of their time at work.

Even today, the demand for studio apartments comes primarily from software professionals and executives from the manufacturing sector. Such professionals have generally spent over a year stationed in a metro and find that they prefer to pay EMIs on an affordable homes that require minimal maintenance rather than pay high rents for flats and serviced apartments.

There is a steady and inflexible demand for studio apartments, both in the metros and tier 2 cities. These apartments are usually the first to be sold out in a residential project that features them. Without doubt, they are the most cost-effective residential options for people who prefer to own rather than rent, especially in projects close to workplace hubs.

Another factor that drives demand for such units is the ease with which they can be rented out or sold at a profit on the secondary market. This also makes studio apartments a prime target for investors. Moreover, studio apartments do not attract much maintenance costs and make for hassle-free purchases as well as resale.

The typical Indian home buyer prefers larger homes, and will go in for more generous formats whenever possible. However, the rate of property price escalations in our primary cities has narrowed things down considerably. Simultaneously, proximity to the workplace remains a priority in an evolving economy, and the studio is the logical choice for those who cannot or do not choose to buy larger units.

Studio apartments are also popular with mid-management level buyers who tend to reside in certain cities for extended periods. Rather than pay for a serviced apartment or hotel room, they prefer to acquire studio apartments and sell them off when they no longer need them.

There is also a lot of demand for studio apartments from single working individuals and newly-married couples who need to set up a home immediately and eventually upgrade to larger sized homes later on. As already stated, the demand for such units on both the primary and resale market is consistently high.

When the downturn hit the Indian real estate market, practically the only residential configurations which continued to see demand were studio apartments and cost-effective 1BHK flats. The demand for larger units has meanwhile revived considerably, but studio apartments are still the fastest-moving products on the market.

The margins are low, but it is definitely a high volume vertical and many developers bank on such configurations as a sure-fire sales proposition, with almost instant absorption if the location is right. This provides them with instant working capital. The demand is even greater for furnished studio apartments, and many developers offer these as well.

The current demand for studio apartments is percolating down from the equally high demand for serviced apartments, and is still picking up from there. 80% of the overall demand for studio apartments in Mumbai, Delhi NCR, Bangalore, Pune and Chennai is driven by software professionals and recently relocated manufacturing sector executives. Price points vary according to city, location and amenities offered, but generally range between Rs. 12-35 lakh.

Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India

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