Indian REITs – The Retail Opportunity

suvushesh valsanSuvishesh Valsan, Senior Analyst – Research & REIS JLL India

The draft guidelines for trading in REITs in India have been introduced and allowed. For the very first time, there exists a tool to channel small savings into the Indian real estate sector. Not surprisingly, several owners of income-generating properties are now considering setting up REITs.

While commercial real estate projects have been popular assets to securitise worldwide, market dynamics in India currently suggest that the retail sector could be a beneficiary as well. Factors underpinning the potential success of REITs in retail include:

 Low Vacancies In Superior Grade* Malls

Over the past few years, developers slowed down the supply of mall space in India because of rising vacancy rates following the economic slowdown. Prior to that, developers were churning out malls at a breakneck pace in response to a spurt in the organised retail business. Back then, few developers understood what the right ingredients for a successful mall are.

the retail opportunity

The overall vacancy rate today stands high at about 20% in retail malls across major Indian cities, while Superior Grade malls have vacancy rates averaging at only 10%. Given that international retailers will prefer to take up space in these malls, the shortage of quality space is evident and will be felt for some time.

Opportunity For Discounted Asset Purchases

For REITs to provide attractive yields, they have to purchase assets at a reasonable price, which then fetch attractive rents. This is particularly important for retail – an asset type that is perceived as riskier due to the lower predictability of income.

While upcoming Superior Grade malls will offer lucrative investment opportunities, some of the existing stock of lower-grade malls could be up for sale at a discount. For instance, of Mumbai’s 65 existing malls, only 20 are of a size suitable for securitisation in a REIT. Of these, five or six could be considered distressed assets.

These low-grade malls are underperforming due to poor design elements and the financial distress of their developers. Other factors such as location, catchment area and retailers’ interest are favourable in many cases. While REITs will not want to consider malls that are strata sold (another major cause of mall underperformance), malls that have everything other than design and finance going for them will be very attractive acquisitions.

 Strengthening Demand

Recent data made available by hiring firms (recruitments), automobile associations (car sales) and the central bank (home loan disbursals and reducing inflation) suggest that consumer sentiment has been on the rise in the past few months. This is good news for organised retail, and indicates a rise in consumer spending going forward.

Mall Management

When compared to the management of commercial buildings (which share common facilities and have relatively stable tenancy profiles), the management of retail malls is complex. Apart from catering to various brand categories, mall management also involves planning the right tenant mix, space optimisation and zoning, and constant adaptation to consumers’ shopping behaviour.

It is fairly certain that REITs would employ better mall management professionals and practices than the mall’s developer. This will increase the probability of their success.

Given the limited number of existing malls that fit the requirements, REITs that are quick to discern and capitalize on the opportunity will benefit. Those that latch on to the potential later will have to wait until new supply of suitable malls hits the market. Moreover, the rising consumer and retailer sentiment will lure REITs into seeking these low-hanging opportunities.

 * Malls are classified as Superior Grade based on location, developer reputation, occupiers’ profile, business model, mall design and other qualitative features such as mall management, ambiance and experience at the mall.

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West Bangalore – A Real Estate Investment Snapshot

Photo_Srinivasa-ReddySrinivasa Reddy, Associate Director – Research & Real Estate Intelligence Services, JLL India

The West Bangalore sub-market covers the areas and projects around Tumkur Road NH-4 towards the Yeshwanthpur and Malleswaram junction, the Rajajinagar Industrial Area, Yeshwantpur, and Tumkur Road and its surroundings (which has a high-density population and has traditionally been the primary industrial hub of the city).

Industrial And Commercial Profile

  • At present, West Bangalore is surrounded by vacant land parcels and is predominantly an industrial area dominated by warehousing and industrial activities. These industries comprise of large public sector units and various small-scale industries.
  • The area is being promoted as one of the large industrial hubs in the city, especially Peenya Industrial Area (IV Phase III stage) which is home to industries like Parle G, ABB Limited, Bosch, Jindal and Volvo Construction Equipment, to name a few.
  • There are currently no graded major operational commercial/office buildings in the micro-market. The commercial base in West Bangalore has predominantly consisted of government offices, training institutes, small industries and warehouses. Many government offices also have their own residential colonies, for example HMT Colony, Air Force Camp, ITI Training Institute colony, etc.

Residential Profile

  • The key residential projects in West Bangalore currently include Temple Bells, Prestige Wellington Park, Gateway, Kensington Garden, Golden Grand, Garrison Vaishnavi Nakshtra, Prince Town, Sobha Aspire and Shoba Elite.
  •  Capital values for high-end residential projects range from Rs. 3800–6500./sq.ft. Buyers from the affordable housing matrix in West Bangalore are mainly small business owners and employees working in industries and the services sector.
  • The upcoming areas in West Bangalore include Karivobanahalli, Handrahalli, Laggere, Jalahalli, Hasarghatta, HMT Housing Colony, BHEL Colony, Peenya, Chikkasandra, Nagasandra and Dasarhalli.

The many infrastructure projects that are taking place in the direction of West Bangalore will lead to improved connectivity and increase residential values in the future. The upcoming residential projects there will attract buyers from the immediate surroundings due to improvements in the social infrastructure.

Investment Profile

  • As of now, investors and speculators in West Bangalore are still scarce on the ground. This sub-market is growing at a slower pace when compared to other markets of the city, mainly because of its industrial characteristic and also lack of MNC-type commercial activities.
  • There is now a gradual opening up of land for real estate development as small and medium industries that have existed In West Bangalore for a long time are shutting down or relocating.
  • Currently, land values are comparatively low in this part of the city, and this provides a very favourable entry point for long-term investors.

Tips For Property Investors Into West Bangalore

  • This region holds immense potential for further real estate development. Apart from the comparitively competitive land values, many infrastructure projects will benefit this micro-market. These include the Peripheral Ring Road (PRR) which will lead to improved connectivity reduce travel time towards important parts of the city. The commute to Bangalore International Airport (BIAL) from Tumkur Road will be reduced by 50% from current levels once the PRR become operational.
  • There is high possibility of locations between Bangalore West and Tumkur City to be considered for Smart City benefits via the recently proposed 100 Smart Cities programme by the NDA government. Factors that will work in these locations’ favour on this front are availability of land for development and strategic presence between two growing cities.
  • This will lead to short-to-medium for residential assets. Long-term appreciation is assured as West Bangalore strengthens its value proposition as a growth corridors.
  • Investors should look at capitalizing on the West Bangalore housing market for medium-long term gains and maintain a period of 4- 5 years as the minimum investment horizon for affordable to mid-end residential developments.
  • Investments into high-end to luxury residential developments in this micro-market should not be the first option for risk-averse investors at this point of time. This is because the buyers in this sub-market are predominantly employees working industries and the services sector who are looking for affordable to mid-end residential options in the price range of Rs. 3500-4500/sq.ft.
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Getting Wise About Sample Flats

Om Ahuja

Om Ahuja, CEO – Residential Services, JLL India

Sample flats are indicative only – they basically serve the purpose of giving the intending purchaser a sense of space and dimension. The fact that they are furnished allows for an understanding of how the available space could be optimally utilized. Sample flats are effective marketing tools and should be viewed as such. There is no compulsion on the buyer to buy anything but a completely unfurnished flat. While we do see many instances where a luxury apartment buyer is impressed sufficiently to ask for an exact replica of a sample flat, such buyers have the requisite financial capacity to pay for such embellishments.

There is little sense in being either carried away or prejudiced by the appearance of a sample flat. These flats are showcases, meant to incite interest and indicate the ‘lifestyle potential’ of the unit. Once a buyer gets a fair idea of how furnishings and colour schemes have been used, he or she should draw a mental picture of how it could be done differently.

A prospective buyer has – and should exercise – the option of asking for some or all of the showcased features to be included in the flat one wishes to purchase, but these will come at an extra cost. What matters at this stage is not the visual impact of the sample flat, but an understanding of how the available space in an unfurnished flat could be used.

Remember – regardless of the sample flat’s appearance, the developer will quote for the unfurnished flat, which means that the price includes the flooring, balcony area (if any), ceilings and walls. In sample flats of less spectacular mid-budget homes, the basic fittings are usually included in the quoted price. The buyer must specifically request for any additional features shown in a sample flat to be retained in the purchased unit, in which case these will appear in an annexure to the agreement as additional charges to the cost price.

That said, it is certainly true that sample flats can make a difference in a buyer’s purchase decision, and developers of luxury homes are pulling out all the stops to use them to maximum psychological advantage. This is well within the purview of fair market practices.

In some cases, visually appealing sample flats may help to detract from the fact that the project’s location is not exactly cutting-edge. Nevertheless, as in any other highly competitive market where advertising plays a major role, the onus of establishing the difference between real and perceived value always lies on the buyer.

 

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What You Should Know About Property Purchase Plans

Rohan SharmaRohan Sharma, Associate Director – Research & REIS, JLL India

Developers are offering a variety of payment schemes to attract buyers during the upcoming festive season. It is imperative that they understand what each payment plan entails. The attraction of delayed payments, no EMIs, etc. has to be viewed in conjunction with the restrictions such as inability to sell the property within a shorter investment period, or before construction is completed.

The current payment options being offered are:

  • 20:80 Plan

Developers ask for 20% upfront payment from the buyer/investor and arrange the remaining 80% loan amount through their own banks. This provides them with Advance Disbursal Facility (ADF) (the subvention plan which the RBI came down heavily on and asked banks to desist from).

As a variant, developers get the amount directly from the banks and pay the pre-EMIs on behalf of the buyers. The pre-EMI is only the interest component payable on the disbursed amount. The actual EMI starts on possession of the apartment. Usually, such arrangements tend to lock in the buyer till possession of the apartment – they cannot exit their investment in the interim. This is on account of the ongoing arrangement with the developer and the agreement, which usually bars transfer during the construction phase.

  • 10:80:10 Plan

This is a deferred payment plan, where the buyer pays 10% initially, 80% within 30-45 days of loan amount approval and the remaining 10% on possession. It is essentially same as the 20:80 plan, and allows ADF to the developer from the bank which is associated with the project. This is a direct arrangement between the developer and bank, and ties in the buyer to the project till possession. It is helpful for end-user buyers, as it saves them the pre-EMI pay-out. Problems can occur if the developer stops paying the pre-EMIs and the burden falls on the buyer.

  • Possession-Linked Plan

All possession-linked plans are essentially a variation of the payment plans described above, and tend to tie the investors to the project for a longer period. Also, the level of price discounts available in such schemes is lower when compared to regular construction-linked or down payment plans. In absolute terms, the buyer is still paying the entire amount of his EMI as per his loan amount, as the principal amount does not reduce till the actual EMIs begin. (It must be remembered that pre EMIs are just payments of interest on the disbursed amount which the developer pays on behalf of the buyer.)

These plans can help buyers who save on rent. They will hence save themselves a double pay-out of both rent and interest. However, since these plans are linked directly to the developers’ arrangements with banks, it is makes exit for those who are considering investment and intend to sell off before the project is completed difficult.

  • Standard – Deferred Payment Plan

A simpler arrangement entails paying a slightly higher booking amount (around 30%); the buyer/investor obtains the remaining loan amount from the bank himself at a later date. This allows an investor a better exit option, while buyers who can come up with the initial higher booking amount could get a bank loan at a convenient time of after 2-3 years, closer to the project’s completion, as the amount is to be paid on possession. This allows greater flexibility for exiting, though is more ‘upfront-payment’ prone and can cause short-term liquidity issues.

Freebies

Additional freebies likely to be on offer include direct discounts on Basic Selling Price (between 5-12%), electronic appliances, consumer goods, fully-fitted kitchens, gold coins, holiday packages and cars. These freebies translate into marginal discounts only. The value of such discounts is in proportion of the average ticket size of an apartment, which varies across different range of projects.

 

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A Guide To Investing In Prime Commercial Property

Ramesh Nair 3Ramesh Nair, COO – Business & National Director, JLL India

At the best of times, investing in commercial real estate requires forethought, research and planning. When tracking down the ideal commercial property for business operations or for investment, various factors such as soundness of location, the health of the local job market, current and future infrastructure initiatives in an area and migration patterns into a city play important roles. While the broad guidelines above hold true for any commercial property investment, prime commercial properties require even greater insight and investigation.

Obviously, investing in a commercial property in a prime location can have multiple benefits:

  • It is easier to find tenants for properties in prime locations than in low-demand locations. Finding tenants quickly is important, since it plays a role in yield calculations. Leaving a commercial property vacant for extended periods will result in loss of income.
  • Banks are more willing to give loans to commercial projects in prime locations, since there is very low likelihood of capital loss
  • It is easier for employees to travel to work every day – a major factor, considering that employee retention ranks very high on employers’ list of priorities today

A prime office space purchased for self-use is arguably the soundest business decision any firm can make. Apart from the fact that such a property is extremely convenient to commute to, a commercial office in a prime location increases a firm’s visibility and reputation. It is a visible demonstration of your firm’s commercial worth to your clients, partners and other businesses. Also, the capital appreciation of a prime office property reflects very favourably on a company’s balance sheet.

Prime Locations

Both in terms of business potential and returns on investment, the highest value lies in prime office spaces. Invariably, the ‘prime’ value in commercial real estate is vested in the location, which leads to the question – how does one define a ‘prime location’?

The factors that make a location prime are a function of its overall accessibility within the city, the quality of infrastructure that supports it, the saturation of high-profile companies represented there and the overall quality of buildings in the sub–market. To determine if a location is prime, investors need to examine the following parameters:

  • Can the office property be reached easily via all modes of transport?
  • Is the office property close to major commercial hubs?
  • What is the demand-supply gap?
  • What is the tenant profile of the location? Which industries prefer it and what are their growth potential?
  • Does the location have good social infrastructure such as restaurants, malls, shopping centres etc.?
  • Is the location well-planned (e.g. Bandra Kurla Complex in Mumbai or has it grown with increased requirements (e.g. Nariman Point, which was reclaimed from the sea?
  • Are there a lot of commercial space transactions happening in this location?
  • Do the buildings have a modern look and feel (e.g. glass façades)?

If the answers to most of these questions are positive, then the location is a prime one.

Prime Properties

The next aspect to determine is whether the project and property meet ‘prime’ criteria, as well. There are over 30 important technical specifications that a commercial property must meet, and this needs to be verified by an expert. If the project is under construction, the buyer or investor must be fully updated on the construction risks, the developer’s track record, etc.

The project and property must also be assessed for:

  1. Repositioning potential
  2. Refinancing potential
  3. Refurbishment potential.

Finally, prime locations and prime commercial properties in them naturally come with prime prices. Since returns on investment are important, one must determine whether the location will also offer good capital appreciation.

Regardless of whether the purpose of buying a commercial property is self-use or investment, using the services of a reputed real estate consultant is a key factor for success. Expert, research-driven advice can ensure that one is not buying into a property or location which has or will have major drawbacks high vacancies and result in low returns on investment.

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