Budget 2014 – A Damp Squib For The Hospitality Sector

Mandeep LambaMandeep Lamba, Managing Director – India, JLL Hotels & Hospitality

For the first time in recent history, the government in power had announced tourism as one of its four pillars for growth. Consequently, the hospitality was looking forward to significant new provisions in Budget 2014. However, quite like in most previous years, the government failed to give hospitality any notable relief and stimulus for growth. Despite its 6.6% contribution to the GDP and the fact that it created close to 40 million jobs in 2012-13, the Indian hospitality sector continues to be a story of neglect from our policy makers.

Even today, India receives only about 0.5% of the global tourist arrivals despite being a country rich in history, culture, natural splendour and diversity. The fact that it has still not been equipped to receive a better share of global tourism receipts is puzzling and frustrating.

What Was Delivered

  • The budget gave tourism some mention and indicated plans for long-term growth by way of developing India’s pilgrimage and heritage tourism circuits (PRASAD & HRIDAY schemes) and also provided for the development of a world-class convention centre in Goa via the PPP route. While these are welcome initiatives, these provisions will take between five to ten years to impact the growth of domestic and international tourist travel.
  • The introduction of electronic visas and visas-on-arrival initiated earlier this year can be a major game-changer for Indian tourism with respect to foreign travel into India.
  •  The time-bound directive to implement e-visas at nine major airports within six months is perhaps the best news that this budget has delivered. This can have far-reaching consequences once implemented.
  •  The improvement and modernisation of railways, proposed new airports of international standards and the thrust on improved road connectivity augur well for the hospitality industry. These along with other policy announcements regarding increased FDI in several sectors and clarity on setting up of REITS, are catalysts for growth.

What Was Ignored

  • The sector is desperately in need of incentives in Tier 2 and Tier 3 cities to make hotel investments there reasonably attractive
  • The sector also needs better borrowing terms through the infrastructure lending route, and relaxed ECB norms
  • The sector needs to be spared from double taxation through service and luxury tax/VAT at the state and centre levels. Indian hospitality was looking forward to rationalisation of taxes and ease of raising capital.

No economy can hope to achieve and maintain any degree of sustainable growth and buoyancy without its tourism and hospitality sector being given the necessary importance and corresponding stimuli. As of now, the Indian hospitality sector is still trying to shake off the lingering effects of the serious downturn it has been experiencing for almost six years.

In short, from the perspective of the Indian tourism hospitality sector, Budget 2014 failed to deliver. The industry must continue to survive primarily on the basis of die-hard optimism that it will eventually be given its rightful importance at the policy level.

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Budget 2014 – Positive For Real Estate

Anuj_PuriAnuj Puri, Chairman & Country Head, JLL India

The Union Budget 2014-15 was presented in the parliament under economic circumstances that required tax revenues to keep pace with targets. Considering the state of government finances and the current situation – below-normal monsoons, Middle East tension leading oil price volatility, the weakness of the India rupee etc., there was not much room for populism.

However, considering the high inflation and curtailed savings that they have had to contend with for some years now, taxpayers still expected a fair shake from the new government, such as enhanced deductions, reduction in tax rates, interest subvention on home loans and tax incentives to affordable housing.

The Finance Minister took a cautious, yet courageous path with his budget announcement:

  •  Housing

In terms of relief to the housing sector, the budget has allocated Rs. 4000 crore for low-cost housing schemes. Apart from this, he has also indicated that there will soon be a relaxation of FDI norms for the affordable housing sector. Though the government has announced such incentives for low-cost housing in the past, the real task lies in the fast execution of the fast execution of these initiatives. It is very positive that the government has taken due note of the demand-supply mismatch in the LIG and EWS housing segments, and it remains to be seen how fast these initiatives hit the ground in real time.

Significantly, the budget has increased the income tax deduction limits under 80C, of which the repayment of principal on housing loans is a component. This limit has been raised from Rs. 1 lakh to Rs. 1.5 lakh. Additionally, the budget has also increased the deduction limit on interest payment for housing loans from Rs. 1.5 lakh to Rs. 2 lakh. These two factors alone will lead to a vastly improved sentiment on the housing markets.

The budget gave further indirect benefits for the residential sector by increasing the individual income tax exemption limit from Rs. 2 lakh to Rs. 2.5 lakh. This will increase disposable income of individuals and would have further implications on their ability to service home loans.

  •  Construction Sector

Construction costs have been rising at the rate of 17% over the last three to four years, and this budget has not provided enough measures to bring down these costs. Contrary to expectations, material costs involved in real estate construction will remain high over the near-to-medium term, which is bound to put pressure on developers’ margins.

  •  Infrastructure

The infrastructure and manufacturing sectors have been given paramount importance in this budget, since these are job creating verticals. Banks will now be encouraged to extend long-term loans for infrastructure projects without any regulatory pre-emptions such as CRR, SLR and priority sector lending norms. This additional enforcement of banks to support the creation of infrastructure will result in faster infrastructure creation and the consequent benefits to the real estate sector.

The budget has allocated a total of Rs. 37880 crore towards the NHAI for the construction of highways, and additional Rs. 3000 crore to boost road connectivity in the North-East regions. For the current year, it has targeted the completion of 8500 kilometres of national highways, which are a known real estate catalyst and will have long-reaching implications on the markets of the cities they connect.

Ahmedabad and Lucknow have been singled out as special beneficiaries of this budget with the allocation of Rs. 100 crore towards the deployment of Metro rail systems in these cities. The increased connectivity will raise the scope of real estate development there and also have an impact of property valuations over the mid to long term

The development of 16 new ports has been proposed at an outlay of Rs. 11,000 crore. Additionally, an allocation of Rs. 11,600 crore has been made for the development of outer harbour port projects. The combined effect of these provisions will be that there will be an increase in demand for commercial office space from the manufacturing sector in India’s major port cities.

  •  Smart Cities

As promised in the new government’s manifesto, it has proposed the creation of 100 smart cities across India. The budget has allocated Rs. 7060 crore towards this end, thereby giving a financial sign-off for this concept. This will have very positive implications for real estate across all segments, namely residential commercial, retail and hospitality. Smart cities, by definition, imply considerable demand for technology-enabled services, and this is a big positive for IT/ITeS companies in India. Significantly, as much as one-third of the country’s demand for office space emanates from this sector.

  •  Retail

The country’s warehousing sector has received a boost with an allocation of Rs. 5000 crores. In this, we see positive implications for the retail real estate sector on account of a strengthened supply chain, which has been a serious requirement of this sector for a very long time. Apart from this, the budget has not provided any further benefits to the retail sector, which is a disappointment.

  •  Hospitality

The budget also brought cheer to the hospitality sector in two major ways. One, it has stipulated that electronic visa services will be introduced in nine international airports in India over the next six months. This will increase the magnitude of tourist arrivals in the country. Secondly, it has indicated that major provisions will be made for the creation of world-class convention centres to be developed through the PPP model. Once these centres are created, they will bring about an increase in corporate tourism into the country. Ailing hotel chains are looking at a significant revival in their fortunes, and we expect that the absorption of hotel-related real estate will rise in the bargain.

All In All…

The real estate sector’s expectations have definitely not been met completely in this budget. However, given the economic situation prevailing in the country, this is not really surprising as the government needs to balance myriad issues while addressing growth. We are satisfied at the real estate sector is once again headed in the right direction.

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Emerging Investment Hotspots

ashutosh-limayeAshutosh Limaye, Head – Research & REIS, Jones Lang LaSalle India
Mining Opportunities From The Complex Real Estate Terrain of India

Executive Summary:

Real estate is an asset class that demands specialised skills and the complexity surrounding this sector increases in the Indian context. Compared to the mature real estate markets in the developed nations, buyers in India need a higher degree of diligence before entering into property agreements. Issues pertain to ownership rights of the property, understanding the difference between usable area and saleable area in absence of standardised definitions, completion of the project and receipt of the completion certificate and so on.

Further, when evaluating multiple investment opportunities, the absence of industry standards in developer ratings, building structure comparison, price distinction across different projects and other factors create difficulties in arriving at a direct comparative approach. In brief, information asymmetries and laxity in disclosure norms need to be addressed for the sector to achieve optimum potential in development and investments.

Amidst these complexities, real estate sector in India has displayed volatility in the past decade. Prior to the Global Financial Crisis (GFC) in 2008, the macroeconomic scenario was extremely robust leading all indicators northwards; be it property prices or space absorption. However, the period coinciding with the GFC and post-GFC absorption levels and property prices showed a marked correction across all major real estate markets in India. The recovery led by the residential sector, was also startlingly quick, with property prices recovering lost ground.

However, the demand levels have shown only a gradual recovery in the office sector. A combination of piling up unsold residential inventory due to decline in absorption rate in post-GFC and rising construction costs are causing difficulties for the developers. In such a scenario, returns through capital appreciation aside, security of the invested capital has become a big priority. Therefore the investors, end users and buyers face the pertinent question – Where to invest?

With this report, we seek to provide the answer to the above question to a certain extent. In this report, we highlight a few investment hotspots across India. At Jones Lang LaSalle, a location/ submarket is categorised as a hotspot in a city when it is emerging as a self-sustained ecosystem with development at all levels.

A location focused on residential segment and low/no commercial and entertainment options is not likely to sustain for a long time. Similarly, a commercial hub with low/no residential development is likely to cause problems for the employees who may seek for alternate residential districts in the vicinity, which can reduce the commuting time to work and therefore is not sustainable. In addition to the overall real estate development, infrastructure also plays a pivotal role in developing a location. Poor infrastructure or delayed infrastructural developments can eventually reduce the investment potential of the location.

Though all-round development requires considerable time, it lends maturity to the real estate market in the location while ensuring that price growth is sustained over a longer time period. To put the above in context of individual Indian cities and specific locations, Powai in Mumbai, which has emerged as a well-developed suburb, has seen a steady increase in prices across all asset classes. As against this, there have been a few locations where speculative activity resulted in increased price volatility which was later marked down considerably when real activity on ground failed to take off.

Kharghar, a suburban location near Mumbai witnessed such a trend in a relatively short time span. With the intent of developing it as a luxury residential hub, the local authorities announced various projects including a golf course and a Millennium Business Park. Infrastructure initiatives also attracted investment by developers and investors in this location which initially resulted in a sharp price uptick. Prices rose further when another round of rise in prices occurred when the international airport was announced near Ulwe, an area adjacent to Kharghar. However, with physical activity at a standstill and airport development slowing down, investor activity has seen a decline which in turn has led to a price correction.

Considering all aspects, we have identified eight submarkets as investment hotspots across the top seven cities in India. Notable absentees in our selection are the prime business districts as they have achieved near saturation levels in terms of development and hence are not expected to either support meaningful price increments or they do not provide a large selection of investable assets.

We have intended to select destinations which are classified as either emerging or growing submarkets and are likely to be well-supported by excellent infrastructural development. According to our assessment, these locations offer a large bouquet of investable options in real estate with their relative lower price levels providing the incentives for future capital appreciation and healthy returns. The locations are:

• Noida & Greater Noida – National Capital Region (NCR)
• Thane – Mumbai Metropolitan Region ( MMR)
• Navi Mumbai – Mumbai Metropolitan Region ( MMR)
• Whitefield – Bangalore
• Southern Suburbs – Chennai
• Viman Nagar and Nagar Road – Pune
• Gachibowli – Hyderabad
• Rajarhat – Kolkata

While these submarkets offer good investment opportunities, property price appreciation is likely to vary depending upon endemic risks associated with the particular submarkets and their precincts. Further, within the submarkets, discounts on property prices vary depending on developer profile, asset class and current construction status of the project and we would advise buyers to consider every option based on their risk appetite.

Please click here to download the report Emerging Investment Hotspots 

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Investment Sale – India’s Growing Real Estate Opportunity

Shobhit AgarwalShobhit Agarwal, Managing Director – Capital Markets, JLL India

Investment Sale – Gaining Ground

Real estate is a business that requires regular funding, be it at the acquisition or execution stage. To raise funds, developers in India opt for modes like joint venture, pre-sale and construction finance. Construction finance can work out cheaper but is difficult to obtain because of the strict guidelines laid down by the Reserve Bank of India. Other routes are relatively easier but cut into a developer’s profits, since they involve sharing approval as well as execution and marketing risk for the project.

Considering the time and complexity involved in the approval processes in India, coupled with delays in execution due to various reasons, a new option is becoming popular among developers and investors. This option is the investment sale route.

In this mode, investors acquire a stake in partially or fully-leased properties rather than entering at early stage of construction. This eliminates the execution risk for investor and provides regular rental income along with possibilities of capital appreciation, and developers enjoy better valuations for their properties.

Residential – Not a Preferred Asset Class For Investment Sales

Since the objective is to hold the property for a longer term to earn regular rental income while retaining an option to exit later, the quality of development as well as the project’s tenants become very important. This puts commercial properties at a distinct advantage, since a commercial lease transaction is, in most cases, an agreement with a corporate for a longer tenure of between 3 – 9 years.

A residential lease arrangement, on the other hand, is with an individual and invariably for a shorter term that usually does not exceed 11 months. Also, while office or retail assets provide higher yields of 10-12%, the yield for residential properties rarely exceeds 3-5%. Hence, residential – while indubitably the most popular asset class in India – is not preferred for investment sales transactions.

India Offers Huge Investment Potential

Real estate in India is currently at an interesting juncture. While it remains impacted by an uninspiring economic scenario that is likely to prevail for some time to come, Indian real estate’s long-term potential is wholeheartedly acknowledged by investors across the globe. With the government taking active steps to improve transparency in the sector, investor interest is expected to grow multi-fold in the future.

The Indian office sector in the top seven cities is currently valued at around USD 72 billion. Completed office space accounts for approximately USD 45 billion, while under-construction stock accounts for USD 27 billion. In terms of area, completed A Grade office stock in the top seven cities is as high as 376 million square feet and is highly concentrated in Mumbai, Bangalore, Chennai and the NCR region, which together constitute more than 80% of the total area.

Out of this A Grade office stock, nearly 45% is FDI compliant which, combined with higher rental yields, has made India an automatic choice for global investors.

CRE SHobhit

Weak Rupee And Probable REIT Listing

The country’s weakening domestic currency has made investment in India all the more lucrative. If an investment of one USD fetched a foreign investor an asset worth INR 49 two years back, it fetches an asset worth of INR 59 today. While this is a double-edged sword, the advantages of a good entry point can certainly not be ignored. If the REIT commences in India, it will also provide easier exit with better valuation.

Challenging Environment

While India offers interesting investment sale options, the challenges it presents remain. The restriction on investments into specific asset classes, ever-changing policies on FDI, taxation and development, coupled with a lack of transparency in the system and high amount of friction in approval mechanisms, have led to an uncertainty in yields and tenure of lock-in for investments in real estate. This has affected investor sentiment and as a result, FDI in real estate and infrastructure in India dropped considerably from USD 5.8 billion in FY10 to USD 1.3 billion in FY13.

New Government – New Hopes

The new government at the centre and its various ministries have been distributed with focus on ‘minimum government, maximum governance’. By giving high importance to good governance and development in his mandate, India’s new Prime Minister has made it clear that he will go the extra mile to encourage foreign investment into the country and, in turn, improve the country’s business environment and prospects.

With massive real estate stock available at high rental yields, India’s excellent investment opportunity will multiply exponentially. If FDI regulations are relaxed going forward, investment sales as a market vertical will grow substantially in years to come.

 

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Where should I invest my money in India?

Photo_Srinivasa-ReddySrinivasa Reddy, Associate Director – Research, JLL India

Where should I invest my money – in a bank or in property, business, gold, stocks or REITs? Many of us have asked that question of both experts and ourselves. These kinds of questions do not seem to have an all-time correct answer, nor do they have a universally correct answer.

India has one of the highest rates of household savings in the world. Indian investors are quite conservative and cautious regarding their capital protection. In addition, many individuals confuse a safe investment with one that can provide a high level of return, and many investments are made just to save income tax. About 30% of investments are channelled through equities and other forms of financial investments, whereas 70% of investments are in physical assets, gold and property.

Looking at historical data on returns from various prevailing investment options for 2005-13, Indian equity markets displayed greater volatility compared with many other emerging markets. Despite markets performing fairly well since 2009, investor participation in the equity market is still very low, indicating a low appetite for this instrument, which is seen as a high risk, high reward instrument.

Gold provides significant returns, but is a dead weight, as it does not bring in a steady income. In addition, gold has lost its “safe haven” appeal, as risk appetite has increased due to the improvement in the economic outlook. The returns from fixed deposits in banks witnessed negative returns in real terms for most years, due to inflation outstripping interest rates.

On the other hand, investments in residential property witnessed stable returns since 2010, as shown in the table, and provided a steady cash flow as well. However, residential property has a higher investment entry barrier, so it is still an option only for relatively few Indians.

The Indian Government is formulating legislation for the introduction of Real Estate Investment Trusts (REITs) in India. Some India based REITs listed on the Singapore Stock Exchange have achieved annual returns higher than average residential price appreciation. Once established in India, REITs will attract small-sized investments, reduce individual speculation and allow for more professional investment and management in the sector as well as help to achieve greater cash flows in to the real estate sector, thus helping the Indian economy to grow faster.

srinivasa table

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