Notes From Davos: An Economic Driver Called Modi

Anuj Puri pic Anuj Puri, Chairman & Country Head, JLL India

On the first day here at the World Economic Forum at Davos, there is no getting around Narendra Modi. Every second conversation that I strike up or am engaged in seems to come back to India’s enigmatic new Prime Minister. One of the many questions I’m asked about him is whether Modi’s popularity and ability to inspire hope are based solely on his electoral promises, or is there real substance here?

By now, it is more than evident that Narendra Modi really means business, and that the new reforms he is introducing are turning out to be very favorable for the country’s economy. The new attitude towards urbanization and growth that Modi brings in, and his vision of India competing with the world’s super-powers, has received a lot of backing not only from Indians but also served to perk up interest from foreign companies eyeing Indian shores for their operations, as well as foreign investors.

modiModi has already demonstrated in Gujarat what his pro-business, infrastructure and policy-driven approach can do for economic revival and growth. His image is of a determined change-bringer and vanquisher of the lassitude that defined the old guard is what was needed most when it comes to rebooting India’s viability as a peer in the Global Economy.

Modi came at a time when the former UPA government’s image was marred by corruption cases, scams and failure to rein in rampant inflation. Today, he has an unenviable and monumental task before him now while dealing with deeply entrenched challenges and scripting a new growth story for India. He faces many obstacles on the road to delivering on his vision.

On the road to turn the Indian economy around and bring the country back into the global sweepstakes, Modi has launched many new initiatives. One of the most talked-about was his reviving the ‘smart cities‘ concept – which, though not new one in India, lacked the forward momentum that comes from focused policies and the requisite policy-level funding. With these now part of the Modi government’s mandate, and with the awareness that has been created about smart cities, we are very likely to see smart cities becoming India’s new standard for urbanization, rather than interesting novelties.

Information technology, which we all acknowledge as an important economic driver for India, has not leveraged optimally. It needs to move from being seen as a mere ‘employment spinner’ to becoming a medium for change. Modi has set his mind to make the IT sector a shining light for Brand India, and he is backing this vision massive funding, as well.

From what we have seen so far, ‘Minimum Government, Maximum Governance’ does not appear to be an empty election slogan. I believe that the direction that Modi’s new reforms point towards a very favorable future for India. It is early days yet, and we should not expect overnight miracles; further major reforms that will potentially improve business sentiments in the Indian economy will necessarily have to happen more gradually. What is certain is that with a relentlessly pro-business government at the Centre, they will not have to wait too long in the wings anymore

  • Inflation

Inflation was a major hurdle for growth of the Indian economy. It not only affected consumer spending, borrowing cost and therefore sentiment but also the construction sector, which depends heavily on raw materials such as cement, steel, etc. Major supply-side constraints such as allocation of natural resources to core industries, and the need for improved infrastructure for easy transportation and simplified taxation for goods crossing state-borders, are key areas for the Modi government to focus on. These are among the primary reasons for India’s high inflation ratings.

Inflation definitely needed to be reined in to promote growth. The level which the RBI perceives as comfortable for the Indian economy ranges between 4%-6% for WPI inflation. Currently, WPI is within controllable limits. However, if we take the real estate perspective, the costs for cement, bricks, steel and other raw materials continue to remain high. This has led to annual building construction costs inflation hovering around 17% y/y over the last four years.

A lot of this is due to constraints on the supply-side rather than merely price concerns. For instance, the cement industry is currently undergoing capacity underutilization, due to which fixed costs are proportionately higher. Also, transportation costs have increased significantly in the last one year, as the central government has gradually deregulated fuel prices.

Both the RBI and the Modi government have shown great resolve to tackle the problem of inflation and its correlation with the generalized borrowing cost in the economy. We have already seen inflation coming down drastically, although this wild horse needs expert monitoring beyond the feigning scope of the fiscal authority. With PM Modi expressing his desire to give the RBI Chairman Dr. Rajan a hindrance-free monetary policy regime, he has not only displayed professionalism but also put to rest criticisms that the new Indian PM wants the first control on every policy tool.

  • GST (Goods & Sales Tax)

India’s complex tax structure renders doing business on a pan-India level difficult. This has been repeatedly highlighted in annual surveys conducted by the World Bank. Single-window clearance for real estate projects is vital to save time, effort and the costs involved in obtaining permissions from various related departments. The introduction of a uniform tax structure for all states is equally critical, particularly to boost the manufacturing, warehousing and logistics industries that is likely to become major occupiers of real estate over the coming decade.

The problem with introducing Central GST (Goods & Sales Tax) lies primarily in convincing the various state authorities, since several states feel that their financial autonomy will be threatened if revenues are collected and distributed by the Centre. Will Modi be able to cut through this Gordian knot? The industry certainly hopes so. Meanwhile, Modi has his work cut out for him in other respects, as well.

  • LARR (Land Acquisition, Rehabilitation and Resettlement) Act

Land-related bureaucracy is high in India, and it acts as a deterrent for investors to operate in the Indian real estate and infrastructure space. The economy is desperate to get past this hurdle, as it needs support from infrastructure development for further growth – and infrastructure is highly land-centric. While the modified LARR (Land Acquisition, Rehabilitation and Resettlement) Act which was put into effect last year by the UPA government has attempted to reduce the bureaucracy involved, there is a current and very pressing need to revisit this Act. Provisions in the bill such as the significant rise in compensation to original inhabitants, the tedious rehabilitation clauses and other norms need to be relaxed if it is to serve its purpose of untangling.

The critical nature of this bill is undeniable, and the Modi government has realized this. His government has even risked taking the ordinance route to pass the crucial amendments that will allow the act to contribute positively. Needless to say, these decisions will have political implications, and Modi’s government will have to approach the issue not only with determination laced with a lot of caution.

  • Affordable Housing

Modi has made it clear that affordable housing is a focus area which he intends to promote as a priority sector. He is obviously aware that in order to do so, the sector will need to see much more incentives for developers as well as for banks. Modi’s government has the right intentions, but it will be difficult to implement them unless the previously mentioned issues – namely inflation, implementation of GST and revision of the Land Acquisition, Rehabilitation and Resettlement Act are dealt with.

The Union Budget for FY2014-15 has already prioritized affordable housing by giving it a status equivalent of infrastructure. Subsequently, to make financing policies more pragmatic, the RBI raised the limit for individual loans for affordable housing from the previous INR 25 lakhs to INR 65 lakhs in metropolitan cities and INR 50 lakhs in other cities. There is no doubt that we are seeing a lot more policy-level will and impetus for affordable housing than witnessed in several preceding years.

At this juncture, the Indian government is sitting on a high fiscal deficit and therefore has limited resources to resort to public investment-led growth. In order to help India reach its economic potential and grow at a rate of 7% a year, the Government has to pull out all the stops in creating an enabling environment for private investors to step up investments. In fact, there is already a revival in sentiment among real estate stakeholders, so Modi is definitely on the right track.

  • Investment Climate

There has been considerable sentiment traction on the introduction of REITs, which can enable small savings to be channelled into real estate for the first time. With REITs now finally part of the visible landscape rather than just a barely glimpsed mirage in the desert, a major concern of the industry with regards to creating large quantum of liquidity is getting resolved. REITs will render the entire real estate funding process more institutionalized, and therefore transparent. Some of the stringent measures proposed in the earlier version of REIT guidelines have been relaxed, with a view to making Indian REITs competitive globally.

We are now looking at a real possibility for Indian real estate attracting a sizeable amount of investments. While SEBI and the RBI would play an instrumental role in formulating the rules and policies governing REITs and FDI, it is the government which is empowered to fast-track the process by hard and determined action.

Again, Modi and his overall vision and perception for growth will obviously play a leading role, and there is already sufficient evidence that he is taking it very seriously. His plan to construct 100 smart cities across various parts of the country and simultaneously relaxing FDI norms for investment in these cities will create ample investment opportunities, thereby also enabling uniform real estate growth across the nation.

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Looking Forward To Davos, And Back To India

Anuj Puri pic Anuj Puri, Chairman & Country Head, JLL India

As I leave for Davos to once again attend the World Economic Forum at Davos this year, I find myself reflecting on the rapid changes that the Indian economy has seen in the last one year. In a relatively short time, it has again emerged in force as an important candidate among the world’s most powerful economies, all of which will be represented at Davos.

The growth rate of the India economy used to exceeded 8% in previous years, but it declined to as low as 4.7% 2013-14. More recently, sentiment and economic confidence have returned because of a stable and pro-business government at the center. Today, India’s economic growth rate is advancing visibly from a slow-down brought about by diminishing competitiveness, both on the economic and industrial fronts. Like many other countries, we have learned the hard way that we need to manage our macro and micro-environment more efficiently, and that we cannot assume that national prosperity is assured.

Thankfully, the arrival of the determined and pro-business prime minister Narendra Modi has signalled a sea-change for the Indian economy. Modi has squarely put the focus back on growth and has identified various policies and systems which either need to be scrapped or upgraded in order to achieve this growth. The primary lesson to be learned here is that a country with economic problems cannot hope to see a turnabout in fortunes unless its leaders stop ignoring glaring issues and inconsistencies, and dedicate themselves to surmounting them.

As I look forward to many engaging sessions and client meetings at the World Economic Forum, it is good to know that India will be putting a stronger foot forward at Davos this year. At JLL India, we have seen first-hand how decisively investor interest has returned to our country. This year at Davos, India is once again a force to be reckoned with. It is a warm feeling that will serve me well on the icy slopes of Switzerland.

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Selling A Property On A Slow Real Estate Market

Om AhujaOm Ahuja, CEO – Residential Services, JLL India

In a slow real estate market, selling a house can be a daunting task. Nevertheless, selling a property is sometimes necessary or desirable despite market circumstances – for instance, when the home’s mortgage value is higher than its market worth, if one has purchased another house and faces difficulties in paying two mortgages, if one wants to upgrade to a bigger and better house or if there is a need to downsize. Other circumstances such as job relocation and family issues can also necessitate the sale of one’s home – with an express need for a quick sale.

As a rule of thumb, it is never a good idea to sell anything when the market is bad and showing no signs of recovery. That said, if there is no alternative but to sell despite unfavourable market conditions, it is not enough to simply list the home and wait for an offer.

The thought to keep in mind in such a situation is that even though the market has decelerated, there are still plenty of home-buyers eager to find a home. There are some key tactics to help increase the possibility of a sale, and these pertain to preparing both the property and one’s mind to increase the probability of a sale:

  • Know Your Market

When selling a house on a depressed market, it is very important to understand what is really happening and why it is happening. Understanding gives objectivity, and an objective mind is more conducive towards a successful sale than a desperate one. Above all, it is important to know the true market value of one’s home, which is often very different from what ones hopes or thinks it is. Most sellers operate in the dark and are simply offering their property for the price they want, regardless of what other homes in the same location are being sold for or are currently selling for. Undervaluing or overpricing your property while trying to sell it on a slow market is a serious mistake.

  • Be Competitive In Your Pricing

On a slow market, property prices dip and the possibility of obtaining a really good price is remote at best.  It is essential to price your home reasonably by looking at similar options available in the current market. If you take a look at the homes in your project or neighbourhood which are listed with brokers but are not selling, chances are that their owners’ expectations are just too high. To stimulate a sale, under-pricing your property relative to others being offered in the project or location by just a little can generate more interest from buyers. For high-end properties – i.e. luxury units in metro cities valued at Rs.5 crore +, one can should consider using the close bid process. In this process, which reputed property consultants employ on behalf of their clients, bids are invited from prospective buyers with the objective of achieving the best possible price. High-end and landmark properties are normally sold using this process, which invariably help sellers to arrive at an optimal sale price.

  • Make Your Home Presentable

Apart from right pricing, nothing will attract potential buyers more than a well-maintained house. This goes beyond just cleaning and sprucing it up, and actually involves removing your ‘identity’ – or the personalization you have undertaken to make it ‘your’ home – from the house as far as possible. Retain only the things that actually add value to the flat. A small investment in making your property presentable is more cost-effective than a price reduction. Make the entrance presentable and address issues related to plumbing, water seepages, cracks in the masonry, loose railings and ill-fitting window frames. When there are many options available on the market, buyers will look for homes that are ready to move in rather than units that require significant effort and expense on repairs and refurbishing.

  •  Be Flexible With Showings

It is essential to keep your home available for inspection throughout the time it is listed on the market. Remember, it takes only one buyer to get your home sold. Keep your home available for viewing at moment’s notice, and do not restrict access solely to the times you are personally available. The more often your home is shown to potential buyers, the likelier is a quick sale. Do not give buyers the impression that their request to see the flat is an inconvenience.

  • Engage The Right Property Agent

On a slow market, using the services of a top-of-the-line real estate consultancy can be a faster route to a quick sale than roping in multiple small-time brokers. A first-class property consultancy employs more operatives and has a larger and more dynamic database of prospects, and these capabilities are a major differentiator from smaller brokerages with limited resources.

  • Be Flexible On Your Terms

On a buyer’s market, the willingness to be flexible on one’s terms can make a big difference. Buyers know that you want to sell your home, but may also be looking for some scope for negotiation. If a home is priced too high and the owner refuses to negotiate on terms, it is likely to be ignored by buyers. Apart from openness to negotiation on the quoted price, offering flexible financial terms with an extended closing date can do the trick.

  • Be Patient

Selling your home is invariably a stressful process, and the stress is inevitably prolonged when the market is slow. Remember that this is a waiting game, and that impatience will work against you. Be flexible, do not display any signs of desperation and use the right resources. At the end of the day, there is always a buyer for every good property.


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India Office Real Estate Market Review 2014

2nd Best Year Ever For Absorption, Lowest Vacancy In 5 Years

Ramesh Nair PhotoRamesh Nair, COO – Business & International Director, JLL India

Given the policy paralysis witnessed during the last two financial year (FY2012-13 and FY2013-14), GDP growth was recorded below 5.0% y/y during both years. Overcapacity in the critical mining and manufacturing sectors reduced the crucial supplies needed by various industries. As a result, a deadly combination of high inflation and falling consumption eventually stunted growth until early 2014. However, since the last two quarters, things have turned around.

The new government has done its homework well, and is targeting reforms at the right places. Real estate, mining, manufacturing and infrastructure seems to be the focus areas for improvements, also indirectly triggering growth for a multitude of ancillary and/or supporting industries. With the renewed confidence, the Indian economy is operating at a speed where current year (Fy2014-15) growth is expected at not below 5.5% y/y. Simultaneously, inflation has ceased to pose challenges to growth, which is positive. All this led to the Indian office market having the 2nd best year ever (other than 2011) in terms of absorption and the lowest vacancy levels since late 2009.

Demand: Close to 30 million sq.ft. of office space got absorbed in 2014, a 3.0 million jump in net absorption compared to the previous year. Cities which contributed the highest in terms of absorption were Bangalore and NCR-Delhi.

tb 1

Bangalore witnessed a significant 72% year-on-year increase in net absorption in 2014, followed by NCR-Delhi (48%), Hyderabad (41%) and Pune (13%). Kolkata (-55%), Chennai (-43%) and Mumbai (-21%) witnessed a fall in net absorption from levels seen last year. A reason for the drop in absorption in Mumbai and Chennai was the lack of availability of suitable office space in the preferred micro-markets. The considerable growth of the IT-ITeS and e-commerce sectors is clearly visible in the growth of office space demand in the IT cities, whereas expansion was limited in sectors such as BFSI (which would have benefited Mumbai significantly). Mumbai also witnessed limited supply in comparison to other tier 1 cities such as Bangalore and NCR-Delhi.

In NCR, Gurgaon, NH8, MG Road and Noida city witnessed higher absorption in 2014 than in 2013. In Mumbai, the Eastern Suburbs and Thane-Navi Mumbai are the two sub-markets that witnessed higher absorption in 2014. In Bangalore, SBD and Whitefield witnessed higher absorption, while Chennai was among the few cities whose CBD recorded marginally higher absorption compared to 2013. Chennai’s PBD (peripheral business district) saw the biggest jump in take-up, while all other sub-markets it was relatively lower.

Pune is among the two cities (besides Kolkata) where CBD, along with SBD, witnessed a respectable jump in absorption compared to that of 2013. The city’s suburbs witnessed a lower absorption from last year. Hyderabad saw Hi-tech City and Gachibowli recording a higher absorption than last year. Absorption in other sub-markets was relatively lower, particularly in the CBD. Kolkata saw CBD absorption growing by more than 4x during 2014 when compared to 2013.

tb 2

Sectors that contributed the highest in terms of leasing were IT-ITeS (35%), BFSI (17%), Manufacturing (13%), and Consulting business (6%). The improved economic outlook in the US, strengthening domestic capital markets and the government’s bold efforts to boost manufacturing sectors among the reasons why these sectors outperformed the others in terms of leasing.

US companies (44%) continued to retain the dominant in share of office space leasing in India in 2014, although its share has decreased by 4% points from the previous year. Domestic companies have increased their share to 33% from 31% the previous year. Despite economic concerns in European Union, the region increased its contribution to leasing by 2% in 2014 to 16%.

Supply: Total stock of Grade A office space across major Indian cities grew by 8.0% in 2014 over the previous year, with an additional supply of slightly below 30 million sq ft. Bangalore saw the biggest addition in office supply in absolute area terms, followed by NCR-Delhi. Mumbai, Pune and Hyderabad witnessed only moderate increases in supply. Chennai and Kolkata added very little supply to the overall basket during the year.

tb 3Vacancy: Pan-India office space vacancy dropped from 18.5% as of end-2013 to 16.9% as of end-2014. Mumbai, Chennai and Pune were responsible for this steep fall in vacancy during the year. While limited supply was helpful in reducing vacancy in Mumbai and Chennai, Pune benefited from both moderate supply and healthy growth in absorption. Despite a significant rise in supply in Bangalore, a healthier absorption resulted in reduced vacancy. The current vacancy levels in Mumbai is the lowest seen over the last 36 months.

tb 4

Rental: The markets which saw the most rental increase were Pune, Bangalore and Kolkata, with rental increases of 8.6%, 5.2% and 4.2% respectively. The rentals in the other markets remained stable.

Yield: Office yields remain unchanged from last year at 9.6% pan-India. The story remains the same across all major markets.

Outlook: With recovery definitely underway, many micro-markets across the country are expected to become landlord favouring. The actual vibrancy on ground is felt even more since GLV is higher than the net absorption by 15- 20%. With a healthy space demand list on hand from various corporates, it is going to be hard for corporates to find the right assets at the right location in 2015. The increase in corporate profitability, corporate confidence and economic growth will continue to result in headcount growth and expansionary leasing activity across most markets in 2015.

While challenges still exist,  the forecasts for 2015 and 2016 projects considerable increase in office take-up when compared to 2012 and 2013. We expect only 22 million sq.ft. of office space to be ready at the right locations against the demand forecast of 30-32 million sq.ft. in 2015. Therefore, rental and capital values will continue to grow. Investment volumes are expected to go up in 2015, driven by low risk cross-border capital. Overall, the investment market will do better in 2015, with a substantial weight of capital targeting office real estate (especially Grade A and trophy assets). Strong investor demand for prime office assets, drop in interest rates and the lack of new supply of core investment options in the primary markets will result in yield compression.


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India Real Estate: How IPCs Make A Difference

The role that IPCs play in a market like India magnifies significantly because of the massive amount of growth happening over a very vast arena

Shajai JacobShajai Jacob, Director & Head – Marketing, JLL India

In a market still defined by significant lack of transparency, real estate consultancies play a complex and responsibility-driven role in all real estate transactions, especially in the case of high-value property assets. In large ticket sized transactions such as those involved in Grade A office spaces, there can be no margin for error. Transparency, ethics and accurate market information play an inalienable role in closing such deals.

Today, MNCs as well as domestic companies and investors depend on International Property Consultancies (IPCs) to help them identify the right opportunities, analyze the risks, take charge of the overall portfolio and generate optimum returns on investment. IPCs bring to the table a potent combination of technical know-how and market insight across all verticals of real estate.

In India, IPCs help both domestic and MNC clients to formulate optimal real estate strategies in the Indian market, which functions within a complex and often confusing framework of policies and regulations. This, coupled with the fact that they are hard-wired into the global market and operate from a standpoint of uncompromising ethics, is the value proposition offered by IPCs in India.

In a market like India, the role that IPCs play as transaction advisors and portfolio partners magnifies significantly because there is a massive amount of growth happening over a very vast arena. Their service offerings include office and residential brokerage, research, portfolio management, project management, property and facilities management as well as Capital Markets.

IPCs also have deep capabilities to effectively execute disposition of surplus or distressed real estate assets, meet the requirements of HNIs with specific investment requirements and catalyse debt funding for developers. In addition, IPCs provide strategic business consulting for domestic clients and are invariably the default service providers for large Government real estate requirements.

Compared to more developed countries, the Indian real estate sector is less organized. However, it is again the cynosure of international investments thanks to the improving policy scenario for investments via FDI. This has naturally brought on the need for a global approach to local real estate, not least of all in terms of better information resources, the kind of business transparency that international investors expect and the ability to decipher information asymmetry via empirical investment research.

There are many ways of operating in Indian real estate, but global investors expect much more than knee-jerk reactions to currently existing market trends. They require their real estate advisors in India to provide and act upon insights based on a learned understanding of the market and advanced capabilities in anticipating possibilities.

IPCs in India provide this kind of knowledge, further backed by hands-on, practical experience in the Indian market. In fact, the role that IPCs play in a market like India magnifies significantly because of the massive amount of growth happening over a very vast arena.

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