Real Estate Compass

With Gold Prices Sinking, What Is The Future Of Residential Real Estate?

02. May, 2013 by Anuj Puri 2 Comments

With gold prices currently on the descent, many investors are asking themselves if residential real estate prices will follow. Gold and real estate are the two primary investment routes for retail investors in India, so this is definitely a valid question to ask.

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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Categories: India Property, India Real Estate, Investment, Jones Lang LaSalle, Market, Prices, Real Estate, Real Estate Tips, Real Estate Trends, Residential Property

Jones Lang LaSalle India CFO survey : Eight Trends for Real Estate Cost Optimisation

25. Apr, 2013 by Ashutosh Limaye 1 Comment

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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Categories: Commercial Property, Corporate Real Estate, CRE, India Real Estate, IT/ITeS, Jones Lang LaSalle, Real Estate, Real Estate Research, Real Estate Trends

SEZs Reforms A Boon To Real Estate

22. Apr, 2013 by Ramesh Nair 1 Comment

In a landmark move that will have wide-ranging implications for commercial real estate in India, the Government has done away with the mandatory requirement of 10 hectares of minimum land area for setting up a IT/ITES SEZ.

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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Categories: Bangalore, Chennai, Commercial Real Estate, India Property, India Real Estate, IT/ITeS, Jones Lang LaSalle, Land, Real Estate, Real Estate Events, Real Estate Research, Real Estate Tips, Real Estate Trends, Residential Property, SEZ

Out-Of-Town Retail – The Viability Of Value

22. Apr, 2013 by Bappaditya Basu 0 Comments

Selling off the damaged or out-dated products has always been a nerve-wrecking task for retailers. However, they can liquefy their obsolete products on discounts to consumers who want to get branded stuff at reasonable rates. Retail companies can offload factory surplus stock at discreet stores located on highways and city outskirts.

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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Categories: India Real Estate, Indian Retail, Jones Lang LaSalle, Malls, Mumbai, Real Estate, Real Estate Research, Real Estate Tips, Real Estate Trends, Retail Properties, Retail Real Estate

Compact Comfort – The Enduring Studio Apartment

18. Apr, 2013 by Om Ahuja 4 Comments

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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Categories: Affordable Housing, Bangalore, Bangalore, Chennai, Chennai, Delhi NCR, India Property, Jones Lang LaSalle, Mumbai, Mumbai, Prices, Pune, Pune, Real Estate Tips, Real Estate Trends, Rental Housing, Residential Property, Studio Apartments