The year 2012 closed with a few notes of positivity as the inflation was below the Reserve Bank of India’s (RBI’s) projected levels and the Index of Industrial Production (IIP) growth increased in the last two months of the year, giving new hopes for 2013.
Overall, 2012 remained inactive, affecting all the major sectors in real estate. Office space absorption remained lower compared with 2011. Meanwhile, retail faced challenges of quality supply, affecting the overall absorption. The residential demand improved; however, developers continued to struggle with unsold inventories. With the expected moderation in inflation and strengthening policies, we have gathered few interesting insights for 2013 from real estate experts.
- Economy – As per RBI, the policies will focus towards growth in 2013, although risks of inflation will continue to remain. Interest rates are expected to witness a downward correction of 100 to 150 bps in 2013. The softening of interest rates is expected to reduce the home loan rates, in turn increasing the buying of real estate assets. Increasing urbanisation and consumption despite the slowdown in GDP growth will be the key drivers of the economy in 2013.
- Policies – The recent policy initiatives are expected to improve the investment climate and business environment, and they are likely to benefit the real estate sector in 2013. Few policies to look at in 2013 are: the Real Estate Regulation Bill, likely to be tabled in the upcoming winter session of the parliament; the real estate investment trusts (REITs) or real estate mutual funds (REMFs), expected to get launched in 2013; and the Land Acquisition and Rehabilitation and Resettlement Bill, likely to be tabled in the upcoming budget session in 2013.
- Infrastructure – The infrastructure sector achieved a substantial FDI of USD 2.8 billion, accounting for a notable 7.7% of the total FDI inflow in FY 2012. In the year 2013, the relaxation of FDI policies in multi-brand retail is expected to surge the investment in back-end infrastructure development such as logistics. Moreover, an FDI of up to 100% is also permitted under the automatic route in built-up infrastructure and is likely to surge the development of the city and the regional level infrastructure in 2013.
- Office Real Estate – Office space absorption in 2013 is likely to remain equal to that in 2012. Supply correction will lead to fewer options for occupiers, and steady absorption will decrease vacancy levels. Competition for space in prime buildings in prime locations is expected to increase in 2013, and these spaces will start earning a premium. Rents are expected to increase from 2H13 onwards as fewer new projects are being launched, and vacant spaces are steadily filling up. Decisions on occupying special economic zone (SEZ) spaces will be taken by occupiers who are sure of taking a position in India as they have to go live by March 2014 to avail the benefits.
- Retail Real Estate – The relaxation in FDI policies in multi-brand retail interestingly has surged aggressive growth amongst Indian retailers to take the first-mover advantage. This is expected to drive the demand in 2013. However, as supply of retail malls remains a challenge, retailers are likely to opt for built–to–suit (BTS) options or high-street properties. As most developers are focusing on residential developments, the supply of malls will reduce in the major cities over the year. In 2013, retailers will be cautious and take more time to execute agreements as they will do a detailed analysis before closing transactions. Retailers will commit to space only if they see approvals in place and the construction of the space in progress.
- Residential Real Estate – REITs in India allowing investments in rental housing is a new trend worth watching. The framework and details of REITs, once formulated, are likely to drive the investor demand across the prime cities in India in 2013. Another interesting trend observed in the last two years was that the stock in the range of INR 2,000–3,000 per sq ft was fast sold out. In 2013, this range is likely to shift to INR 3,000–5,000 per sq ft with the increase in inflation and construction costs.
- Industrial Real Estate – Sale-cum-leaseback of exiting industrial assets by existing companies is likely to increase in 2013. MNCs testing the waters in India are likely to focus on BTS industrial properties. Warehousing companies are now preparing for the goods and services taxes (GST) and are slowly moving from godowns to distribution centres. The growing trend in e-retailing and FDI in multi-brand retail is expected to surge the demand for warehousing spaces in 2013.
- Education and Health Care – There are aggressive growth plans in K-12 and skill-space educational institutions in 2013, particularly in the non-metro cities of India, where there are large opportunities. In the health care segment, hospital chains, along with day care centres, are expected to expand aggressively in 2013. Both these segments are expected to attract private equity investment in 2013.
- Investment Sentiments (Capital Markets) – Debt capital is likely to increase in 2013. Banks are expected to be more flexible in lending. Most of the realty funds are close to their exit periods as they were invested around 2006–2007. Therefore, the exit of real estate funds is expected to increase in 2013. Meanwhile, interest on income-producing assets by institutional investors is likely to increase over the year. However, the availability of such assets will continue to remain a challenge. Assets will witness a softening of yield rates amidst increased liquidity.
- Delhi Real Estate – Most of the absorption in Delhi NCR is likely to focus around Gurgaon and Noida, with the exception of Delhi International Airport Limited (DIAL) and few select stand-alone Grade A projects of Delhi. As the demand supply gap of quality office space is expected to increase because of the supply constraints in select precincts of Delhi NCR, rents are expected to increase in certain micro-markets by 2H13. Developers will focus on delivery of the products.
- Mumbai Real Estate – Office absorption and residential demand will continue to increase in Mumbai. The trend of completion of highquality new office projects pushing up Grade A office vacancy levels and providing tenants with greater bargaining power will reduce in 2013. With banks drastically reducing lending activities over the last two years, resulting in debt remaining a constraint, not much of new commercial supply (except spill over from 2012) is expected to be completed in 2013 and 2014. Residential launches are expected to increase; however, price drop is unlikely to happen over the year. Amidst constrained supply of quality retail malls, rental gap between Grade A malls and Grade B malls will further widen in the year.
- Bangalore Real Estate – In terms of office space, Outer Ring Road will continue to be the sought-after destination in 2013. For residential real estate, North Bangalore is expected to continue to remain as the best performing region in the city with strong infrastructure development, increased demand and price appreciation in 2013. Meanwhile, Whitefield will continue to retain its sheen for both office and residential real estate because of affordability, proximity to key work places and good social infrastructure.
- Other Cities – Chennai, which witnessed a historical high number of residential launches in 2012, is likely to slow down in 2013. This trend is also expected in Pune. Meanwhile, Kolkata and Hyderabad are likely to witness increased launches. Prices of residential units are likely to increase in all the cities because of the increased construction costs. Ahmedabad, Bhubaneswar Kochi and Coimbatore are other cities in India that are likely to witness immense development activities in 2013.
Please download Jones Lang LaSalle’s Monthly Real Estate Monitor – January 2013 here: http://www.asiapacific.joneslanglasalle.com/india/Pulse/Jan2013/Pulse_Jan2013_India.pdf