India’s GDP was revised downward consistently in the last three quarters of 2012. In 2013, this trend will prevail – though the quantum of revision will be lower. The country’s economic environment will certainly improve in 2013, with a corresponding (though lagging) gain in momentum for real estate. The most tangible benefits of economic improvements on the Indian real estate space will be seen in 2H2013.
The average inflation rate (based on the wholesale price index, or WPI) moderated to 7.4% in 3Q12. This can be seen as sensibly low when compared with the average CPI, which remained at 10.2%. As a result of the slight moderation in WPI inflation, the Reserve Bank of India started softening its cash reserve ratio to improve the credit situation. Further easing of liquidity with the prime objective of reviving the GDP is expected in the first half of 2013. Base rates, which peaked in 3Q12, are likely to start falling in 4Q12 on the heels of monetary easing by the RBI.
RESIDENTIAL REAL ESTATE IN 2013
Residential property prices have breached affordability limits in cities like Mumbai. Nevertheless, developers will have to factor in the ground realities of the business while debating the lowering of prices to catalyse sales in 2013. Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders are already beset with the increased costs of license costs and cost of construction.
However, it became evident in 2012 that homes are not selling at the current price points, and developers do need to re-calibrate their bottom lines while still remaining viable as businesses. It is extremely doubtful that the previously offered freebies and other such incentives will prove to be much of a booster in the current environment. Since the only way to catalyse healthier sales at this point is offering buyers tangible financial relief, we are likely to see drastic trimming of frills in projects to make them more marketable from a pricing point of view, and innovative payment schemes.
Developers will also offer buyers attractive pre-launch benefits in a bid to accelerate sales momentum in the initial months following a launch. Developers with large-scale projects with a greater share of unsold inventory will be under greater pressure to offer discounts than those with smaller projects and limited inventories.
Although most of the cities of India will see an increase in residential launches in 2013, the southern cities of Bangalore and Chennai will witness a decline in launches as compared to 2012YTD. It is important to note that these two cities recorded a historical high in terms of the number of launches during 2012.
To illustrate - Pune has recorded an average of close to 6000 units per quarter over the past three years (2010–2012YTD). This is more than twice the average quarterly launches recorded during the period 2007-2009. As a market that has grown too fast in such a short time, launches in Pune will be moderate in the near term.
COMMERCIAL REAL ESTATE IN 2013
The fact that the major cities of Mumbai, NCR-Delhi, Bangalore and Chennai saw 72.5% of the total commercial space absorption in 2012 is a telling one, and indicates the forward path. These cities will grab the lion’s share of contribution in total commercial space absorption in 2013, certainly within the range of 74-76%.
In terms of commercial real estate investment potential, Mumbai, Bangalore and Delhi NCR will continue to be of highest interest to big ticket investors focused on real estate in 2013. We also expect investor-driven demand to remain upbeat in Chennai, Hyderabad and Pune. Mumbai will see the highest share of commercial corporate property transactions from companies focused on their own occupancy needs. The Delhi NCR region, will be more popular with high net-worth and institutional investors.
We expect 2013 to bring a larger-than-usual number of NRI investors into the commercial space arena. This is because NRIs are currently enthused by the prevailing exchange rate benefits and the fact that commercial real estate capital values are still 15-25% under their 2007-08 peak levels.
RETAIL REAL ESTATE IN 2013
In 2013, new organized retail project completions will increase significantly (by 109% y-o-y). Chennai, Hyderabad, Kolkata and Pune will be among the major contributors to this increase, with a 53% share of the country’s overall mall supply for 2013. The primary reason is that a sizable amount of supply that was expected to reach completion in 2012 has been being pushed to 2013. Altogether, India’s major cities like Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million square feet of mall space in 2013. Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70% of the total retail space absorption. Other cities like Pune, Hyderabad and Kolkata will account for the remaining 30%.
The Government’s nod to FDI in multi-brand retail will be a major driving factor for increased activity in 2013. Since the policy opens the portals to major MNC retail brands in India, the organised retail sector will see a major transformation in terms of its overall contribution in the mid-term. This, in turn, will positively impact the absorption of retail space over the next 12–24 months. The absorption is forecast to touch 6.8 million square feet and 7.1 million square feet in 2013 and 2014 respectively.
That said, the benefits of the much-awaited FDI decision will not become fully evident in 2013, as it will take mall developers at least two years to incorporate the design elements and dimensions required to meet global standards. Mall developers are expecting a massive increase in demand for their projects in 2013; however, those whose shopping centres do not meet the requirements of international brands in terms of location, overall size, design, professionally managed operations will fail to see any action.
The much-debated policy on FDI into the multi-brand retail sector was finally implemented in September 2012. The policy now permits FDI of up to 51.0% into this sector, which is likely to boost the retail real estate market with the entry of international products, practices and technologies into India. Back-end retail infrastructure such as logistics and warehousing (both of which are critical growth catalysts for the retail sector) will receive a significant boost from this policy, as 50% of the total FDI into the retail sector is directed at these segments.
The power exchange and civil aviation (and also broadcasting) sectors have been permitted FDI in a bid to improve efficiency and productivity. In a time when liquidity is down and the performance of various sectors is deteriorating, a shot in the arm for power and aviation will have positive (albeit only over the long term) ramifications on the real estate sector, as well.
The Direct Tax Code (DTC) - a major evolutionary step in the country's taxation system - will change the entire financial landscape of India. As it spells major change, it will require a fairly in-depth study from an occupier’s perspective before all its implications can be understood and assimilated. The Government of India has deferred the implementation of DTC from 2014 to 2015, which gives occupiers more time to capitalize on their expansion decisions while carefully negotiating with developers.
The delay in the implementation of DTC has resulted in a good portion of the office space demand for IT SEZs to spill over from 2013 to 2014. With the demand for IT SEZ space to remain healthy in the next 12–18 months, we expect the developers of IT SEZs to focus on execution and completion of projects for the duration, to ensure ready supply to match the immediately upcoming demand.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India