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India emerges

India emerges

September 2016

Riding on the back of a strong reforms-driven economy, the sub-continent’s real estate sector is set for a sustained bull run.

 

India is the hot, new investment magnet. Even as other big emerging markets like China, Brazil and South Africa are facing rough weather, India is not only standing tall as an island of relative stability with its growth unscathed by global events, but also the structural reforms by India’s single-party majority government are setting the pace for sustained growth in years to come.

Just last month, the country’s parliament passed the historic GST (General Sales Tax) Bill to implement an uniform tax structure across the country, rationalising tax structures and improving the ease of doing business.

The current prime minister is focused on improving India’s stature amongst the global investment community, and there has been a big change in India’s image as a business and economic hub. After 100% foreign direct investment (FDI) was allowed into the real estate industry earlier this year, it was only a matter of time before foreign developers made big investment announcements.

From multi-billion investments by foreign corporates to individual investments in specific projects by international investors, there is an unprecedented inflow of foreign capital in the Indian real estate space. “The latest policy announcements made by the government have positioned India as one of the most open economies. The various announcements convey the government’s commitment to reforms and to making India a lucrative investment destination for investors across the globe,” says Anshuman Magazine, Chairman & Managing Director, CBRE South Asia. According to him, investment-led growth of sectors like manufacturing, aviation, food and retail will directly benefit the real estate market in India, especially office, retail, logistics and warehousing segments.

Resurgence of offices

After witnessing sub-30 million square feet of net absorption for three years in a row (2012-14), 2015 saw absorption rise significantly to above 35 million square feet, with the momentum continuing into this year. “An aggressive expansion strategy adopted by many companies, particularly after going through a slow phase in the immediate preceding years, along with rising prominence of new players in the e-commerce, healthcare and technology space led to the recent jump in occupancy,” says Anuj Puri, Chairman & Country Head, JLL India. Ever since the majority government has been voted to power in 2014, India’s macroeconomic outlook has remained resilient, leading to the entry of new foreign firms and expansion of existing firms, and a resultant demand for office space, Puri adds.

A gradual fall in vacancy, which is currently at its seven year-low level of 15.9%, in tandem with the rise in absorption, is a perfect opportunity for rents to rise faster. “The rise is particularly fast in lower vacancy markets such as Pune, Bengaluru and Hyderabad, since these markets are more preferred by the leasing giants within IT-ITES sector. Few other sub-markets such as Mumbai suburbs, Gurgaon in the National Capital Region and Chennai’s suburban business districts are also witnessing moderately higher increase in rents,” says Puri.

In terms of sectoral share, IT-ITES continues to be at the top with 35-40% share of all office leases, and this dominance is likely to continue for some years. “However, with increasing push being given to manufacturing sector through initiatives such as Make in India, relaxed FDI norms into defence manufacturing, gradual progress towards a uniform taxation across all states through GST, Skill India, etc., we could see the share of manufacturing rise in the medium term, from the meagre 15% share it occupies currently,” says Puri.

New growth markets

Be it commercial or residential real estate, while the mature markets of India’s metro cities are witnessing low growth rates, a new wave of tier-2 cities are witnessing explosive growth. Research by Cushman & Wakefield has identified eleven such cities that are expected to spur demand, driving cumulative incremental residential demand alone to one million units between 2016 and 2020.

“These selected tier-2 cities would benefit from growth in economic activity through the industrial and services sector, construction and development of major infrastructure initiatives and the ‘Smart Cities’ project, resulting in demand for residential units over the next five years as their population increases due to large inflows of migrants,” says Anshul Jain, Managing Director, Cushman & Wakefield India.

The western region of the country is likely to account for the highest demand, followed by the southern and northern regions respectively. While Surat city is a frontrunner and is likely to account for one-fourth of the new demand, Kochi and Visakhapatnam will be the next two in terms of growth.

“There is a need for developing alternate urban economic centres in India as the tier-1 cities will soon be exhausted in terms of infrastructure to be able to support the desired growth. These new cities are well poised to become the next growth centres owing to their inherent strengths, government initiatives and attraction of foreign and private investments, over a period of 5–7 years,” says Cushman & Wakefield’s Jain, adding that while these cities have some inherent strengths, a systematic growth plan is also in place to achieve the goal.

The global Indian

The average number of residential properties owned by wealthy Indians stands at four, the highest in the world, compared to the global average of 3.7, according to property consultancy Knight Frank. From being among the top buyers of London’s luxury homes and New York’s condominiums, to being the biggest investors in the GCC region, the affluent Indian is going places.

While foreign investors are scouting for opportunities in India, Indian buyers are storming the global markets like never before. On the back of this development, Cityscape has now launched its India edition. The first edition of Cityscape India, organised by Informa Exhibitions in partnership with India’s leading real estate event organiser Abec, will be held from March 3-5, 2017 in the country’s financial capital Mumbai.

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