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Open for Business

1 August, 2014

India’s commercial property sector could present lucrative opportunities for investors as a new real estate investment trust (REIT) looks set to open the country up for foreign direct investment.

India is tipped to become the world’s third largest economy by 2020. Recovery from the global financial crisis is underway, and with a new business-focused BJP government in place, the country looks set to fulfil its true potential in the years to come.

Real estate plays a central role in India’s economic fortunes, and with the government and industry working together to create a formal real estate investment trust (REIT) investment is set to become even easier, and hopefully even more lucrative.

“The government is expected, through various policies and structural measures, to kick-start the recovery in the real estate sector,” said Rohan Sharma, Associate Director – Research and Real Estate Intelligence, for Jones Lang LaSalle (JLL) India, and co-author of the JLL report Destination India – A Real Estate Journey for Corporate Occupiers, published in May 2014.

According to Sharma, a REIT would help developers get access to cheaper financing. It would also give the property sector a stronger industry status. The BJP government and policymakers are also looking at affordable housing policy and at making changes to the Land Acquisition Act, all in favour of accelerating the real estate market.

“The business-friendly approach [of the government] is likely to positively impact the real estate sector,” Sharma added.


According to the JLL report Destination India – A Real Estate Journey for Corporate Occupiers, the Congress Government has shown keen interest in setting up REITs in India and the Securities Exchange Board of India has released draft guidelines for the proposed REIT structure.
“The pass through entity status to REITs is likely to bring in more foreign investment as it provides a viable exit option to investors and provides more breadth to the overall market. However, we are still awaiting the fine print on REITs, where though taxation is proposed as pass through, other aspects like stamp duty, dividend distribution tax etc. for transferring assets between entities are yet to be discussed,” explained Akshit Shah, Manager – Capital Markets Research JLL, India, and co-author of the JLL report.


The JLL report states that while the cost of commercial real estate in India has grown over the past decade, it is still considerably lower than most other developed nations. Delhi and Mumbai are ranked 10th and 11th in the list of costliest office spaces in Asia Pacific, yet they are more than 55% cheaper than the table topper, Tokyo. Bangalore, one of the fastest growing office markets in India, is at number 21 and is more than 85% cheaper than Tokyo.

For corporations looking to relocate – India is a prime market, not only for its low-cost real estate, but for its low-cost workforce too.
Over the past two decades, India has made a mark on the global map as the foremost offshoring and outsourcing destination. The country has managed to attract large multinational companies operating in the field of banking, manufacturing, hospitality, logistics, and also construction and warehousing. The growth of the services sector coincided with the explosion in construction of commercial offices to fulfil the need of such occupiers. The three biggest cities of Delhi, Bangalore and Mumbai attracted the largest share of occupiers in the services and outsourcing businesses.

For corporations looking to set up in India, finding the right premises is crucial. JLL states that partnering with the right kind of developer who offers optimum building specifications and facilities is essential. Finding the right city is also key. India’s cities are categorised as Tier 1, Tier 2 and Tier 3.

“Tier 1 cities still remain a better bet as they have achieved the critical mass necessary for consumption of demand. They also attract more talent from the remaining parts of the country. Select Tier 2 and Tier 3 cities, which are developing as industrial/manufacturing clusters or are located close to existing larger cities and on national highways, also offer potential for real estate investments,” advised Sharma.

In terms of leading Tier 1 cities, Mumbai is known as the financial capital of India, Delhi its seat of government, and Bangalore as a business destination. But new cities are emerging offering new opportunities.

Tier 2 cities emerged in the country when the need arose for setting up secondary offshoots at a more affordable cost. This gave rise to the manufacturing and IT hubs in Chennai, IT and biotechnology incubators in Hyderabad, and engineering and IT hubs in the erstwhile pensioners’ paradise of Pune. In the Eastern part of India, Kolkata too emerged as an attractive destination for IT and manufacturing firms. These cities today contribute to over two-thirds of occupier driven office space leasing volumes in the country.


Traditionally, India has been something of a closed market. FDI has been curtailed until recent years, and therefore local money and local developers largely control the market.

According to Shah and Sharma, the REIT and other government schemes will help open India up to more foreign direct investment (FDI).

“Some FDI relaxation is expected and the budget has already reduced the minimum development size to 20,000 sqm from the earlier 50,000 sqm and minimum capitalisation to US$ 5 million from the earlier US$ 10 million, which is likely to bring in more investment. The pass through status to REITs is also likely to bring in more FDI, though greater clarity is still awaited on the operational issues. Greater investment is also likely in the manufacturing and infrastructure sectors,” Shah said.

For international investors, Shah says many of the challenges centre on transparency. “It is improving steadily for the bigger metros,” he said.

The delays in approvals are also a challenge to start a project on time. The taxation and retrospective taxation issues also present a challenge. Lack of a secondary mortgage market and lack of REITs, thus reducing the exit options for investors, also needs to be addressed.”


The commercial office development scene, while largely dominated by local developers and investment, is now playing host to a few global players as well. JLL states that some of them come with development capability credentials, while others are using their investment experience to become development partners.

Ascendas, which is a global office development and investment firm, has been present in India for over a decade, partnering on multiple developments across Hyderabad, Bangalore, Pune and NCR-Delhi.

Other firms such as Tishman Speyer and Hines are leveraging on their development experience to create superior quality office projects. Blackstone, through strategic acquisitions, is today the second biggest developer in India, both in terms of developed and under-construction stock. Blackstone currently holds 28 million sq ft of office space in collaboration with its Indian partners.

Key local players include IDFC (domestically raised private equity fund), IL&FS, Milestone Advisors, and ICICI Ventures among others who have invested in built-up office projects. A key feature of their investment philosophy has been buying distressed and under-performing assets or from developers who are struggling with cash flows.

Most of such asset acquisitions are largely IT parks or well-known commercial developments in the large Indian cities, which are preferred by global occupiers.

As the commercial world looks to relocate its workforce to the Indian subcontinent, investors would be wise to look closely at India’s commercial real estate market. With new FDI guidelines coming into play, and the potential of REIT investment, India is most definitely open for business.