Real estate sector is cautiously optimistic

Real estate sector is cautiously optimisticThe winds of change are evident over the past two years, with 2015 coming to a close on an optimistic note. Encouragingly, India’s economic revival has gained fervor as policymakers have been proactive in initiating reforms to strengthen the growth in various sectors to augment gross domestic product growth. While the optimism in the economy has percolated to a few sectors to some extent, the real estate sector has been a bundle of contradictions in 2015.

Private equity investments into the realty sector have rebounded last year, touching new highs since 2008, signalling growing optimism.

Adding to the buoyancy is the commercial office sector that has gathered momentum with some large lease and buyout transactions seen during the year. These include a buyout of about 500,000 sq. ft of office space in Mumbai’s Bandra-Kurla Complex by a pharmaceutical firm in India, Tata Consultancy Services Ltd’s agreement to lease more than 2 million sq. ft of built-to-suit space in Thane and Flipkart’s leasing of 2 million sq. ft of space in Bengaluru.

Companies are firming up expansion and consolidation plans, leading to increasing leasing activity as they foresee higher potential and increasing business activity.

On the flip side, user sentiments in the residential sector are still seen to be weak, resulting in inventory remaining high. The retail sector, too, has remained sluggish, with only three malls becoming operational in the January-September period. Overall, while business sentiments have certainly improved in 2015, the actual trickle-down-effect of many of the reforms and policies announced over the past two years is likely to be seen only in 2016.

Gradual recovery to set in

2016 is likely to bear witness to the implementation of various initiatives such as housing for all by 2022, Smart Cities, goods and services tax, real estate investment trusts (REITs), etc. that are likely to give an impetus to the real estate sector. The government’s removal of earlier conditions on investment norms and minimum area under the foreign direct investment policy is a game-changer for the real estate sector and would boost investment in projects of varying sizes.

The future of the real estate industry on a whole will depend on faster implementation of projects, adherence to project timelines, delivery as per committed schedule. Some states such as Gujarat, Andhra Pradesh and Jharkhand have ranked high on the ease of doing business index that is likely to give higher impetus to developers.

The sector is likely to see further consolidation, with top developers partnering smaller developers in smaller cities that would unlock their development potential. In the commercial space, the imminent launch of REITs this year would enable the sector to access foreign funds (previously prohibited under foreign-exchange rules), while attracting long-term finance from foreign and domestic investors.

With an optimistic business environment expected, activity in the office sector is expected to intensify. Across the eight key Indian cities, grade A net absorption is expected to touch 30 million sq. ft in 2016, with Bengaluru continuing to be the front-runner in net absorption, followed by the National Capital Region (NCR). Hyderabad and Pune, too, are likely to emerge as strong contenders. Further, 2016 is likely to see traction from developers, with the largest quantum of supply over the next five years expected to come in 2016 at 54 million sq. ft.

The buoyancy in the office sector is expected to percolate to the residential sector in the medium to long term. Higher consumer confidence, spurred by greater economic activity, higher jobs prospects and lower interest rates would go a long way in driving residential demand. The residential real estate sector in Hyderabad and Pune is expected to see healthy appreciation in capital values. The Hyderabad market has shown signs of a turnaround after years of political uncertainty, while Pune offers relative affordability compared with Mumbai, Bengaluru and Delhi, placing it at an advantage.

On the retail front, 2016 is expected to see 32 malls becoming operational, spanning a total of 14.7 million sq. ft, the highest supply infusion seen over the next three years. Private equity firm Blackstone’s interest in investing in malls in India is promising for the sector, showing that there is a certain attractiveness in the shopping centre space given future prospects.

Overall, the real estate sector is waiting in the wings to see robust demand and further ease of conducting business operations. Riding the wave of economic growth and reforms, the real estate sector remains cautiously optimistic while looking forward to implementation of key policies and reforms that will strengthen the beleaguered industry.

Sanjay Dutt is managing director at Cushman and Wakefield India.