Top 10 real estate trends
The second half of 2010 saw some level of revival coming back to the real estate industry which is projected to grow to US$50 billion by the end of FY2010 at an average rate of 20%. But the industry still hasn’t been able to overcome the blues of global recession. Though the sentiment is quite upbeat among the developers who feel the industry will come back strongly sooner than later, the analysts and market observers while predicting the outlook for 2011 sounded more cautious.
The country’s real estate market size is projected to touch US$180 billion by 2020 but the year 2011 may not see the industry coming in full stream, owing to slower than expected demand for some segments coupled with after effects of global recession. Though the ‘Affordable Housing’ segment would drive the industry as 26 million homes are projected to be required by 2012 to meet the existing demand, the luxury housing segment may take some more time to see demand picking up. Integrated Township which should be the future of Indian housing industry may still see low interest from the developers due to infrastructure burden and long execution period. SEZ and IT Park segment will also see a lean growth period as both manufacturing and IT have not completely overcome the slowdown. The Green Building trend could see some momentum as developers seeing this as a good selling point for their project. But it will take some more time to see more number of green projects coming up in India. Cities like Mumbai which has huge slum base and dilapidated buildings could see more redevelopment projects are coming into existence. Textile mill land development which is again primarily a Mumbai city phenomenon would see more number of projects announced/executed on the recently-auctioned lands by National Textile Corporation Ltd (NTC). But since the developers had to pay huge land price for the lands, it is expected that majority of the supply will be added in the luxury housing and commercial segment.
As the year 2010 saw the prices are touching the 2007 level in some markets, the analysts say, there is still scope for price correction in some micro market in than range of 10-15% due to oversupply. “Price increase of 10-20% in cities such as Kolkata, Chennai, Bangalore and Pune; along with prices close to or exceeding 2007 levels in the Mumbai and NCR region have collectively resulted in approximately 250 million sq. ft. of unsold residential inventory,” said Sachin Sandhir, MD & Country Head, RICS India.
Agrees Azaz Motiwala, founder & CMD, IKON Marketing Consultants, a research firm based out of Rajkot: “Indian real estate industry may see some down turn in 2011. It may start from 1st quarter of 2011 and last up to 3rd quarter of 2012. However it will be not too intense as it was during recession period. It is expected that price may slash by 10-15% during this phase of correction but under certain situation it may last up to end of 2013 with price correction of 30% specifically in Tier-I cities.”
However, majority of developers we spoke to think price correction may not happen all across but luxury segment may see some correction. “We are quite optimistic and looking forward to the year 2011, since the infrastructure development across Mumbai Metropolitan Region (MMR) has also picked up momentum and are likely to push up demand for housing. As far as prices are concerned, they seem to be stabilising now across all the locations and we don’t think there is any chance of downward movement,” said Mayur R Shah, Managing Director, Marathon Group.
ABIL Group’s Chief Executive Sudhanshu Purohit agrees: “I do not see a further major correction in 2011 apart from what has already happened. The general outlook seems good in the residential sector and especially so in city specific areas.”
On the fund side, banks may become more cautious while lending to real estate players, thanks to recent ‘bribe-for-loan’ incident, which could be reason for some project delays. Funds from equity and debt market may not also come in so easily. As sentiment is low in stock market, the real estate IPO will chose to wait and watch.
Affordable housing segment supported by strong demand from Economically Weaker Sector (EWS) and Lower Income Group (LIG) would be the driving force for the industry in 2011 and beyond as 99% of required 26 million homes will be needed by these group. This segment despite holding huge potential was not been able to attract many developers due to various reasons including high input costs such as land price and construction materials. However, majority of developers we spoke to come out very enthusiastic about the segment. “Supply in this segment will increase however good infrastructure is required. Government incentive is most needed for this segment,” said Manoj John, VP, Corporate Planning and Strategy, RNA Corp.
The government’s contribution is highly needed in terms of infrastructure development and making land available in reasonable price to make affordable housing an attractive and viable proposition for developers. There is huge number of projects slated to be launched this year all across India.
“With the Government trying to gather momentum for the category further with the theme – ‘Housing for all’, the real estate industry is expected to soon harness the massive opportunities of scale and scope at the base of the pyramid,” said a recent white paper released by Jones Lang LaSalle India (JLLI).
Just like affordable housing, there’s going to be strong demand for mid segment backed by middle income group. The segment is expected to attract both the end users and investors. Developers say the demand in this segment will remain robust in the coming years. “The mid segment has always been the leader in the Indian market and will continue to be so. It witnessed growth in 2010 and became a favourite of the home buyers. Even in 2011 it will witness an upswing especially in NCR and Tier II & III cities,” said Ravi Saund, Head Business Development, CHD Developers Ltd.
The houses in the ranges from Rs30-70 lakh in the metro cities is seeing more supply as many project in this range commenced around 2008-2009 will see completion. “With the revival of economy and increased job opportunities mid-housing projects are in the limelight. Demand for the mid-housing segment has seen considerable increase in the last two or three years. We are sure that majority of the demand for the residential housing may come for this segment during the forthcoming period,” said Mayur R Shah, Managing Director, Marathon Group.
After seeing spur in project launch under this category, the luxury segment had to face some drop in demands, thanks to global recession and its impact on the high-earning buyers. Also, the price which went northward would stabilise or even see some correction. Since it will take some more time to see demand is picking up, developers would go little slow for launching new luxury projects. However, the segment holds lots of promise and it will come back strong sooner than later.
“In 2011, although select developers would still launch premium projects, the rate of new supply in the segment is expected to remain range-bound in the near term. However, the premium projects are slated to outperform each other with displays of irrational exuberance in terms of world class architecture and unmatched amenities,” the JLLI white paper said.
Despite being a niche category, the luxury housing with high level of amenities is going to see a consistent demand. However, the location would be the deciding factor for this segment.
Green building practice in residential segment is gradually gaining momentum after it received good response in the commercial segment. More number of projects with green features are expected come in 2011. “Interestingly, the sector has witnessed sustainable construction across segments, be it value housing or premium residential towers. We expect the trend to continue in future, as buyers become aware of the benefits of green buildings and in turn developers look forward to market their products with a green certification,” the JLLI white paper said.
Developers realise that green tag helps in selling their products as the reduced maintenance costs would help in recouping the increase in capital costs. “Green building industry currently valued at Rs15000 crore and is growing at CAGR of 45%.This segment will not be affected by any correction or bubble in market,” said Azaz Motiwala, Founder & CMD, IKON Marketing Consultants.
Though the segment holds lots of promise, it will see slow pace of growth in 2011 due to infrastructure burden that the developers have to bear besides long gestation period. But Integrated Township is that where India will live in future. Some city outskirts have good amount of developable lands which developers would like to explore. The year 2010 saw good number of such projects being announced and the trend might continue in 201 but in little slower pace.
“Since the gestation period is high for this segment there are not many integrated townships across the country. Another reason is the lack of availability of commercially developable urban land of the extent needed to develop Integrated Townships,” said T Chitty Babu, Chairman, Akshaya Pvt Ltd. he adds that Integrated Townships is the answer for decongesting cities but to make it happen in a sustainable manner, the state governments need to unlock land parcels.
Real estate developers are all positive about the potential that the development of these townships offer and new upcoming projects will definitely revive the interest of the investors and attract buyers due to the reasonable cost and the amenities offered.
“It offers vast scope to the developers since it caters to not only the lower middle class but also different segments of people by providing multiple housing options. As cities expand and connectivity grows a lot of private developers are taking up development of satellite townships,” said Uday Dharmadhikari, CEO, Usha Breco Realty.
Redevelopment of old building and slums in cities like in Mumbai are need of the hour. The segment faces lots of obstacles as it terms of policy and clarity. The government needs to make this segment attractive for the developers by making the whole process more transparent.
“The increasing cost of land and TDR, construction; liasioning cost and expectation of the tenants of redevelopment societies makes it difficult at times to come up with such projects more often,” said Hemal Jain, Business Development Head, Neev Homes.
RICS in its recently released report said: “Even though India has been able to relocate 59.7 million people out of slum conditions since 2000, with slum prevalence falling from 41.5% in 1990 to 28.1% in 20105, approximately 49,000 slums continue to blight the urban landscape, with 57% of slums coming up on public land, owned mostly by local bodies and state governments.”
According to an expert committee, the report added, there has been a growth of 17.8 million people living in slums across the country in the last decade. Additionally, the projected slum population in 2011 is expected to go up to 93.06 million from 75.26 million that was estimated in 2001 as per the new methodology.
According to the report, by 2011, 31.63 lakh people will be living in slums in Delhi as compared to 23.18 lakh in 2001, while in Maharashtra 1.82 crore people will be living in slums.
Mumbai also has lots of mill lands that can increase the land supply for the city. National Textile Corporation had recently auctioned some of the mill lands for development.
“Lower Parel has become the centre for luxury residential projects in Mumbai with over Rs 45,000 crore worth of residential projects under construction. With the location providing further opportunities for growth due to available land parcels from auctioning of sick mills, the location should be the one to watch for during 2011,” the JLLI report said.
Marathon Group which is one of the first movers in the mill land development said, “The magnitude of the land parcel is vast in Mumbai. Mill land development has suddenly become the most important subject for real estate development in Mumbai in the recent past. The city is suffering from land scarcity and burgeoning demand, hence the future potential is simply unimaginably high. Private participation in developing Mumbai cannot be compared.
IT & SEZ DEVELOPMENT
The IT sector is still to fully recover from the recession. Though the Indian IT firms have shown positive growth, they are still cautious when it comes to expansion and office occupancy. The segment will continue to see slow pace of growth even in 2011.
The JLLI in its white paper said the traction for IT SEZ spaces is likely to remain during 2011, as the deadline for notifying a SEZ is March 2012 and operating out of the premises is March 2014. “Developers, who are planning to build SEZs or have got approval for the same, should begin the construction during to satisfy the March 2014 deadline for units to occupy spaces,” it adds.
The white paper adds that Pune, Hyderabad, Chennai and Kolkata have a balanced supply of IT and IT SEZ projects. Mumbai, Bangalore and NCR-Delhi have a larger supply of IT projects and relatively fewer IT SEZ projects in pipeline.
T Chitty Babu, Chairman, Akshaya Pvt Ltd, said: “The outlook for the segment would be neutral in the short term though much will depend on how IT fares as there is increasing pressure to clamp on outsourcing in the developed world. In the long term the segment will fare well owing to our competitive advantage in this industry.”
SEZ development may also take some more time to see momentum coming back in full stream. Though it started well, it had to face various obstacles related to land acquisition, environmental clearances and tax policies. The segment is expected to pick up with recovery of global economy and increase in manufacturing activities.
“Market is picking up as large numbers of MNC are coming in Indian market as wells as domestic companies are expanding at a fast rate,” said Manoj Kumar, VP Marketing, M2K Group.
Sunil Mantri group which has presence in Kolhapur for IT Park and SEZ in Nagpur said that the government policy on SEZ is here to stay and is one of the most promising opportunities for generation of employment, economic growth and infrastructure development for the country. “The increasing price of land in the big cities and the educational and infrastructure growth in the Tier II, Tier III cities, have led the builders to shift their focus to the smaller cities instead of the metros,” Sunil Mantri added.
HOT REGIONS (SEZ)
HOT CITIES (IT Park)
RETAIL REAL ESTATE
Retail sector is stated to see resurgence in 2011. Some cities had seen over supply situation and many developers had chosen to stop or delay their retail projects during recession. However the year 2011 is expected to see large number of malls becoming operational as many international retailers would venture into India. Retailers would continue to expand beyond Tier I into Tier II and Tier III cities.
The JLLI research finding said: “The year 2011 will witness the completion of shopping centres across tiers of geography and segments including value, lifestyle, specialty and luxury. However, the focal point will still be value and necessity retailing in the Tier III locations which limits the expansion of lifestyle and luxury retail to Tier I and Tier II cities.”
According to the report, sixty-five shopping centres encompassing a total retail space of 24 million sq ft are expected to become operational during the next five quarters between 4Q10-2011 across the top seven metropolitan cities of India. “The matured retail markets of Mumbai and NCR-Delhi, which constitute 70% of the operational stock of retail space, account for only 51% of this new supply. This is due to increased construction activity in the Tier II markets which are relatively underserved, despite having a large potential,” it added.
The retail segment will get a boost for a number of factors including growing number of integrated township across India which will see more malls and retail outlet coming up; brown-field redevelopment in prime cities where old buildings and mill lands are being converted into modern buildings which will have mix of retail, office and residential construction.
With the growing purchasing power of consumers in tier II, tier III and small cities, the retail segment sees huge potential to grow in near future.
“I can expect domestic demand and consumption to have an upward movement in 2011 which will drive forward office and retail market. Malls were not doing well until now, but in last 2-3 months we can see footfalls have increased. We are observing that retail sector is going to go up in 2011, may be end of second quarter,” said Samantak Das, National Head – Research – Research & Advisory Services, Knight Frank (India) Pvt. Ltd.
OFFICE REAL ESTATE
The office market though has shown some sign of revival is still to overcome recession blues. The over-supply situation still persists in some market. The year 2011 would see developers are focusing more on completing and executing the ongoing projects rather than launching new ones.
“Even within the commercial property segment, which is yet to shrug of its recession blues, there persists the problem of oversupply, specifically within the office segment. However with a positive macroeconomic outlook for 2011 due to increasing labour productivity, reform initiatives and planned infrastructure development, the commercial property segment is likely to receive a further boost,” said Sachin Sandhir, MD & Country Head, RICS India.
He said the the oversupply situation is already improving with the demand-supply gap on a pan India basis having dipped from 11% to 6% from Q2 2010 onwards. “This can also be substantiated by the RICS India Commercial Property Survey Q3 2010, which indicates that growth in tenant demand is continuing in the market. However, despite investor enthusiasm, the country’s commercial property markets continue to lag behind competitor markets such as China on account of several forward looking indicators such as rental and capital value expectations, predominantly due to less supply constraints,” he added.
The JLLI research shows, as of October 2010, a total of 88.2 million sq ft of office space is proposed in the top seven Indian cities, supplemented by 161.1 million sq ft of office space that is under construction, implying that they have broken ground but are yet to become operational. “In 2009 and 2010, developers focused their attention and efforts in the execution and delivery of projects that were under construction. Increased confidence in the sector will ensure that some of the proposed projects, which are lying inactive, start witnessing construction activity and get launched in the market during 2011. Despite this, the focus would remain on execution and delivery of ongoing projects,” the report added.
Though developers feel sourcing finance is not going to difficult in 2011 as there are various options such as PE funds, debt and bank available to fund projects. However, the last year’s ‘bribe-for-loan’ incident would make banks more cautious while lending to real estate developers. So the banks will take longer than normal time to sanction loans which would cause delay in project execution.
In the event of stock market not going very bullish, real estate companies would choose to wait and watch before launching their IPOs. This will make raising fund from equity market more difficult. However, a large number of PE funds are waiting to be launched in India as foreign investor looking to capitalise on India’s infrastructure growth prospect.
“On the fund flow side, the realty sector will be relatively unattractive as bank loans to the sector slow down and institutional investors lack confidence in the market given the recent developments of the loan scam and tightening of interest and lending rates. Consequently, developer’s ability to raise either debt or equity capital could be severely impacted, which is already evident in the case of some developers holding back their IPO’s as realty stocks remain under pressure,” said Sachin Sandhir, MD & Country Head, RICS India.
Samantak Das of Knight Frank (India) said that fund raising will always be an issue for developers but the recent so called scam won’t have much impact. “Only thing is that the disbursement time will increase because there will be more scrutiny. Bank will try to cut down some sort of funding but scrutiny will be very much so I can see lots of movement towards funds, NBFCs and PEs,” said Das.