These trends will shape – or reshape - the Indian real estate sector in 2017 and beyond
1. Global capital flow into Indian real estate will increase further
India ranked fourth in developing Asia for FDI inflows as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. That is endorsement at the highest levels - and real estate saw equity investment on a very visible return journey to India last year. Indian real estate has attracted USD ~32 billion in private equity so far. The global capital flow into Indian real estate in 2016 stood at USD ~5.7 billion.
Though the historic high of 2007 (in terms of total PE inflows) was not breached, last year proved to be the second-best year so far. Despite Brexit and uncertainty around the new US President’s outsourcing and visa-related policies, private equity activity also looks healthy in 2017 - thanks to a strengthening and modernizing economy, and the growing reputation of India as an attractive investment destination.
2. Developers will revamp their business models
Throughout 2016, the number of new residential project launches was lower than units sold. With all states staring at the approaching deadline to implement their versions of the Real Estate Regulation & Development Act (RERA), most of them will definitely fall in line. This landmark law will enforce hitherto unprecedented transparency and accountability requirements for developers into the system, and do a lot to increase consumer confidence. Consumer activism, which has already been making news in recent times, will increase in distressed ongoing projects.
3. Co-working: More of India Inc. will move into ‘hybrid’ spaces
Co-working spaces are popping up across Indian metros as well as tier-II cities, providing start-ups with flexible working options at affordable rents. At last count, there were more than 100 operators in this space across India, though there is still very limited supply of co-working spaces available. However, this segment is slowly but surely moving into boom mode across India, given the many advantages that such spaces offer:
- Employee motivation and retention
- Boosted productivity
- Firms focused on agility who house their innovation teams in co-working spaces can induce a quicker learning curve to integrate them into the entrepreneurial ecosystem
- The perfect option for companies who need their client servicing teams close to their respective client sites in locations with low office vacancy.
4. The sun rises on affordable housing
Affordable housing in India is finally set to get the much-coveted infrastructure status. One crore houses are to be built in rural India by 2019, and this vital segment will now see cheaper sources of finance - including external commercial borrowings (ECBs). Re-financing of housing loans by National Housing Banks (NHBs) can give a further boost to the sector.
5. Office sector transformation: From REIT to complete
The first REIT listing is expected within the next few months, and prominent private equity funds such as Blackstone will likely be the first movers. REITs will attract institutional and smaller investors alike because of their inherent nature to provide regular dividends at relatively low risk.
Smaller investors are especially excited at this new and easier investment opportunity because:
a. Indian REITs will prefer to invest in commercial space developments – specifically the highest quality or Grade-A properties; and
b. Only 20% of an Indian REIT’s monies can be invested in development, which is the riskiest aspect. The remaining 80% of a REIT's assets must be invested in income-producing property.
6. More industry consolidation on the cards
Slowing sales and lack of financial prudence among several developers is leading to a fairly obvious conclusion - consolidation. The overcrowded real estate sector is going to become a lot leaner and meaner, with consolidation happening by ways of joint developments and joint ventures between landowners and/or small developers with bigger, better-organized players, smaller developers being bought out by larger players, and struggling developers cashing in their land banks by selling them to players with stronger balance sheets and appetite for growth.
The author is the CEO & Country Head, JLL India