Commercial realty on an upswing
With the Government initiating measures for improving ‘ease of doing business’, appropriate policy changes such as REIT and Foreign Direct Investment (FDI) relaxations, and legislations like Real Estate Regulation Act 2016 (RERA), the commercial realty sector has a lot to look forward to.
The sector witnessed a robust streak during the last three years as net absorption in the top eight cities — Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune — consistently crossed the 30 million sq. ft. mark. This is taken to be the pointer towards accelerated economic performance, improving investment environment and strong government spending. The Indian economy has outperformed several other big economies in the last two years and this has been the major propeller of office space leasing. A number of other factors such as desire to relocate to newer workplaces with modern facilities and achieve cost efficiencies too have ensured sustained growth in commercial realty.
The latest Cushman & Wakefield report titled ‘Commercial Real Estate: Positive Disruption, Beacon of Change’ finds India well-insulated from three major global trends i.e., changes in US trading and immigration policies, a slowdown in the Chinese economy, and BREXIT.
According to the report, the Information Technology-Business Process Management (IT-BPM) sector, which accounted for 65-70% share in commercial office leasing activity in top Indian cities until a couple of years ago, has lost some of its sheen because of several global challenges, though it still maintains a lion’s share of over 50%.
As for the outlook for 2017, the report expects the leasing growth to be impacted owing to circumspection among the occupiers. This, however, may be limited to the first half with a pick-up expected in the second half. Research forecasts the average CRE supply in the top Indian cities to be of the order of 40 to 45 million sq. ft. (msf) while the average net absorption will hover around 32 to 35 msf.
The report expects that the first REIT listing (expected later this year) will guide the sector towards an organised market, aided by the RERA that has just kicked in.
Buoyancy of the Indian commercial market can be gauged from the fact that in 2016, India constituted around 55% of the office net absorption for Grade A commercial office spaces alone in the South-East Asia region.
According to the report, the potential to list under REITs, which can offer investment opportunities worth $43 to $s54 billion across the top seven cities in the country, is stimulating institutional investors who are eyeing leased office assets across the top markets.
Major global institutional funds such as Blackstone, Brookfield, GIC and the Canada Pension Plan Investment Board (CPPIB) are contemplating investment in India. They are likely to bring in retail investors to fund commercial development which was prohibited till now.
The RICS report suggests India to take cues from countries such as Singapore which has 32 REIT listings currently.
As of March 2017, the FTSE S-REIT Index gave five-year annualised returns of 76.63%, outperforming the FTSE realty Index which gave returns of 63%. On the other hand, the country’s broader Strait Times Index’s annualised 5-year returns stood at 24.62% as of March 2017.
The RERA has been hailed as a huge boon as it brings in more transparency and accountability which will aid in improving the perception of the sector and bring in higher volumes of investments.
The RICS report urges the need for adopting common definitions and aligning the professional standards to global standards as foreign investors would look for homogeneous definitions and standards.
The Indian market has ambiguity about rentable space, leasable area, rights and duties after selling projects which lead to discrepancy. Similarly, valuation and accounting standards are diverse. Adoption of measurements consistent with international market is also emphasised for creation of efficient operations.