With the Indian economy projected to grow at above 7% over the next three years, the commercial real estate should remain robust with sustained demand from occupiers in the year 2018 as well.
A new benchmark for the Indian real estate industry was set in the year 2017. Owing to demonetization, the entire economy came under pressure in the first quarter of last year. The real estate industry was obviously hit badly as well, due to the involvement of cash transactions. The entire residential sector saw tepid sales, almost zero new launches and even cancellation of units booked by buyers. Land sales reached a stagnation with hardly any deals happening in the first quarter of the year.
As things started to settle in, RERA and GST were announced, which again caused a bit of inactivity. Both buyers as well as developers preferred to wait for the final set of rules to be effective before moving ahead. RERA was a big dampener to sales since most developers spent quite a bit of time getting all the legal documentation and paperwork done to get things in place. Especially in states like Maharashtra, where the state regulatory bodies were robust in getting things rolling on time, developers stalled sales in projects till they got themselves registered.
Business cycles were badly affected last year with buyers holding back purchases and developers reducing new launches – thus, impacting sales which witnessed a major slowdown in most cities. By the end of the year, the three-tonged effect of demonetisation, RERA and GST started giving a new face to the sector. A face with new standards of delivery, transparency and accountability.
On the other hand, those with a significant exposure to commercial assets sailed through plummeting residential sales. Last year saw positive demand and rental rates for the office space in a number of cities, especially Pune, Hyderabad and Bangalore. The country saw a pan-India leasing volume of close to 42.8 million sq ft, marginally up from 2016. Bangalore remained the front runner with a record-breaking leasing volume of above 15 million sq ft.
With the Indian economy projected to grow at above 7% over the next three years, the commercial real estate should remain robust with sustained demand from occupiers in the year 2018 as well. A number of corporates have started reviewing their real estate strategies and monetising assets where possible. Companies are firming up their relocation and consolidation plans and tenants are locking in large office spaces at favourable lease terms to hedge against increase in rents. The commercial real estate market witnessed some big deals last year. The pace for the commercial market in 2018 has already been set with one of India’s biggest commercial property acquisitions concluded in Bandra Kurla Complex in Mumbai in early February. The SEBI-IDBI deal of above Rs 1,000 crore has been billed as India’s second-largest end-user office-space transaction by value after Abbott India’s in 2015.
However, on the residential front, new supply is likely to be restricted in 2018. Implementation of RERA should provide a positive sentiment as it promises to weed out fly-by night operators from the industry. The sector is already seeing and is likely to see a major consolidation as many developers would sell their assets in order to complete on-going projects or cut down on debt. More joint ventures and joint developments will be seen with some of the financially distressed developers being taken over by the larger players, thus giving the sector a fresh line up of competitors.
From a buyer’s perspective, there is a clear preference for ready-to-move-in properties that are devoid of any compliance issues. Home buyers are willing to pay a slight premium for projects being developed by long-standing and reputed developers. ‘Affordable Housing’ is the flavour of the season and will be an important segment in most developer’s portfolios in 2018.
While the commercial sector will continue to hold ground, we may not see a transformational recovery of the residential market in 2018. Since the operational dynamics of the markets have seen a considerable change, growth from here onwards shall be driven primarily through stronger fundamentals and is likely to be more sustainable.
(By Divya Seth Maggu, Associate Director, Valuation & Advisory Services, Colliers International India)