Even in this vigilant environment, the office market has strongly bounced back, with gross absorption close to peak 2019 activity. Recovery in the residential segment has been emphatic, with 2022 sales velocity expected to be close to a five-six year high. This is more remarkable, given that the RBI has opted for consecutive repo rate hikes amounting to 225 bps in the current year, says Anurag Mathur, CEO, Savills India.
In an exclusive interview with Sanjeev Sinha, Mr Mathur shares his Real Estate Outlook for 2023 and gives his views on the best asset class for investment in the coming year. Excerpts:
How do you view the performance of the real estate sector over the year? Any key highlights/takeaways from the year 2022?
Although the year started with slight uncertainty, the activity in the real estate sector picked up the pace soon after, particularly in the second and third quarters. As the year comes to a close, caution seems to have crept in on account of a prolonged war in Europe, heightened inflation, and imminent global economic slowdown. Even in this vigilant environment, the office market has strongly bounced back, with gross absorption close to peak 2019 activity. Recovery in the residential segment has been emphatic, with 2022 sales velocity expected to be close to a five-six year high.
This is more remarkable, given that the RBI has opted for consecutive repo rate hikes amounting to 225 bps in the current year. The policy actions have been calibrated well with measured caution, so as not to hamper the demand which is in a resurgence mode. Data centres, industrial, logistics, and life sciences sectors meanwhile are set to expand further in the next few years. Awarding of infrastructure status to data centres and a revamped SEZ bill (DESH i.e. Development of Enterprises and Services Hub) have been some of the notable measures.
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What is the outlook for the commercial real estate market in India for the upcoming year? Is commercial real estate back to pre-Covid levels?
The office market is already close to the pre-pandemic level activity of 2019. With the return to offices gathering momentum, office occupancies will likely increase in 2023. Alongside this, the general adoption of hybrid work strategies has created the right impetus for occupier expansion in Tier II and III cities of the country. Co-working operators are expected to benefit most from the new work culture. Flexible spaces with managed/enterprise-level offerings are likely to be increasingly favoured by occupiers with dynamic real estate requirements. Meanwhile, the IT-BPM sector will continue to drive the office sector demand in 2023 as well.
What trends do you foresee for the upcoming year across the sector?
Flexible spaces with enterprise-level offerings are likely to witness the maximum growth within commercial real estate. On the residential front, there is an anticipation of continued broad-based demand across housing segments. Interestingly, select domestic locales have witnessed investor interest in fractional ownership/time sharing of second homes. 3PL, e-commerce, and manufacturing will in all likelihood continue to be the growth drivers in the industrial and warehousing segment. With respect to data centres, a shift from cloud to colocation facilities is pre-empted to be more pronounced in the near future.
Which real estate asset class should one look out for in 2023 as a good investment option?
Life science assets and commercial buildings/IT parks with sustainable futuristic value propositions are likely to be preferred by institutional investors. Land and residential apartments will continue to be safe avenues for investment in hard or tangible real estate. Second homes and properties in the peripherals of urban agglomerations will have the maximum long-term return potential. For the investor with an interest in real estate derivatives, REITs will continue to offer steady returns. With the highly anticipated retail REIT likely to be public in early 2023, fund size will no longer deter the common man from investing in grade-A shopping malls and offices across the country. In fact, these are compelling times for the retail investor, with real estate investment avenues ranging from land to REITs and fractional ownership in second-home properties.
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Your take on the performance of REITs in the year 2023? Will we see more REIT listings in the upcoming year?
REITs in India are still in a relatively nascent stage. Underlying asset and sponsor quality play a crucial factor in asset performance. In India, all 3 listed REITs are backed by strong sponsors and have high-quality underlying commercial assets. Hence, overall REITs continue to have a positive outlook in 2023. Moreover, since 90% of the income from underlying assets in a REIT is distributed to unit-holders, the market price of a listed REIT is not expected to fluctuate too wildly in the long term. Also, given that the underlying asset has a steady income, REIT properties with long-term leases will continue to offer stable returns to the investor. With only 15% of the grade A office stock in the country currently listed under REITs, reputed developers with sizable quality portfolios are likely to push for more office REITs in the future. The performance of the maiden retail REIT in 2023 is likely to be critical for the future of REITs with varied underlying asset classes.
As inflation soars in India, stringent monetary policy measures have been introduced. How do you see this impacting the real estate stakeholder, potential buyer, and investor sentiment? Could this dampen the recovery spirit of the sector?
The policy response to heightened inflation in the country has been commensurate and commendable. The repo rate hikes have neither been too steep nor sudden, to adversely impact the stakeholder sentiment in the real estate sector, especially the EMI-dependent homebuyer. The demand side is likely to stand up to RBI actions and have a negligible impact unless there is a 200-300 bps increase in a very short span of time. Although financing cost has increased, RBI measures are expected to arrest inflation and consequently rise input prices and overall construction cost in the next few quarters. Conversely, prolonged inflation or spiraling prices of key construction materials will affect developer profitability. Prices will then be ultimately passed on to the home buyer, which in turn might affect the demand side.