indian realty - through the looking glass - jll · indian realty - through the looking glass...

Indian Realty - Through the Looking GlassUncovering trends in Office, Retail and Residential

2 A joint initiative of Jones Lang LaSalle and CII

Indian Economy - Performance Based ResilienceThe Indian economy showed resilience despite the global financial slowdown in 2008. Strongly driven by the service sector the Indian economy is the fastest growing after China and it has posted robust growth in the last three years. An established IT/ITES industry, a growing BFSI (Banking, Financial Services and Insurance) sector, and the emerging sectors such as - Manufacturing, Media and Telecom, have been the core growth drivers of the economy. Going forward, the increasing potential in sectors such as biotechnology, pharmaceuticals and semiconductors are expected to trigger growth in future years.

A joint initiative of Jones Lang LaSalle and CII 3

Rising Urbanization offering opportunities for real estate developmentIndia is witnessing urbanisation on an unprecedented scale with the share of the urban population increasing from 28.0% in 2001 to 31.0% in 2011. According to the United Nations, India has the highest urban population rate of change among the BRIC nations (Figure 1). At this rate, an estimated 843 million people will live in Indian cities by 2050, a figure which is the combined population of present day USA, Brazil, Russia, Japan and Germany. Urbanisation in India is changing the face of Indian metropolises as their fast evolving skylines become filled with skyscrapers and iconic architecture. Meanwhile the smaller towns and cities are witnessing a metamorphosis through the expansion of roads and flyovers, real estate development and open areas. This rapid urbanisation is expected to offer large-scale opportunities for real estate and infrastructure development in Indian cities, as well as access to a large skilled workforce.

Young population presents possibilities of rich demographic dividend

India has a growing young population as nearly 64.0% of the Indian population is in the 15-64 working age-group and 35.0% is in the 15-

Indian Real Estate Boosters

Figure 1: Average Annual Rate of Change of the Urban Population (BRIC and CIVETS)

34 years age-group. It is estimated that in 2020, the average age in India will be only 29 years, compared with 37 in China and the United States, 45 in Western Europe, and 48 in Japan, providing immense opportunities for growth and development across industries wanting to reap this demographic dividend. The growth in opportunities will increase employment leading to a rise in disposable incomes and consumption expenditure. Increases in consumption will further drive the growth of the manufacturing, retail, residential and commercial sectors.

High savings rate coupled with increasing availability of credit will spur housing demand

The Indian households are relatively deleveraged having household saving rates of 21-24%, which is higher than in other nations. Nowadays more credit is available to Indian households through the proliferation of credit cards and the availability of easy loans, and this has increased the purchasing-power of consumers. The ability to afford housing is important to the aspirations of the burgeoning middle and upper-middle segment of the urban population, which is desirous of a higher standard of living. Residential units are one of the most favoured investment options of the Indian household and as incomes rise, many households will invest in second homes as investment vehicles.

Source: World Urbanisation Prospects, United Nations, Department of Economic and Social Affairs, Population Division

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6.0

5.0

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1970

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ColombiaSouth Africa

BrazilVietnam

Russian FederationEgypt


Short-term Economic InhibitorsPolicy Paralysis

In recent times, the Indian economy has faced challenges because of government’s policy paralysis. The delay in reforms to open up sectors to FDI (Foreign Direct Investment), delays in approvals for real estate and infrastructure projects, along with uncertainties over implementation of General Anti-Avoidance Rules (GAAR), are causing anxiety among foreign investors who want to explore opportunities in India. Although, GAAR, which was introduced within the Direct Tax Code of the union budget, has been deferred until fiscal year 2013-2014, the extent to which it can change income-tax laws retrospectively is still unclear. While further postponement of the decision to allow FDI in multi-brand retailing has caused dismay in investors, the passing of regulations to allow 100% FDI in single brand retailing has received a mixed response from international retailers given the local sourcing clause. Such policy reversals/rollbacks in recent times and a lack of bold decisions by the government has put India in a bad light and has negatively impacted the country’s reputation among foreign investors.

Euro Zone Crisis

The global economic climate is clouded with concerns regarding the Eurozone crisis with corporations across the world worried about the liquidity crunch that the euro crisis may cause. In anticipation of a possible global economic slowdown in the near term, all real estate stakeholders have been cautious about their expansion and investment plans. The heavy dependence of the real estate sector on the IT / ITES industry which in turn is dependent on the global economic situation is a near term restraint on the real estate sector’s growth. However, the depreciation of rupee against the dollar has led to an increasing interest in sourcing services from India which could sustain the growth of IT / ITES industry in the near term.

Inflationary environment dampening buyer’s sentiment - A Presentiment

In a bid to curb inflation, the Reserve Bank of India (RBI) increased the key interest rate for the 13 time since March 2010 in October 2011. Consumer credit became more expensive thereby dampening sales of consumer products and services. High interest rates reduced the ability to purchase of the home buyer, which dampened residential sales in 2H11, primarily in the low and middle-income segments.

However, as inflation took a downward trajectory from November 2011, the RBI slashed the cash reserve ratio (CRR) by 125 bps in two phases, followed by a 50 bps reduction in the repo rate in April 2012, to ensure economic growth (Figure 2A, 2B). The lowering of interest rates is expected to improve the affordability of homes thereby improving buying sentiment in the near term.


Figure 2A: Base Rate and Cash Reserve Ratio Trends

Source: Reserve Bank of India

Source: Reserve Bank of India

Figure 2B: Repo Rate and Reverse Repo Rate

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Unlocking the logjams to fast track real estate development in IndiaNeed for a Robust Investment Climate

FDI is of acute importance to the growth of the Indian real estate market primarily because of the sector’s unprecedented scale of capital intensive requirements. While banks have played an important role in the real estate transformation, by increasing the availability of funds, bank credit is still quite expensive in India and can only be a limited source of funding for risky projects. In 2011, the RBI introduced strict and ponderous rules for bank lending to the real estate sector and this has made it even more expensive and cumbersome for banks to extend loans to real estate developers. Compared to developed economies, India still does not allow Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs).

The FDI policies need to be relaxed progressively to attract interest from investors and provide them with a profitable exit strategy in the future. Foreign investment is required not just for meeting the huge capital requirements of Indian industry but also to enhance the competitiveness of Indian enterprises through access to global designs, better practices and technology. This calls for a cohesive approach from the industry as well as the government towards creating a better investment climate to ease the current liquidity crunch among developers.

Transparency - Critical Driver for Growth in India Real Estate

India and China witnessed the largest improvements in the transparency index within the Asia-Pacific region during 2012. International corporate occupiers and investors are now increasingly demanding better information on market dynamics. Data availability has been improving since 2008 across office, retail and residential real estate sectors in India’s major cities. The increasing penetration of national and international real estate developers, investors and occupiers in the secondary and tertiary cities of India has acted as a catalyst to increasing transparency outside the Tier I cities. Real estate agents as well as facilities and project managers in India are increasingly adopting higher professional standards and this is reflected by the widespread penetration of International Property Consultants across Indian cities, both Tier I and Tier II. Moreover, developers are becoming more professional and transparent in a bid to attract private equity funding. There has been an improvement in the reporting standards followed by developers as well but, while the improvement in transparency levels in Indian real estate is good, it is still not adequate.

Professionalism Aimed at Improving Efficiencies

Developers need to become more organised and efficient and aim for global best practices, in terms of construction and design. They need to emphasise newer and better technical know-how and specialised construction techniques, using good quality economic materials and by employing trained professionals. This will help them implement new projects faster and in a more efficient manner. Over the years, construction technology has also evolved, so using the latest techniques is vital in such a competitive environment.

Emphasis on Adequate Infrastructure to Unlock Potential Development Opportunities

The Government realises the need to upgrade the infrastructure of various Indian cities, to de-congest the city centres and unlock the development potential of locations on the city fringes. Due to a lack of available land within cities, suburbanisation has accelerated in several metropolitan areas during the past decade. Several office, retail and residential developments have dotted the suburban landscape due to unaffordable land prices in city centres. Therefore, the pace of infrastructure development needs to catch up with the speed of real estate development so both can be integrated and public-private partnerships (PPP) are required to support this. The Government needs to focus on creating a synergistic environment for private participation to enable a sustained and successful introduction of PPP projects.


Office Real Estate - Growth PoisedPoised for growth despite minor hiccups in the near term

The year 2011 saw record completions and absorption of office space. Close to 37 million sq ft of office space was absorbed in 2011, surpassing the previous peak of 33 million sq ft in 2008. Major Indian cities underwent strong pre-leasing activity in buildings under-construction. Occupiers chose to consolidate their offices by vacating multiple small offices in central business districts and taking up larger areas in secondary and suburban districts instead.

While construction activity is slated to continue at a high pace, leading to 19.0% higher completions in 2012 than in 2011, absorption is likely to be subdued. We expect 32 million sq ft of office space to be

absorbed in 2012, registering a decline of 12.5% over 2011 (Figure 3). This expected decline will be due to the postponement of expansion plans of corporate occupiers amid slowing global economic growth attributable to the Eurozone debt crisis. Demand from domestic occupiers, although robust so far, is also under question due to concerns over domestic economic growth, delays in policy reforms, a projected slowdown in corporate earnings and moderately high core inflation. However, large IT occupiers seeking to consolidate or relocate are expected to generate significant demand for IT SEZ and IT buildings in peripheral districts.

Figure 3: Supply overhang to remain despite an annual demand forecast of over 32 million sq ft during 2012-2014

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: Figures are representative of India’s seven metropolitan cities - NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune

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Window of opportunity for occupiers is closing soonStrengthening absorption of office space in the past six quarters has caused appreciation of rental and capital values in most markets. While the Tier 1 cities of Bangalore, Mumbai, Delhi and Gurgaon witnessed the bulk of gross rental appreciation during 4Q10-2Q11, the Tier 2 cities of Chennai, Hyderabad, Pune and Kolkata saw this appreciation only recently during 3Q11-1Q12, rising by over 2% each q-o-q in the last six months. We expect moderate rental appreciation to continue despite slowing absorption due to a sharp rise in costs (construction materials, interest rates etc) being borne by developers.

Bangalore, given its low vacancy rate, moderate supply and healthy absorption is expected to witness the highest appreciation in rentals among the seven cities during 2012-14. However, some of the oversupplied suburban areas of Indian cities are likely to feel the pressure of inadequate absorption, thereby keeping rents stable in the near term. Thus, the period from 2Q12-4Q12 will provide a fast closing window of opportunity for both buyers and leasers of office space, when rental and capital values are only moderately above their cyclical lows (Figure 4).

Figure 4: Change in Office Rental Values

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: Mumbai City includes CBD, SBD Central, BKC and SBD North. Mumbai Suburbs includes Eastern and Western Suburbs. Delhi City includes CBD and SBD of Delhi.


Outright purchase of office space is still a lucrative optionThe commercial office and retail sectors were the worst hit sectors during the recession of 2009. While residential prices corrected by 19.0% (peak-to-trough) on average at an all-India level, office space capital values fell by 35.0% (Figure 5). Although by end-2011 residential prices surpassed their previous peak of 2008, office sector

capital values have improved by less than 15% since the last trough. As of 1Q12, office space is still 25.0% cheaper than at the peak of mid-2008. Thus, in the near term, the purchase of office space is a lucrative option for buyers and investors alike.

68.5 (Trough) 15% increase since last trough

30% increase since last trough

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Figure 5: Jones Lang LaSalle REIS Capital Value Index - Relative Movement of Office and Residential Sectors



Trend of large sized leases by a few MNCs slows as smaller leases by numerous SMEs gain momentumDuring the first wave of offshoring to India, large MNCs took up increasingly large chunks of office space across Indian cities, primarily in suburban areas. Consequently, the average size of office leasing transactions in the suburbs of the top seven Indian cities rose sharply after 2004 and peaked at 89,650 sq ft in 2007 (Figure 6). In 1H08, as signs of global economic turmoil emerged, foreign occupiers became cautious. Later, in 2009, most large companies postponed their expansion plans and as a result the average lease size came down to 26,980 sq ft in 2009.

From 2010 onwards, as sentiment improved, large size transactions regained favour and the average lease size recovered to 35,280 sq ft. IT/ITES companies were once again taking up large office space areas while BFSI firms (Banking, Financial Services and Insurance) were consolidating their multiple offices.

Central Business Districts (CBDs), home to consulting companies, headquarters of domestic firms, investment banks and asset managers, have registered an average lease size of less than 20,000 sq ft since 2007. Given the dearth of available space, they are fast losing their sheen to secondary and suburban districts. While secondary districts of Bangalore, Pune and Chennai witnessed large size transactions before 2006, they are fast becoming the new CBDs and are privy to the same fate of registering small sized transactions.

Since most large MNCs and IT companies have already established huge multiple back offices in India, we expect the next wave of outsourcing to be led by small- and medium-sized enterprises (SMEs), both foreign and domestic. These SMEs are expected to contribute heavily to leasing volumes albeit with a smaller space per lease. Not surprisingly, in 1Q12, the average lease size was only 25,100 sq ft.

Figure 6: India Office Real Estate - Leasing Trends


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The ‘Target’ OccupierThe bulk of Grade A office space in India is occupied by three industries, IT Services and IT consulting, BFSI and Real Estate and Professional Services. These sectors have contributed to 55-60% of the leasing transaction volumes across India since 2004. During the economic slowdown in 2009, while the share of the IT sector fell sharply, the share of BFSI, Media and Telecom increased. Over the years, while the share of IT Services and IT consulting has fallen from 46.0% in 2005 to 30.0% in 2011, the BFSI and Real Estate sector accounted for 14.0% of leasing volume in 2011 compared to 11.0% in 2005. In 2009, the share of BFSI & Real Estate increased owing to larger completions in secondary business districts of Mumbai where

the typical occupants are BFSI firms. Moreover, foreign banks became more aggressive with their offshoring plans in a bid to cut cost to ease margin pressures. Additionally, the fall in rents incentivised BFSI oc-cupiers to upgrade from Grade B to Grade A properties.

Professional services, mainly consulting firms have been occupying increasing areas of office space over the years. We expect this trend to continue as the high-end KPO sector continues to see fast growth, at a time when the low-end BPO sector has matured to a certain extent. Within the manufacturing sector, the Industrial Goods and Automotive and Electronics and Computer Hardware sectors each accounted for 8-10% of India’s total leasing area.

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: 1. Figures are representative of India’s seven metropolitan cities - NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune2. Professional Services includes Research & Consulting; Accounting, Audit & Taxation; Architecture, Design & Engineering; Legal Services; Marketing, Advertising & PR; HR &

Employment Services3. Miscellaneous includes Energy & Utilities, Transportation and Warehousing, Other Industries

Figure 7: Annual Leasing Volumes by Occupier Industry

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Professional Services Software & IT Services

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Corporate occupiers can save money by having a strategic plan in place for their real estate needsReal estate costs are the second largest cost component after human resources for the services industry. While all corporate firms have a separate human resources department that strategically plans and executes recruitment and management of the workforce, very few corporates have a dedicated corporate real estate (CRE) team. Even in companies that do have a CRE team, the role of this team is often reduced to managing lease administration, rental negotiation and facilities management. The need of the hour is to elevate the status of the CRE team from being a mere administration team to a strategic one to achieve cost competiveness with greater efficiencies.

CRE teams must consider various future business scenarios before making the decision to consolidate offices into a central location or decentralising to multiple locations. Further, the entire real estate portfolio of the company must be evaluated rather than individual properties alone. Corporates can optimise their real estate costs by planning and tying the expansion/consolidation plans with real estate

cycles and the availability of upcoming supply in various locations across India. For instance, during times when rental values are at a cyclical low, occupiers can prepone their eventual expansion plan rather than waiting for their existing premises to be fully occupied before looking for new space in the market. Such a pro-active approach would not only minimise costs for occupiers but would also reduce the risk of vacancies for office space developers.

Also, cost reduction can be achieved through efficient utilisation of workspace by increasing the density of employees per unit of office space. Many corporates are experimenting with alternate workplace strategies such as working from home and the use of business centres for temporary or highly mobile workers. These strategies involve implementation of remote collaboration, mobile technologies and the replacement of assigned one-to-one workplaces. However, a balance between cost reduction and employee productivity needs to be maintained to ensure an effective CRE strategy.


Retail Real Estate - In Pursuit of QualityThe retail landscape of the country has undergone a radical change in recent years. India has now finally positioned itself firmly on the radar of international brands.

If we trace the growth of the organised retail trade in the country, we see that Mumbai and Delhi- NCR were the harbingers of organised retail in the country and between 1999 and 2002 this organized retail was limited to these cities. In the 2003-2007 period there was an expansion of the organised retail trade in India and after the proliferation of shopping centres in Mumbai and cities such as Bangalore, Chennai, Pune, Kolkata and Hyderabad witnessed the second wave of organised retail. With the global financial crisis during 2008, the period from 2008-2010 brought with it greater emphasis on good mall management techniques, and revenue-sharing models

were introduced with retailers asking for the greater involvement of developers. However, it is the post-2010 era that has ushered in a retail metamorphosis. Today, the sector is rightly placed in the growth phase of the retail industry life cycle, as retailers gear up to explore the new opportunities beyond the top seven Indian cities.

A multitude of factors worked in tandem to fuel the growth of the retail estate market. Apart from the Indian economy being one of the fastest developing economies in the world, factors such as a sustained rise in employment in the country, increasing urbanisation and migration of people from rural areas to urban centres has led to a rise in the income levels of the working population. With these growth drivers in place, the development of the retail trade in India during the last decade has been nothing less than a revolution!

Supply - Absorption - Vacancy TrendsThe year 2011 witnessed the completion of shopping centres covering different geographical areas and segments including value, lifestyle, speciality and luxury. A total of 13.8 million sq ft of retail space across 34 retail malls in the top seven cities became operational during 2011. While Tier III cities are expected to witness only value and necessity retailing going forward, Tier I (Mumbai, Delhi, Bangalore) and Tier

II (Chennai, Hyderabad, Pune, Kolkata) cities will continue to see lifestyle and luxury retail offerings. With close to 70% of mall space being concentrated in NCR-Delhi and Mumbai, there are tremendous opportunities in the organised retail segment amongst the host of other emerging cities in India (Figure 8).

Figure 8: Supply Absorption Vacancy Trends - India

Having said that, the past trends have

been satisfactory for the retail sector, except for lack of

quality retail space. The year ahead

will see a sufficient supply of malls

coming on stream in major cities, but absorption is likely

to trail behind supply due to lack of quality retail infrastructure.

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12

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Quantity at the cost of QualityOf the 62.5 million sq ft of operational stock across the top seven cities of India, about 51% is contributed by malls that are of superior grade, 37.0% by average grade malls and 12.0% by poor grade malls (Figure 9). Such an equitable distribution of superior to lower grade malls across India is due to the rise in the number of poor malls in Mumbai and NCR along with the rise in the number of superior grade malls in other cities in India. This distribution is expected to remain in the near term as the share of superior grade to average grade malls is expected to be in the ratio of 53:47, with no poor grade mall completions. With few poor grade malls lined up for completion in the medium term (next 12–24 months), the overall share of good quality mall space in the country is likely to improve.

In order to understand the retail market dynamics from a quality perspective, we analysed the performance of the malls based on multiple parameters. While there can be multiple parameters through which a performance of a mall can be gauged, the vacancy level in a particular mall has been considered as the metric to judge the performance. Since the occupancy level and profitability of a mall have a direct correlation with each other, a mall’s vacancy, can be taken as a sound metric to measure the success of a mall.

Figure 9: India Retail Stock - Supply Share by Mall Grade

Note: A total of 218 malls in the top seven cities of India were studied as part of the analysis. We segmented each of the malls in to three broad categories of Superior Grade, Average Grade and Poor Grade based on an array factors that include - developer profile, amenities offered, quoted rents, vacancy levels, car parking, tenant mix, anchor tenants, mall management, and nearby catchments, among others.Legend: M-Mumbai, D-NCR-Delhi, B-Bangalore, C-Chennai, H-Hyderabad, P-Pune, K-Kolkata; Superior Grade Malls Average Grade Malls Poor Grade Malls

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: Near term supply refers to supply in the next 6 to 12 months.

Figure 10: Stock Vacancy Dynamics by Mall Grade

Superior Grade Average Grade Poor Grade

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With a sub-10% vacancy levels, most of the superior grade malls across top seven cities attract increased retailer interest. Average vacancy in India among superior grade malls is at ~7%.

Less than 2 million sq ft of average grade stock each in cities other than Mumbai and Delhi. India ‘s average vacancy among average grade malls is ~27%.

Mumbai and Delhi have the highest number of Poor Grade Malls as opposed to negligible or no poor grade stock in Chennai and Hyderabad. India ‘s average vacancy among poor grade malls stands at ~40%


Buy versus Lease: Impact of Ownership on Performance of Malls

Note:The inner circles in figure 14 and 15 indicates the number of malls with High Vacancy The outer circles in figure 14 and 15 indicates the number of malls with Low VacancySustained high vacancy levels for more than a year will have a negative impact in grading an operational mall. For this study, a mall is considered to have a high vacancy if the mall vacancy is observed to be greater than 10% as of 1Q12Source: Real Estate Intelligence Services (Jones Lang LaSalle), 1Q12

Figure 13: Number of Malls by Grade: Sale Model

• Only 14% of malls with stratified ownership are of Superior grade • About 68% of the malls in this category have high vacancy levels• Nearly 54% of the malls in this category are in NCR-Delhi

14%

56%

30%

Superior Grade

Average Grade

Poor Grade

• When compared to the lease model, the sale model is prevalent in about 47% of the operational malls. About 54% of the malls using the sale model became operational during 2007 or before.

• More than half of the total mall stock in the top seven cities in India in under the lease model.

• Emerging cities in southern India have more malls with the lease model and low vacancies.

Superior GradeAverage GradePoor Grade

Figure 12: Number of Malls by Grade: Lease Model

• Over 90% of the malls with single ownership are either of Superior or Average grade

• About 71% of the malls in this category have low vacancy levels• Poor grade malls, as a category is negligible with just 9%

representation

9%

43%

48%

Figure 11: Number of Malls - Lease vs Sale Model

47%

53%

Sale Model

Lease Model

Figure 15: Number of Malls by Grade & Vacancy: Sale

Superior Grade

Average Grade

Poor Grade

16%

37%

8%26%

55%

58%

Figure 14: Number of Malls by Grade & Vacancy: Lease

Superior Grade

Average Grade

Poor Grade

7%

16%23%

51%

61%

42%


Shopping for Quality Supply - The next focusIn recent years, although substantial retail developments have come on stream, only a percentage of them have been able to capture active interest from retailers. Few developers grasp the intricacies linked to running a successful mall and fail to pay attention to factors such as catchment area viability, location, supply benchmarking and mall management techniques - all of which are crucial ingredients to success. As a result, we have a number of mediocre shopping centres in sub-standard locations surrounded by inappropriate catchment areas, designed experimentally and sold by strata (strata-selling mall space can spell disaster for the mall). These malls are essentially ruins of hastily-commissioned projects where no retailer wants to set up store and add to the pile-up of vacant retail space in our cities.

Poor quality malls are expected to continue to struggle with higher vacancies in the short-to-medium term as they fail to garner retailer interest. This demand polarisation is so stark in the mature cities that few retailers are willing to pay a premium to lease space in well performing retail assets. Therefore, the vacancy in prime operational malls is in low single digits. With a dearth of good quality mall supply in the Tier 1 cities of NCR-Delhi, Mumbai and Bangalore, the rental and absorption variance in superior versus average grade malls is expected to further widen. The limited superior grade supply of retail malls in the mature cities of India has led to retailers scouting for

quality space in retail high streets and even in stand-alone commercial properties. Mixed-use buildings and small office blocks in established as well as emerging locations are on the retailers’ radar. As a result, properties which, through retrofitting, can enable retailers to execute their expansion plans in quick time are fast becoming precious assets for large format retailers.

Retailers today are learning from the past mistakes of unplanned growth and are now focused on expanding only through those malls that are backed by desirable attributes such as a good location, a lease-only model, an experienced developer profile, a professional mall management team and an active tenant mix management that can lead to healthy visitor numbers as well as a decent conversion ratios. While the demand for a superior shopping experience is evident in the established retail markets of India, the Tier II cities and Tier III towns are fast acclimatising themselves to the new and changed Indian retail market and have a growing demand for the branded products offered by national and international retailers.


1Q09

7%

48%

22%

6%

16%

27%

42%

21%

5%

2Q09

19%

37%

6%

31%

6%

3Q09

18%

38%

6%

10%

21%

7%

4Q09

54%

6%

29%

6%

1Q10

62%

6%

7%

15%

8%

2Q10

8%

51%

5%

7%

24%

4%

3Q10

11%

32%

15%

8%

25%

10%

4Q10

8%

29%

18%

8%

30%

7%

1Q11

45%

9%

6%

32%

5%

2Q11

33%

17%

16%

21%

10%

3Q11

29%

14%

11%

34%

10%

4Q11

28%

23%

15%

22%

10%

1Q120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

More Than 7,500

5,000 - 7,500

4,000 - 5,000

3,000 - 4,000

2,000 - 3,000

Upto 2,000

Sha

re o

f Uni

ts L

aunc

hed

by P

rice B

and

Figure 16: Supply Trend by Price Band - India

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12 Note: The CV Range refers to capital values at the time of launch

Residential Real Estate -Prudent Pricing and Timely Execution - Path to SuccessThe residential sector was the first sector in India to recover after the 2008 recession. After initial slow growth the sector gathered momentum and at the beginning of 2010 there was strong absorption and new launches, particularly in Delhi and Mumbai. Residential prices also inched up unleashing fresh optimism among developers. Residential property rates attained their previous 2008 peaks in several locations across the country. While NCR-Delhi led in terms of residential launches and absorption, strong price momentum was also observed in Mumbai. However, by end-2010, the sales velocity dropped due to the hardening of interest rates.

This hardening of interest rates dampened the market even further in 2011 with sales retreating from their last peak in 1Q10 and

decreasing across all prime cities, except Bangalore, and with residential properties’ price appreciation also slowing down in selected cities. Residential launches declined sharply in 2011, especially in the premium segment, with rising construction costs slowing down building activity and new launches.

At the beginning of 2012, however, there was a positive signal for home buyers when the RBI changed its stance from addressing inflationary concerns to ensuring growth by easing liquidity. Although the absorption rate recorded a marginal q-o-q rise across prime cities in 1Q12, the probability of this trend being sustained over the next three quarters will depend on prudent project pricing and timely execution.

Supply - Absorption - Vacancy TrendsThe supply of residential units in India’s top seven cities has been driven primarily by new launches in the price band of INR 2,000-4,000 per sq ft. This price band represented more than 65% of the new launches during 2008 and 2009. Since then the share of new launches in this price band has been shrinking and launches in the price range of INR 4,000-7,500 have been increasing at a faster pace. While the share of new launches priced less than INR 4,000 per sq ft

fell from 86.0% in 2008 to 68.0% in 2011, new launches in the price band of INR 4,000 - INR 7,500 doubled their share from 11.0% to 23.0% during the same period. Not surprisingly, a net drop of 18.0% in total new launches was recorded during 1Q12 as compared to 1Q11 levels while new launches priced below INR 4,000 per sq ft recorded a net drop of 38.0% as compared to a net increase of 18.0% recorded in launches priced from INR 4,000-7,500 per sq ft (Figure 16).


More Than 7,500 5,000 - 7,500 4,000 - 5,000 3,000 - 4,000 2,000 - 3,000 Upto 2,000

1Q09

9%

44%

25%

6%

13%

18%

38%

26%

9%

2Q09

13%

42%

4%

29%

9%

3Q09

15%

43%

6%

25%

7%

4Q09

10%

45%

10%

27%

1Q10

6%

55%

6%6%

23%

2Q10

10%

51%

6%7%

25%

3Q10

9%

45%

11%

7%

23%

4Q10

10%

43%

11%

6%

26%

1Q11

9%

41%

11%

7%

28%

2Q11

8%

33%

17%

13%

31%

3Q116%

30%

15%

9%

34%

5%

4Q115%

29%

16%

13%

30%

8%

1Q120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sha

re o

f Uni

ts ab

sorb

ed b

y Pric

e Ban

d

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: The CV Range refers to capital values at the time of launch

Figure 17: Absorption Trend by Price Band - India

Similar to supply, absorption was also mostly skewed towards projects in the INR 4,000 per sq ft band across all the seven metros in India. This price band included affordable and mid-segment housing in most cities and was mostly driven by the end-user demand. Absorption in projects with units priced below INR 4,000 per sq ft increased from 78.0% in 1Q09 to 86.0% in 3Q10. This was because buyers were capitalising on the bottomed-out prices of projects after the economic recession, with the fall in prices being sharper in projects in fringe areas of select cities. Moreover, with the passage of time, new commercial developments in fringe areas increased demand for homes in these areas.

Oversupply and poor buying sentiment during the recession increased the stock of residential units and this kept residential prices under pressure across most cities in India. However, when interest rates were increased by the RBI at end-2010 it affected home buyers’ ability to purchase, and this resulted in a slowdown in sales across price segments. The absorption share in projects priced above INR 4,000 sq ft improved from 3Q10 onwards going from a mere 15.0% in 3Q10 to about 36% by 1Q12 (Figure 17).


Pricing it Right: Too high priced or low priced projects struggle to sell One of the prime lessons that recession taught real estate developers was that the product had to be priced appropriately to suit consumers. Buyers have become very cautious about their investments and they are always on the lookout for value for money. Projects which were launched in the price band of more than INR 7,500 per sq ft took longer to sell. Added to this, prices of projects launched in 2009 in the under INR 2,000 per sq ft price band escalated rapidly in 2010, thereby negatively affecting their absorption.

Since buyers of projects in the price band of INR 3,000 per sq ft or below are price sensitive ‘Need Based Buyers’, their ability to afford houses diminished during the times of hardening interest rates. Similarly the segments of buyers in the price band of INR 7,500 per sq ft or more were predominantly ‘Aspirational Buyers’ or second-home buyers who could choose to postpone their buying decision. Hence projects in the price band of INR 3,000-7,500 per sq ft have a relatively lower percentage of unsold stock as compared to the other two categories.

Figure 18: Share of Unsold Units by Price Band and Launch Year

Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12Note: Unsold Units are as of 1Q12

0%

10%

20%

30%

40%

50%

60%

70%

80%

Upto 2,000

18%

22%

31%

69%

2,000 - 3,000

14%

6%23

%64

%

3,000 - 4,000

17%

7%22

%50

%

5,000 - 7,500

7% 6%32

%53

%

4,000 - 5,000

8% 8%23

%46

%

More Than 7,500

3%28

%56

%68

%

% U

nsol

d Un

its in

Tota

l Uni

ts L

aunc

hed

in a

Year

2011

2010

2009

2008


Figure 19: City-Wise Share of Unsold Units by Launch Year


2011

2010

2009

2008

Mumbai

7%

45%

47%

NCR-Delhi

8%4%

34%

54%

Bangalore

7%

23%

70%

Chennai

15%

9%

19%

57%

Pune4%

40%

54%

Hyderabad

51%

4%

21%

Kolkata

6%

49%

17%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Shar

e of U

nsol

d Un

its b

y Yea

r of L

aunc

h

23%

Few units are available for sale among projects launched in 2008, those in Hyderabad being the only exception. Hyderabad faced political uncertainty constantly from 2010 onwards and this slowed down sales and launches in the city. Hence 2008 and 2009 launches have a higher share of unsold units. Most of Bangalore’s unsold stock is just 12-15 months old whereas Mumbai has an equal share of unsold stock among units launched in 2010 and 2011. The majority of the 2009 launches are sold out across all cities except Hyderabad and Kolkata. Launches in Kolkata rose sharply between 2007 and 2009 leading to a huge increase in unsold stock. This, coupled with recession, led to a slowdown in both launches and absorption in subsequent years, thereby leading to a higher share of unsold stock from 2009 launches.



In the residential sector, Indian cities rarely follow property cycles in tandem. However, the Tier 1 cities of Mumbai, Bangalore and NCR-Delhi typically tend to lead the cycle. In contrast to the office and retail sector during the economic slowdown in 2008-2009, prices decreased for a maximum of three to four quarters after which they bounced back again. Mumbai was the first city to witness appreciation in residential prices in 3Q09 with the strongest increase in 2H09 peaking at about 8.0% in 4Q09 (Figure 20). Prices in other cities also rebounded after 3Q09, but at a slower pace than Mumbai. Prices in Hyderabad have largely remained constant since 3Q09. Residential capital values in Bangalore have increased by 25.0% since the trough in mid-2009, despite prices falling by only 13.0% during the recession and the Chennai, Kolkata and Pune markets have appreciated by over 20% during the same period. Average capital values in NCR-Delhi appreciated by 16.0% during the same period. This was largely because of a huge influx of residential launches in Noida that kept capital values in the district under pressure. Conversely, Gurgaon has witnessed a rapid rise of 35.0% in average property prices since mid-2009.

Residential property appreciation has slowed down in 2011, however, not in all markets. Prevailing capital values are well beyond the previous peak witnessed in 3Q08 in Mumbai, Bangalore, Chennai and Kolkata. In NCR-Delhi, capital values are expected to surpass the previous peak by end-2012 and residential property rates are likely to continue their upward trajectory in select cities, albeit at a slower pace than in 2010. A good amount of this appreciation will come from the increase in construction costs and the increased costs of capital. We believe that certain locations that have witnessed rapid increments in price, will not only witness resistance to any further price rises, but also face some downward pressure. Projects in suburban markets which are already oversupplied with a homogeneous mix of residential products will face difficulties in increasing prices. Location and infrastructure in suburban markets will be decisive in influencing buyers’ preferences.

Figure 20: Simple Average of % Q-o-Q Change in Capital Values of Constituent Micro-Markets

Residential property Cycle - Present Tense; Future?


Execution is the Key - Striking a Balance between Sale velocity and Construction ProgressThe analysis in this section establishes the link between construction progress and sales velocities of residential projects in each of the top seven Indian cities.

After the economic recession buyers became extremely cautious as many projects were put on hold during the recession. Either a cash crunch among developers or low sales volumes discouraged developers from continuing with construction of their projects. In some cases projects were totally shelved and buyers were compensated. Such instances have made buyers prioritise factors such as developer reputation, ability to deliver on time and project approvals as important criteria for making a decision to buy.

A buyer’s market is one where there is a need for completion of construction before a project is fully sold. In contrast, a market where the projects are fully sold before completion is a developer’s market.

The analysis reveals that the cities of Pune, Hyderabad and Kolkata are buyers’ market as residential projects in these cities witness the bulk of sales activity during the construction process as opposed to the proposed stage. Thus, buyers in these cities are cautious and are

willing to take a risk only on projects that have broken ground with all building approvals in place rather than projects available only on the drawing board. In contrast, the primary sales in NCR-Delhi, which is a developer’s market, are usually made in projects that are in proposed stages. This is mostly due to the heavy participation of investors and speculators who prefer purchase in the early stages of a project in the expectation of high returns. With very few completed projects, even among those projects that have recorded sales exceeding 90%, the developers in NCR-Delhi lag behind in construction as compared to their counterparts in other cities. One possible reason for this trend could be the sheer size of the residential developments in NCR-Delhi which take a longer time to complete.

As the buyer’s preference to buy is closely linked with the certainty of possession by the promised date, it is important for the developers to emphasise timely execution to maintain healthy sales volumes. While the residential sector, being a self-liquidating asset class, offers a faster mode of exit for developers/investors, a sales status linked construction promotion could help developers maximise revenues.

Figure 21: Sales Status versus Construction Status by City - Heat Map

Note: All projects launched in 2006 and beyond are considered in the analysis. As the cell colour changes from red to yellow, a higher percentage of units are under-construction as compared to proposed. As the cell colour changes from yellow to green, a higher percentage of units are completed as compared to under-construction. The project completion refers to physical completion only and doesn’t consider the procurement of occupier certificate form the respective local government authorities.Source: Real Estate Intelligence Service (Jones Lang LaSalle), 1Q12

Mumbai

Legend

Most Projects are Proposed

Most Projects are Under

Construction

Most Projects are Under Completed

Hyderabad KolkataPuneChennaiBangaloreNCR-Delhi

Upto 10% Sold

90% - 100% Sold

80% - 90% Sold

70% - 80% Sold

60% - 70% Sold

50% - 60% Sold

40% - 50% Sold

30% - 40% Sold

20% - 30% Sold

10% - 20% Sold


Amit Mookim, Director, Strategic and Commercial Intelligence (SCI) [email protected] +91 22 30902141

Amit has more than 10 years of management consulting experience across diverse industry and consult-ing disciplines in India and the USA. Based out of Mumbai, his focus industries include real estate, hospitality, etc. He has been instrumental helping set up the Commercial Due Diligence and Market Entry practice at KPMG India. Amit has advised several Indian and multinational clients and Private Equity funds in their strategy towards setting up new businesses such as hospitality assets, resorts, special economic zones, retail, townships and IT parks. Amit holds a Masters in Business Administration (MBA) from Faculty of Management Studies (FMS) and Bachelors in Economics from University of Kolkata.

AuthorsAnkit Bansal Senior Analyst, Research & REIS [email protected] +91 22 3307 1513 Ankit Bansal has been involved in enhancing and expanding the Real Estate Intelligence Service (REIS) by designing new research and analytics offerings. Based out of Mumbai, he also manages bespoke research assignments and contributes towards regional and local research publications covering economy, sector analysis, market forecasts and investment strategies. Prior to joining Jones Lang LaSalle, he was involved in research and consulting across diverse sectors including consumer goods, digital media and financial services. Ankit holds an undergraduate degree in Business Studies from Delhi University and a Masters degree in Knowledge Management from Nanyang Technological University, Singapore.

Hariharan Ganesan Manager, Research and REIS [email protected] +91 22 3307 1500 Hariharan Ganesan joined the Jones Lang LaSalle India in April 2008 and is responsible for managing the quarterly research offering - Real Estate Intelligence Service (REIS) publications. Based in Mumbai, he contributes to bespoke research publications on office, retail and residential real estate markets. Prior to joining the Mumbai team, he managed research operations for Jones Lang LaSalle based out of Chennai region and has worked on multiple topical white papers, property market digests and bespoke research projects spanning diverse geographies within India. With over six years of research and marketing experience, Hariharan holds a dual degree from BITS Pilani and an MBA from IIPM, Delhi.

Special ContributorsTrivita Roy, Manager, Research & REIS [email protected] +91 40 4040 9100 Trivita Roy joined Jones Lang LaSalle Research team in 2007. Based out of Hyderabad; she contributes to topical whitepapers, property market digest and research deliverables on industrial, commercial, retail, and sustainable real estate markets in India. She is also responsible for Indian real estate intelligence service (REIS). Trivita is trained as City Planner from Indian Institute of Technology Kharagpur and has more than three years of experience in real estate research.

Ankita Satnaliwala Senior Analyst, Research & REIS [email protected] +91 33 2227 3293 Ankita Satnaliwala contributes to bespoke research assignments, topical whitepapers and research deliverables on commercial, retail and residential real estate markets in India. She is also responsible for the Real Estate Intelligence Service (REIS) analytics and publications on the Kolkata market. Ankita holds a Bachelors degree in International Business (Economics) from Lancaster University, UK and a master’s degree in Real Estate Finance from the University of Cambridge.

About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47.7 billion of assets under management. Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 22,000 employees operating in 81 offices in 15 countries across the region. The firm was named the Best Property Consultancy in Asia Pacific at ‘The Asia Pacific Property Awards 2011 in association with Bloomberg Television’. For further information, please visit our website, www.ap.joneslanglasalle.com.

About Jones Lang LaSalle IndiaJones Lang LaSalle is India’s premier and largest professional services firm specializing in real estate. With an extensive geographic footprint across eleven cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 4800, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, Industrial, capital markets, residential, hotels, health care, senior living, education and retail advisory. For further information, please visit www.joneslanglasalle.co.in management, capital markets, residential, hotels and retail advisory. For further information, please visit www.joneslanglasalle.co.in

COPYRIGHT © JONES LANG LASALLE All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.

Real Estate Intelligence Service (REIS) is a subscription based research service designed to provide you with cutting edge insights into diverse and challenging real estate markets through collation, analysis and forecasts of property market indicators and trends across all major markets across various real estate asset classes - office, retail, residential. REIS empowers you with consistent and complete market data and analyses for all real estate indicators by specific micro markets. It is supplemented by value added services including client briefings, presentations and rapid market updates. For more details, contact, Ashutosh Limaye - [email protected]

Confederation of Indian Industry (CII)The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s development process. Founded over 117 years ago, it is India’s premier business association, with a direct membership of over 7100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 250 national and regional sectoral associations.CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.The CII Theme for 2012-13, ‘Reviving Economic Growth: Reforms and Governance,’ accords top priority to restoring the growth trajectory of the nation, while building Global Competitiveness, Inclusivity and Sustainability. Towards this, CII advocacy will focus on structural reforms, both at the Centre and in the States, and effective governance, while taking efforts and initiatives in Affirmative Action, Skill Development, and International Engagement to the next level.With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.Reach us via our Membership Helpline: 00-91-435 46244 / 00-91-99104 46244. CII Helpline Toll Free No: 1800-103-1244

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