india's stock of commercial real estate report jun2014

8/18/2019 India's Stock of Commercial Real Estate Report Jun2014

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India’s Stock of Commercial

Real Estate

Research Report

2014

On Point

The new preference for international and domestic funds


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India’s Stock of Commercial Real Estate2

Nevertheless, India continues to lead in terms of GDP growth over comparable emerging and developed nations, largely on the

back of its socioeconomic fundamentals that remain intact. With a population younger than other comparable emerging nations,

India’s favourable demographics and ensuing rise in consumption are sure to last longer than those in other countries, promisinga prolonged period of higher GDP and income growth. The median age of India’s population is only 26, while that of other leading

emerging nations ranges from 30 to 40. In leading developed nations, the median age falls in the range of 37-46, signalling a

relatively lower propensity to spend and a much lower GDP growth rate compared to emerging countries.

Fundamentals remain strong despite frustration over

current slow economic growth

Not so long ago, the Indian economy showed consistent upward growth trajectory, which made it the second fastest-growing

economy in the world. Its high growth rate, backed by a favourable demographic transition and the strong global economy, fostered

rising consumption in virtually every sector. However, since the start of the global nancial crisis (GFC), India’s economic growth has

been affected by reduced foreign inows and lower exports. The country’s GDP growth witnessed a falling trajectory for the rst time

in a decade, and it currently stands at 4.5% y-o-y (revised from the 5% estimated by CSO previously) as of the full scal year (FY)

2012-2013.

Figure 1: India: Erstwhile Rising Growth Trajectory Temporarily Gets Hiccups

(% YoY growth in India’s Real GDP)

Source: RBI, CSO

10.0%

1970-79

4.1%4.5%

5.7%

7.2%

8.6%8.9%

6.7%

4.5%

1980-89 1990-99 2000-09 2009-10 2010-11 2011-12 2012-13

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

00%

Decadal data Yearly data


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India’s Stock of Commercial Real Estate 3

Table 1 Real GDP Income Growth Median Age

Annualised average growth 2006-2013 (% 2013 est.

Leading emerging nations

Brazil 3.6% 11% 30.3

Russia 3.7% 12% 38.8

India 7.4% 10% 26.7

China 10.2% 18% 36.3

Leading developed nations

US 1.2% 2% 37.2

UK 0.6% -1% 40.3

Germany 1.5% 3% 45.7

Japan 0.6% 2% 45.8

Source: IMF, CIA World Factbook

Source: SIAM, DGCA; *data for FY13-14 up to Dec-2013

Source: World Bank Entrepreneurship Indicators, 2013

Table 2: Rising consumerism in India

FY05-FY14 Passenger Car Sales Two-wheeler Sales Domestic Air Passengers

CAGR % 14.9% 10.1% 10.5%

Figure 2: Wages Are Lowest in India Among Comparable Nations

India’s per capita income continues to rise and fuel consumption.

Table 2, ‘Rising Consumerism in India’, shows that rising income

has resulted in increased consumption of several durable goods

and services that were of little signicance to ordinary Indians

around a decade ago. Therefore, despite the challenging operating

environment that currently exists in India in terms of policy inertia,

corruption and bureaucracy, among others, the country continues

to witness high growth rates in the registration of new rms. The

World Bank’s Entrepreneurship Indicators for 2013 show that during

the 2004-11 period, the number of new rms registered in India has

grown by 26% y-o-y on average. This was the second highest growth

observed across all comparable emerging economies of the world

(see Table 3).

At present, the global risk perception of emerging economies

(including that of India) is relatively higher, owing to weak worldwide

investor sentiment. India, in particular, has had to face the dilemma

of twin decits-current account and scal-owing to a fall in foreign

inows and domestic tax collections, along with high imports

(particularly gold, oil and durables). However, the economy’s inherent

advantages highlighted above have not gone fully unnoticed. The

World Investment Report 2013, released by the United Nations

Conference on Trade and Development (UNCTAD), has repeatedlyidentied India as the third most attractive destination in the world

for investment during the 2013–2015 period, as revealed through a

survey of 159 top multinational companies. Some of the main reasons

identied by these companies included India’s vast and untapped

market, along with labour cost, which is lower than in many other

emerging markets.

Table 3: Number of new rms incorporated

Emerging Economies Annual avg growth 2004-11 (%)

Russia 35.4%

India 26.0%

Indonesia 13.3%

Hong Kong, China 12.7%

Singapore 9.7%

Brazil 6.3%

Korea 5.7%

Malaysia 2.5%

Australia 0.9%

2000

1600

1200

1000

800

600

400

200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

Actual Forecast

0

Brazil

Taiwan

ChinaIndia

1800

1400

Source: International Labour Organization and JLL research


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Real estate in India: Gradually gaining the interest of

mainstream investors

Figure-3(c)

Figure-3(a): Commercial Real Estate Borrowing Figure-3(b): Individual Housing Loans

0

N o v - 0

7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

J u l - 0 8

J u l - 0 9

J u l - 1 0

J u l - 1 1

J u l - 1 2

J u l - 1 3

N o v - 0

8

N o v - 0

9

N o v - 1

0

N o v - 1

1

N o v - 1

2

N o v - 1

3

1,600

1,400

1,200

1,000

800

600

400

200

I N R

b n

Source: BSE, RBI, Real

Estate Intelligence Service,

JLL

140

120

100

80

60

40

20

I n d e x

2007 2008 2009 2010 2011 2012 20130

Commercial CapitalValue Index

Residential CapitalValue Index

BSE Realty Index

BSE Sensex Index

N o v - 0

7

F e b - 0

8

F e b - 0

9

F e b - 1

0

F e b - 1

1

F e b - 1

2

F e b - 1

3

M a y - 0

8

M a y - 0

9

M a y - 1

0

M a y - 1

1

M a y - 1

2

M a y - 1

3

N o v - 0

8

N o v - 0

9

N o v - 1

0

N o v - 1

1

N o v - 1

2

N o v - 1

3

A u g - 0

8

A u g - 0

9

A u g - 1

0

A u g - 1

1

A u g - 1

2

A u g - 1

3

6,000

5,000

4,000

3,000

2,000

1,000

0

I N R

b n

As the growth rate of new enterprises being registered is rising every

year, commercial real estate is bound to benet, and the ReserveBank of India’s (RBI) data on borrowing reects this trend. Cumulativeloans to commercial real estate have been rising fast with every

passing year, and in the last six years, the gure has nearly tripled.More jobs are created with every new rm getting registered, therebyputting more income in the hands of Indian households. This also has

had a benign effect on residential real estate. Loans to individuals

for house purchase have nearly doubled during the same six-yearperiod. Developers operating in the residential market in India

have also benetted from the mismatch in demand and supply, ashousing shortage has been a perennial problem in India. Cumulative

commercial real estate loans has tripled to reach INR 1.428 billion in

the last six years up to November 2013, whereas individual housingloans doubled to reach INR 5.185 billion during the same period.

Physical real estate outperforms real estate equities

In spite of the effects of the GFC and a general slowdown in theIndian economy, physical real estate has been performing well. Apart

from the underlying demand-supply mismatch, the advantages of

investing in physical real estate over equities were signicant. TheBSE Realty index witnessed a signicant decline of 89% in absoluteterms from 2007 to end-2013 (see Figure 3C). In comparison,commercial property prices declined only by 14% during the same

period. This gives us enough condence to believe that with therevival of the world economy in the near to medium term, investors

will become more condent in investing in physical real estate inIndia as opposed to investing in equities, given the healthy returns

expectation as well as downside protection the former offers.


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IT-ITES sector-the largest occupier of real estate space in

India-continues to strengthen

The IT-ITES sector, which is the dominant sector in India in terms of

real estate occupancy, has seen a spectacular growth rate over thelast decade. As of FY2004-2005, the sector employed around 1.1

million people, and this gure rose by almost three times to just under

3 million people by FY2012-2013. Further, the growth in employment

generated by this sector is expected to remain strong in the coming

years (see Figure 5). The National Association of Software and

Services Companies (NASSCOM), the primary trade association

of IT companies in India, has projected that this sector will likely

employ around 10 million people by 2020, thereby growing at a rate of

approximately 20% annually for the next seven years.

The Indian IT-ITES sector is poised to gain strength from the currentlevel, considering that economies of the United States and Europe,

which together account for a dominant share of the industry’s

revenues, have started to witness a recovery from the after-effects

of the nancial crisis. The depreciated value of the Indian currency

at the moment has also helped the sector to boost its margins, and

the growth of this sector will generate considerable demand for

ofce property. It also strengthens our belief that while the immediate

economic and business outlooks may not be too encouraging,

Source: NASSCOM

Source: Real Estate Intelligence Service, JLL

Figure 4: Share of leasing activity by occupier type across India

2009 2010 2011 2012 2013

100%

80%

60%

40%

20%

0%

Professional Services

Consultancy Business

Telecom, Healthcare-Biotech, Real Estate &

Construction and otherindustries

BFSI

Miscellaneous

IT & ITES

Manufacturing /Industrial

23%

22%

23%

25%

5%

34%

26%

11%

18%

8%

39%

29%

8%

18%

4%

46%

18%

16%

13%

5%

34%

14%

13%

10%

4%

24%

opportunistic buying and, thus, demand for commercial real estate

will remain intact in the near to medium term.

Figure 5: IT-ITeS Employment

8.0

9.0

10.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2020P

1.1

2.9

10

0.0

E m p l y e e d P e r s o n ( i n m i l l i o n s )


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Slowing down of FDI evokes some support from

policymakers

Foreign direct investment (FDI) has been one of the most important

factors that helped several sectors in India to sustain high growthrates in the recent past. The opening up of FDI in 2005 virtually

coincided with the period when the rising growth potential of the

Indian economy became apparent globally. What followed thereafter

was a more than 50% y-o-y rise in FDI inows into the real estate and

infrastructure space in India each year until FY2009-2010. Thereafter,

as the GFC started to affect emerging economies (including India),

FDI inows started to moderate. For the latest eight-month period

for FY2013-2014 (up to November 2013), FDI in real estate and

infrastructure stood at USD 889 million, which is far below the USD

Source: Department of Industrial Policy and Promotion (DIPP), GOI *For FY2013-2014, data available up to November 2013 month

Figure 6: Sharp fall in FDI in Real Estate & Infrastructure in India

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY07 FY08 FY09 FY10 FY11 FY12 FY14*FY13

1,652

3,922

4,829

5,787

1,663

3,141

8891,332

FDI in Retail Estate & Infra ($mn)

0

U S D

m n

5.8 billion peak inows into this sector witnessed in FY2009-2010.

Before 2005, only Non-resident Indians (NRIs) and Persons of Indian

Origin (PIOs) were allowed to invest in Indian real estate, but with

various restrictions in place. In 2005, the government opened up FDI

in real estate (with limited restrictions) with the intention of bridging

the wide gap between demand and supply. From then onward, FDI

in real estate witnessed remarkable growth until the past three years

when it moderated signicantly, reecting a global risk-off sentiment

and domestic macroeconomic issues-high ination, weak currency,

twin decits and moderating economy, among others.


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Real estate investments in India: FDI conditions highlighted

in the Press Note 3 guidelines

FDI in India is permitted either via the automatic route or through

the approval route. Investments in integrated townships, housing,built-up infrastructure and construction development (including hotels

and resorts, commercial, hospitals and so forth) are automatically

approved.

While the slowing growth of the Indian economy has signicantly

affected FDI inows into the real estate sector, the government

has recently shown a commitment toward reviving FDI investors’

sentiment, particularly for real estate.

Recent efforts of the government to revive FDI are moves in the right

direction

• There is a proposal to introduce the Real Estate Regulatory Bill,which could help allay concerns over the transparency issues that

currently plague the Indian real estate sector.

• In June 2013, the RBI eased norms for external commercial

borrowings in the affordable housing sector. The minimum

experience for developers was reduced from ve to three years.

• Several initiatives were taken to allay concerns of international

retailers, who were hitherto unconvinced about entering India

despite the further opening up of the sector last year.

• In the retail sector, the government is mulling over the idea of further

raising FDI limit to 74% in multibrand retailing from the present limitof 51%.

• Foreign retailers are now allowed to open stores in cities with less

than 1 million population in those states where not a single city has

a population of 1 million or more.

• The criteria of 30% sourcing from small and medium enterprises

(SMEs) that have an investment cap of USD 1 million has been

relaxed to some extent. The cap has now been raised to USD 2

million, considering the future growth prospects for the SME unit.

The Indian government is also toying with the idea of relaxing norms

on minimum built-up areas, investment horizons (time frame) andminimum capitalisation conditions to encourage FDI capital inows.

These initiatives, we believe, would help in reviving sentiment among

foreign investors.

Conditions for FDI in Real Estate in India

Minimum Area

• Development of serviced housing plots - 10 ha• Construction development projects - built-up area of 50,000 sqm

• Combination projects - either of the above two conditions

Minimum Capitalisation

• For wholly-owned subsidiary - USD 10 million

• For joint ventures (JV) with Indian partners - USD 5 million

Time Frame

• FDI cannot be repatriated within three years from completion of

capitalisation• At least 50% of projects to be developed within ve years from

date of obtaining statutary clearances

Prohibitions

• FDI in real estate business and construction of farm house notpermitted

• Investor cannot sell undeveloped plots• Payment cannot be made through traveller’s cheques or foreign

currencies

• Purchase of agriculture land/plantation property/farm houses by

NRIs/PIOs requires RBI permission

Exceptions

• Hotels and tourism, hospitals and SEZ projects have thebenets of not attracting conditions of minimum area, minimumcapital and time frame

• Investments made by NRIs in townships, built-up infrastructureand construction development projects also do not attract

conditions under the above three heads

Industrial Parks

• FDI in industrial parks would not be subject to the aboveconditionalities, provided it meets the following criteria:

• It would comprise a minimum of ten units, and no single unitshall occupy more than 50% of the total allocatable area

• Minimum percentage of the area to be allocated for industrialactivity shall not be less than 66% of the total allocable area

Source: DIPP


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Indian REITs - A keenly awaited source of funding for cash-

strapped developers

Real Estate Investment Trust (REIT) is a listed entity that owns and

actively manages a portfolio of income-producing real estate assets.REITs are listed on stock exchanges, and their shares are publicly

traded like equities. This is a key feature that helps REITs to generate

liquidity. REITs can have sector-specic portfolios (e.g., ofce, retail,

industrial or residential) or a diversied real estate portfolio across

several real estate sectors. They also use geographic diversication in

managing the risk of their commercial real estate portfolios.

REITs are yet to take off in India, while globally, many developed and

developing countries have already introduced them.

Table 4: Introduction of REITs - in Developed Markets

United States 1960s

Australia 1971

Japan 2001

Singapore 2002

United Kingdom 2007

- In emerging markets

Brazil 1993

Russia 2003Thailand 2003

Hong Kong 2005

Philippines 2009

Globally, the combined market cap of REITs stood at around USD

850 billion, as per estimates provided by Asia Pacic Real Estate

Association (APREA) as of end-2012. North America has been the

most developed REIT market and has the largest share of over 50% in

the total market cap of REITs globally. The concept of REITs in Asia is

relatively new, although it currently accounts for a 12% global marketshare, thereby becoming a fast-growing REIT market. The APREA

claims that while the region has a relatively higher share in total

investible real estate market (physical) globally, penetration of REITs

in Asia is proportionately lower. With REITs yet to establish in the two

large economies of India and China, the Asian REIT market’s potentialfor growth is immense.

REITs in India - Gearing up for a take-off

The Securities and Exchange Board of India (SEBI) had framed draft

regulation for REITs in 2008, although it did not gain momentum

after that, possibly resulting from the policy inertia exhibited by

the Indian government until last year. As of end-2013, the SEBI

attempted to revive discussions on establishing REITs in India, having

acknowledged the instruments success globally in attracting relatively

cheaper funds. Some of the binding regulations for Indian REITs

(I-REITs), as derived from the draft of SEBI regulations of 2008, are

mentioned below:

• I-REITs should have a net worth of INR 50 million

• At least half of the trustees of I-REITs should be independent

• Schemes to be launched by I-REITs must be ‘closed-ended’, and

units of every scheme must be listed on a stock exchange

• I-REITs are allowed to invest only in real estate; investing in vacant

land is prohibited

• I-REITs cannot engage in property development activity

• I-REITs cannot take more than 15% exposure to a single real estate

project

• I-REITs cannot take more than 25% exposure to a real estate project

of a single developer (or any other transacting party)

These regulations are still at the drafting stage and are yet to be

formalised or enacted. Concerns for authorities or REITs going forward

could be India’s partial readiness for institutional participation in the

realty sector. For instance, there has to be a clear demarcation of

real estate assets, which must be graded by institutions and valued

correctly. The legal structure surrounding the real estate sector inIndia is currently rather weak. The lack of professionals may also act

as a drag for India, as there are few real estate specic education

modules. Until REITs become a reality in India, existing developers


9/24


Source: IPIT website

Source: A-iTrust website

and investors will look to FDI as the only possible alternative for exiting

an investment.

However, in the absence of I-REITs, certain Indian developers have

resorted to listing their properties abroad, particularly on the Singapore

Stock Exchange. A few examples of I-REITs listed in Singapore are

given below, along with their performances:

1) Ascendas India Investment Trust (A -iTrust):

Assets of Ascendas India Trust include:

• International Tech Park - Bangalore

• International Tech Park - Chennai

• Cyber Pearl - Hyderabad

• The V - Hyderabad

• aVance Business Hub - Hyderabad

• International Tech Park - Pune

Performance of A iTrust:

• Listed at SGD 1.55 in August 2007

• During the GFC, along with other assets, A -iTrust shares fell from

a peak of SGD 1.66 (November 2007) to a trough of SGD 0.45

(October 2008)

• It recovered to SGD 1.05 (January 2010) by 133% from the trough

• Over the last two years until August 2013, share prices have

remained largely range-bound, compared with a 33% fall in the BSE

Realty Index

2) Indiabulls Property Investment Trust (IPIT):

Assets in the Indiabulls Property Investment Trust include:

• One Indiabulls Centre (One IBC) - Elphinstone Road, Mumbai

• Indiabulls Financial Centre - Elphinstone Road, Mumbai

Performance of Indiabulls Property Investment Trust:

• Listed at SGD 0.72 in June 2008

• During the GFC, share prices fell from a peak of SGD 0.74 (June

2008) to a trough of SGD 0.13 (October 2008)

• It recovered to SGD 0.30 (April 2010), up by 131% from the trough

• Over the last two years up until August 2013, share prices have fallen

by 29% as against a 33% fall in BSE Realty index

Figure 7 (a): A iTrust1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

Sep07

Sep08

Sep09

Sep10

Sep11

Sep12

Jan14

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

May08

May09

May10

May11

May12

Sep13

May13

0

i n S G D

Figure 7 (b): IPIT

0.8

0.7

0.3

0.1

0.6

0.5

0.4

0.2

Jul08

Apr09

Jan10

Jan14

Oct 13

Jul13

Apr13

Jan13

Jan12

Jan11

Oct 12

Oct 11

Oct 10

Jul12

Jul11

Jul10

Apr12

Apr11

Apr10

Oct 08

Jul09

Jan09

Oct 09

0

i n S G D


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Value of ‘under-construction’ real estate in India: Analysing

ofce sector value dynamics

As at 4Q13, the total value of under-construction real estate in

India stood at USD 234 billion. This value has been growing at acompounded annualised growth rate (CAGR) of 32% over the last

three years since end-2010. The value of real estate then stood at

USD 101 billion. Indian real estate market had witnessed its worst

phase during mid-2010 owing to weakness in business sentiment.

This signicant growth in the value of under-construction real estate

in India was primarily led by the residential sector, which grew at

42% CAGR during the last three years. The residential sector’s value

as of 4Q13 stood at USD 191 billion, and it accounts for more than

80% of the total value of under-construction real estate in India. Thissector accounts for similar proportions in almost all leading cities of

India (except Hyderabad and Kolkata; refer gure 9B). Three years

back, the residential sector accounted for only a 66% share of the

Figure 8: Sector share (%) in value of under-

construction real estate

(as of 4Q13 data)

14.4%

3.8%

81.8%

Ofce Retail Residential

Source: JLL, Real Estate Intelligence Service

total value. This clearly reects the shift in focus of developers over

the last three years toward the housing market as business sentimentweakened. A widespread slowdown in economic activity on one hand

and an inherent demand-supply gap in housing on the other forced

developers to focus their activity on the residential sector in the last

few years.

The top seven cities in India-NCR-Delhi, Mumbai, Bangalore,

Chennai, Pune, Hyderabad and Kolkata-account for more than 80%

of the total value of pan-India under-construction real estate. Delhi

has the highest concentration of under-construction real estate value

of 33% of the total pan-India. The relatively large residential and retailsectors makes Delhi the leading contributor in value proposition.

Mumbai has the second largest share in total real estate value,

although it has a dominant share of the ofce market.

Figure 9 (a): City share in total value of Indian real estate


33.1%

15.4%

1.6%

8.0%

3.7%

3.7%

29.7%

4.8%

NCR-Delhi

Mumbai

Bangalore

Chennai

Pune

Hyderabad

Kolkata

Others


11/24



Figure 9(b): Sector-wise share (%) in value of real estate under-construction across top cities

(data as of 4Q13)

100%

80%

60%

40%

20%

NCR-Delhi Bangalore Chennai Kolkata Other CitiesPune HyderabadMumbai0%

3.8%10.9%

85.5%

1.1%

14.7%

84.2%

3.7%

17.1%

79.1%

2.2%

11.1%

86.7%

4.8%

12.7%

82.5%

23.7%

23.9%

52.4%

8.1%

29.6%

62.3%

4.1%

17.3%

78.6%Ofce

Retail

Residential

Figure 10: City-wise share (%) of ofce by area in 4Q13


Other Cities

Bangalore

NCR-Delhi

Chennai

Kolkata

3.8%

4.6%

4.9%

9.1%

13.1%

16.7%

17.8%

30.0%

Pune

Hyderabad

Mumbai

0.0% 10.0% 20.0% 30.0% 40.0%

Figure 11: City-wise share (%) of ofce by value as of 4Q13


NCR-Delhi

Bangalore

Other Cities

Chennai

Kolkata

3.3%

3.4%

3.7%

6.1%

9.5%

18.6%

25.1%

30.4%

Pune

Hyderabad

Mumbai

0.0% 10.0% 20.0% 30.0% 40.0%


12/24


Ofce market scenario: Value dynamics across leading cities in

India

The top-seven cities account for 80% of the total real estate value in

the ofce sector. The total value of ofce real estate pan-India stood

at USD 34 billion as of end-2013. The value of under-construction

ofce space in India currently accounts for 60% of the total value

of completed ofce space. This means that in the next ve years,

the value of completed ofce space is likely to grow to over USD

50 billion. Being the commercial capital of India, Mumbai has the

highest concentration of under-construction ofce real estate value.

The city accounts for a dominant 30% share in pan-India ofce market

value (see gure 11). NCR-Delhi (25%) and Bangalore (9.5%) are the

other two tier-I cities that follow Mumbai in that regard. .

Over the last three years, Bangalore has witnessed the highest

growth by value of under-construction ofce space. The city’s value

has grown at a CAGR of 26% during the last three years. The

availability of high-quality and large ofce space at sub-dollar price

per square feet of rentals (lower operational costs), access to a large

pool of skilled workforce and a cosmopolitan culture have worked

in Bangalore’s favour, making it a preferred destination for IT–ITES,

manufacturing and consulting companies. Bangalore’s ofce market

vacancy level is less than 10%, which is much below the national

average of 18% as of 4Q13. Among Tier I cities, NCR-Delhi follows

Bangalore, with an 11% CAGR of the value of under-construction

stock during the same period, supported by improving infrastructure

and the consequently rising acceptance of NCR as a preferred

destination for business.

Among the Tier II cities, Hyderabad has seen the value of under-

construction ofce stock grow by 13% CAGR during the last three

years. The ofce market in Hyderabad is largely driven by the

IT–ITES and pharmaceutical sectors, both of which have managed

to show resilience to the economic slowdown. These sectors have

a strong export market, particularly in the West, which is currently

recovering steadily from the GFC.

Mumbai has seen only a marginal rise in value of ofce under-

construction, owing to the slowdown witnessed in its stronghold

BFSI sector. However, over the last few years, Mumbai has gradually

witnessed the penetration of non-BFSI tenants, which has helped

the ofce market in the suburban (inexpensive) locations of the

city. The city has recently witnessed major infrastructure projects

getting completed or nearing completion, all of which will create new

opportunities for developers and investors around the upcoming

micromarkets.

While the supply of under-construction ofce space in the three

leading metropolitan cities (Mumbai, Delhi and Bangalore) is much

the same, capital values in these cities are the key differentiators

of the value dynamics. In terms of concentration of ofce supply (or

area) in the under-construction space, NCR-Delhi leads the pack of

top seven cities, with a share of 17.8% of India’s overall supply, while

Mumbai (16.7%) and Bangalore (13.1%) follow closely.


13/24


Taking stock of ‘completed’ ofce assets in India

23%

1%7%

9%

19%

23%

18%

NCR-DelhiBangalore

Chennai

Mumbai

Kolkata

PuneHyderabad


As of end-2013, stock of completed Grade A real estate ofce space

in the top seven cities stood at 376 million sq ft, which is around 70%of the total pan-India ofce stock. Tier-I cities of Mumbai, Bangalore

and NCR-Delhi hold the largest share of ofce stock (refer gure 12).

The completed stock of Grade A ofce space across leading cities of

India witnessed signicant growth of 30% CAGR during the pre-

slowdown period (2005-2009), owing to a push from policies favouring

real estate and a general growth in economic activity during that time.

However, post the economic slowdown, growth fell to merely 14%

CAGR during the four-year period 2009-2013. Kolkata, Chennai and

Pune witnessed the biggest fall in growth in stock of completed ofce

market assets between the two time periods. Mumbai, however, wasan exception to this trend (see gure 13).

In Mumbai, the growth differential in completed ofce stock market

between the two time periods reveals a different pattern. While

the growth of completed ofce stock fell quite signicantly across

all major cities in India post slowdown, Mumbai witnessed a rise

in growth during the second period compared with the previous

four-year period. We believe that the reason for this was a

change in policy, which came during the second period, when city

authorities allowed companies to house their back ofce functions

in IT-designated buildings. This allowed many non-IT rms to only

maintain a front ofce in the expensive central business districts,

while the major chunk of back ofce functions were moved to the

relatively inexpensive IT-designated buildings in the suburbs. Certain

developers who had large land parcels in the suburbs utilised this

opportunity to offer commercial space at reasonable rentals. This new

policy created a favourable situation for all stakeholders, enabling a

rise in demand as well as supply of ofce space in the suburbs.

Figure 12: Share of completed ofce space (by area)

amongst top-7 cities(as of 4Q13, %)

50%

45%

40%

35%

30%

25%

20%

15%10%

5%

0%NCR-Delhi Bangalore ChennaiMumbai Kolkata IndiaPune Hyderabad

Post-slowdown (2009-13)

Pre-slowdown (2005-09)

Figure 13: Pre-slowdown and post-slowdown phases of India real estate and the impact on Investable-grade ofce stock

(% growth in ofce stock by area)

Source: JLL, Real Estate

Intelligence Service


14/24


Growth of Real Estate Ofce Stock in Different Cities over

2009 Stock

Additions to ofce stock: Substantial already, but a lot lesser going forward

Addition in ofce stock is calculated by taking 2009 stock as base. The growth % in ofce stock as of 2013 YTD is

from 4Q09. The growth % in 2014 and 2015 are incremental over Figures relate to Grade A overall market.


2009-13 2014F 2015F

DELHI

YTD Stock:70 mn sq ft

MUMBAIYTD Stock:90 mn sq ft

PUNEYTD Stock:36 mn sq ft

BANGALORE YTD Stock:73 mn sq ft

CHENNAIYTD Stock:53 mn sq ft

HYDERABAD YTD Stock:29 mn sq ft

KOLKATA YTD Stock:17 mn sq ft

16%

7%

9%

10%

9%

9%

74%

91%

52%

8% 9%46%

5% 3%50%

11% 14%54%

23% 9%77%


15/24


Pune

Figure 14: Listed players’ share in total

FDI-compliant universe

Figure 15: Building category-wise share of FDI-compliant stock (by area) of ofce space

Figure 16: City-wise share in FDI-compliant

stock (by area) of ofce space

27%

73%

Listed player’s share

Unlisted player’s share

26%

1%7%

12%

18%

20%

16%

NCR-Delhi

Bangalore

Chennai

Mumbai

Kolkata

Hyderabad

5%

48%48%

Non IT

IT SEZ

IT Buildings

The Universe of FDI-compliant ofce assets in India

*By FDI-Compliant stock, we mean that sub-set of the total Grade-A ofce stock which meets all criteria for receiving FDI investments as per PressNote 2 and 3 guidelines of the Department of Industrial Policy & Promotions (DIPP)


Source: JLL, Real Estate Intelligence ServiceSource: JLL, Real Estate Intelligence Service

FDI-compliant ofce stock* accounted for around 45% of the total

total completed Grade A investable stock of 376 million sq ft as ofend-2013. This share rose signicantly from under 30% of the total

investible universe as of 2006.

Out of the total FDI-compliant stock in India, the share of listed

developers stood at 27% as of 2Q13.

Once again, the IT–ITES sector occupied the largest share of the

FDI-compliant stock. Only 5% is occupied by the commercial (non-IT)

sector.

Needless to say, IT–ITES dominated cities of Chennai, NCR-Delhi

and Bangalore had the highest share of FDI-compliant stock.


16/24



The opening of FDI to investments has been a key driver of this

transition in supply for FDI-compliant stock. On the demand front,

however, there are certain key trend changes in the Indian ofce

market that have led to a change of preference in favour of FDI-

compliant properties. Some of the reasons are listed below:

• Lease transactions have gradually increased over the last few years,

leading developers to become conscious of the quality of buildings

that they will have to manage (see gure 17).

• Secondly, in the previous decade, the Indian economy’s meteoric

growth rate was seen as a major diversication opportunity

geographically for large multinational companies, especially those

from the United States. These MNCs have strong preferences


Figure 18: Almost entire incremental demand for FDI-compliant stock has come from the IT-SEZ space

100%

80%

60%

40%

20%

1H1320060%

IT SEZ

IT Non-SEZs

94%

52%

6%

48%

Figure 17: Share of Sale and Lease Transaction in Total Recorded Transactions

100%

95%

5%

91%

9%

93%

7%

84%

17%90%

80%

70%

60%

2011 2013*2012201050%

SalesTransactions

LeaseTransactions

for quality ofce space that enhances employee productivity and

reduces cost through efcient usage of energy resources (Table

3 highlighted the strong growth in new rms incorporated in India

during recent times, as per the World Bank’s 2013 Entrepreneurship

statistics).

Of the total FDI-compliant stock as of 2008, merely 6-7% comprised

of IT-SEZs. This share grew signicantly to 45% as of mid-2013. The

sharp decline in the share of IT non-SEZ during the same period

suggests that many domestic IT companies moved from their erstwhile

standalone IT parks and buildings to IT-SEZs to take advantage of the

benets offered under the SEZ Act.

*update is as of 3Q13


17/24


After the hysteria of the last few years, tepid recovery of real

estate growth in India reects a transition of the industry

During the last eight years from 2006 to 2013, the Indian real estate

market has received cumulative private equity (PE) investments of

USD 15.4 billion. The skewed nature of investment inows into the

sector through this channel is evident from the fact that 44% of that

amount came in one year-2007. Post that, investments have been

consistently lower. During 2013, PE investments are estimated to

have been around USD 66 million, unchanged from the level seen a

year earlier.

While it is easy to blame macroeconomic factors for this steep

correction or fall, it was actually a combination of the following factors

that led to the decline

• The edging real estate industry in India lacked the depth and

maturity required to handle large inow of money. As a consequence,

easy money was managed by inexperienced developers

• Over exuberance, misguided by the overtly optimistic expectations of

PEs, brought the PE industry to this point

• What made things worse was the clash of cultures, with guts-driven

grassroot promoters on one side and sophisticated number-

crunching PE managers on the other

• With the worsening of the macroeconomic scenario in India that

followed in the later years, exits became more difcult. Of the total

USD 14.7 billion invested during 2006-2012, only 20-25% managed

to make an exit

Emerging opportunities - Rupee depreciation and yet-to-recover

capital values

The depreciated value of the rupee (13% depreciation against the

USD in 2013) has made exits difcult. However, on the ip side, it

has made entry more lucrative for foreign investors. According to a

survey done by Bain & Co, revealed in its India Private Equity Report

2013, fundraising is no longer difcult for ventures in India with sound

credibility, nancial strength and product differentiation.

Commercial real estate prices have yet to fully recover from the

bottom observed during 3Q-2009, thereby keeping the opportunity to

invest at low levels still alive. Considering that the cost of construction

has increased during this period because of rising commodity prices

globally, this is a window of opportunity that may be short-lived. Also,

with Indian authorities currently in the mood to break the jinx of policy

inertia, it will not be long before we see establishment of a real estate

regulator and the implementation of certain relevant reforms that will

radically improve the maturity and transparency of the sector.

Figure 19: PE Investment in Indian Real Estate

8

7

6

5

4

3

2

1

2006 2007 2008 2009 2010 2011 2013*2012

0.850.940.88

3.31

6.76

1.29

0.660.66

0

i n U S D

b i l l i o n

Source: Grant Thornton data *JLL preliminary estimate for CY2013


18/24


It is interesting to note that India offers one of the highest yields in commercial real estate.

The average yields of global emerging cities ranged between 8% and 9% over the period

considered, whereas the average for other global developed cities ranged between 4.5% and

6%. As against that, yields recorded in Mumbai (India) have consistently moved above theaverage yield trend. This could be primarily because of the following reasons given below:

• Yields are typically benchmarked against the cost of capital in the respective countries. Since

the cost of capital in India is relatively higher, yield expectations have remained higher when

compared with other nations. This has enabled foreign investors to benet through interest

rate arbitrage using offshore leverage.

• Secondly, emerging markets (including India) are still perceived as relatively risky compared

to developed markets. Possibility of frequent changes in tax rules, policy inertia and stringent

entry and exit regulations have contributed to this perception. Macroeconomic headwinds in

India (discussed previously) added to these concerns.

• Thirdly, the regulatory environment for Indian real estate is perceived as restrictive.

Further, in the absence of REITs in India, there is not sufcient market depth

to allow for exit from the asset once invested. The government appears

to be working on it, and we have intermittently heard of

policies to relax norms for investments.

India offers an attractive real estate yield

Source: JLL, Global Real Estate Intelligence Service

11.0%

9.0%

5.0%

3.0%

2008 2009 2010 2011 1H 201320121.0%

Hong Kong SydneySingaporeNew YorkLondon Tokyo Mumbai

Figure 20 (b): Ofce Market Yields in Developed Market Cities

7.0%

Source: JLL, Global Real Estate Intelligence Service

12.0%

11.0%

10.0%

9.0%

8.0%

7.0%

6.0%

2008 2009 2010 2011 1H 201320125.0%

Seol JakartaMumbaiBeijingBangkok Manila

Figure 20 (a): Ofce Market Yields in Emerging Market Cities


19/24


Indian real estate sector in transition - Ofce sector yields reect the changing trend

Image

Figure 21: Spread Between Overall City Yields and CBD Yields


Q 1 2 0

0 8

Q 1 2 0

0 9

Q 1 2 0

1 0

Q 1 2 0

1 1

Q 1 2 0

1 2

Q 2 2 0

0 8

Q 2 2 0

0 9

Q 2 2 0

1 0

Q 2 2 0

1 1

Q 2 2 0

1 2

Q 3 2 0

0 8

Q 3 2 0

0 9

Q 3 2 0

1 0

Q 3 2 0

1 1

Q 3 2 0

1 2

Q 4 2 0

0 8

Q 4 2 0

0 9

Q 4 2 0

1 0

Q 4 2 0

1 1

Q 4 2 0

1 2

Delhi Mumbai Bangalore

Chennai Hyderabad Kolkata

1.2%

0.8%

0.4%

1.0%

0.6%

0.2%

-0.8%

-0.4%

0.0%

-0.2%

-0.6%

During the pre-crisis period, most of the seven widely tracked cities

in India witnessed movements in yields within a narrow range,

irrespective of their risk-return prole. However, post-crisis, there

has been realignment in the risk proling of various cities within

India, and this has helped to better allocate funds across portfolios.

For instance, there is now a clear demarcation between high-risk

suburban districts and the CBDs. The rising spread between the

CBDs and non-CBD locations across the leading cities in India

(shown in the graph) suggests that investors are revisiting the entire

spectrum of real estate investment options more carefully than in the

past (before 2009), when movements in yields were mostly one-

directional and similar. We believe these are signs of an industry that

is on a gradual path to maturity


20/24


History of Commercial

Real Estate Yields in

India since 2005

The yields took a sharp upturn with the advent of the GFC. Since most FDI investors in Indian

real estate were based out of the United States and Europe, they became extremely wary of

acquiring further exposure to real estate, especially in emerging economies such as India.

Funds faced investment freeze in the backdrop of pessimism. This resulted in reduced liquidity

in the sector for new investments as well as defaults in committed investments. Offshore

leverage also became a challenge. Average yields increased sharply (from 10.5% to 11.5%)

during this period, reecting the low-risk appetite of investors in Indian commercial real estate. R i s i n g

Y i e l d s

2008-2009

Toward the later part of 2009, yields started reversing again before comfortably nestling within

the 10-10.75% range. A large part of the credit for reviving the commercial real estate market

in India was attributed to domestic investors-mainly domestic real estate venture funds and

high net worth individuals (HNWIs) who took advantage of the stressed valuations. Between

CBDs and suburbs, a spread of 80-90 bps was recorded between the yields, primarilybecause of risks of a huge supply overhang expected in the suburban locations. This phase

witnessed the ight of investors toward quality assets in top cities. The quality Grade A assets

continued to command a premium, which helped yields to maintain steadiness during this

period.

S t e a d y

Y i e l d s

2010-2012

‘Risk normalisation’ continues to be the theme of investments. Growth expectations for 2013

were not higher than the levels observed in 2012. The key challenge faced by India today is

the political risk arising out of the policy inertia preceding the general elections in 2014.

M o d e r a t e C

o m p r e s s i o n

2013 and

beyond

Real estate, as a sector, boomed in India after the opening up of FDI in 2005. In the rst three

years (2005–2007), a large number of global nancial institutions set up third-party funds

along with allocations from their books for deployment in the real estate sector. The economy

was buoyant, and most economic indicators ashed green. Most large projects received equityfunding resulting in the sector experiencing falling yields in this phase (from 12.5% to close to

10%).

C o m p r e s s

i n g Y i e l d s

2005-2007


21/24


Market yield (%)

Figure 22: Relatively faster rise (or fall) in capital values have led to yield compression (or strengthen) in India

Source: REIS, Jones Lang LaSalle research

Yields in India to remain benign over the near to medium term

With increasing maturity seeping into the real estate business, renewed push from policymakers to revive the sector and moderate

compression of yield, we see that the ofce sector’s overall attractiveness has gone up. That possibly explains the ndings from a reference

check of some large PE rms, which indicates that close to 15 offshore funds are in the process of mobilising around USD 4.5 billion for

investments into various realty sectors, including commercial.

Historically, yield compression or rise in India has largely occurred as a consequence of faster rises or falls in capital values against those

of rental values. Our latest estimates for the near to medium term suggests that the spread between the growth of capital values and rentals

would remain marginally positive. Therefore, we foresee mild compression in yields to continue for some more time.

Gross rents Capital Values (RHS)

11000

10000

9000

8000

7000

6000

5000

4000

3000

Capital Values fallfaster than rentals

Capital Values rise marginallyfaster than rentals

110

70

0

100

80

90

60

50

40

2 Q - 2 0

0 6

2 Q - 2 0

0 7

2 Q - 2 0

0 8

2 Q - 2 0

0 9

2 Q - 2 0

1 0

2 Q - 2 0

1 1

2 Q - 2 0

1 2

4 Q - 2 0

0 6

4 Q - 2 0

0 7

4 Q - 2 0

0 8

4 Q - 2 0

0 9

4 Q - 2 0

1 0

4 Q - 2 0

1 1

4 Q - 2 0

1 2

4 Q - 2 0

1 3

4 Q - 2 0

1 3

4 Q - 2

0 1

4 F

Yields strengthen Moderate yield compression

11.0%

10.8%

10.6%

10.4%

10.2%10.0%

9.8%

9.6%

9.4%

9.2%

9.0%

2 Q - 2

0 0 6

2 Q - 2

0 0 7

2 Q - 2

0 0 8

2 Q - 2

0 0 9

2 Q - 2

0 1 0

2 Q - 2

0 1 1

2 Q - 2

0 1 2

4 Q - 2

0 0 6

4 Q - 2

0 0 7

4 Q - 2

0 0 8

4 Q - 2

0 0 9

4 Q - 2

0 1 0

4 Q - 2

0 1 1

4 Q - 2

0 1 2

4 Q - 2

0 1 3

4 Q - 2

0 1 3

4 Q - 2

0 1 4 F


22/24


Conclusion

The Indian real estate sector has witnessed stark contradictions in

terms of growth over the last decade. During the pre-GFC period, it

received large capital inows, owing to India’s strengthening economic

activity and support from favourable policies. However, during the

GFC, immaturities of India’s real estate sector came out glaring at

investors as well as policymakers. A combination of factors, along with

a weakening domestic economic growth, led to demand sluggishness

in the sector. An ensuing slackness in absorption of ofce assets,

however, could not shake fundamentals of the Indian real estate sec-

tor. We believe that the economy’s high potential for growth, coupled

with a rising national income and propensity to consume will attract

many multinational businesses, thereby generating demand for ofce

space. Additionally, the sector itself is in transition over the last few

years since its immaturity got exposed during the nancial crisis. While

investors were always the smarter and professional lot, they had much

to learn about the operating dynamics of the sector in India. Develop-

ers, on the other hand, have increasingly realised the benets of inte-

grating professional practices to stay nancially sound and attractive.

Our guide to the universe of Grade A ofce assets and FDI-compliant

ofce assets is a useful tool for investors trying to ascertain various

investment options in the commercial real estate space in India. We

believe that at present, the sluggishness in the commercial real estate

sector is behind us, and the sector is poised for a recovery on the back

of attractive yields and yet-to-recover capital values.


23/24


Author

Suvishesh Valsan

Assistant Vice President, Research & REIS

+91 22 3985 1309

[email protected]

Special contribution & guidance

Karan Khetan Assistant Manager, Research & REIS

[email protected]

Akshit Shah

Manager, Capital Markets Research India

[email protected]

Devi Shankar

Assistant Vice President, Capital Markets

[email protected]

Ujwala Rao

Head - Capital Markets (West India)[email protected]

For more information about research

Ashutosh Limaye

Head of Research - India

+91 22 3985 1319

[email protected]

For further business with Capital Markets

Shobhit Agarwal

Managing Director - Capital Markets

+91 22 3985 1488

[email protected]


24/24

www.jll..com

About JLL

Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management rm offering specialized real estate services to clients

seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 70 countries from

more than 1,000 locations worldwide. On behalf of its clients, the rm provides management and real estate outsourcing services to a property

portfolio of 3.0 billion square feet. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets

under management.

JLL has over 50 years of experience in Asia Pacic, with over 27,500 employees operating in 80 ofces in 15 countries across the region. The

rm was named ‘Best Property Consultancy’ in three Asia Pacic countries at the International Property Awards Asia Pacic 2013, and won nine

Asia Pacic Awards in the Euromoney Real Estate Awards 2013.

For further information, please visit our website, www.jll.com.

About JLL India

JLL is India’s premier and largest professional services rm specializing in real estate. With an extensive geographic footprint across 11 cities

(Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of

over 6800, the rm 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.

The rm was named the Best Property Consultancy in India (5 Star Winner) at the International Property Awards - Asia Pacic for 2012-13.

For further information, please visit www.joneslanglasalle.co.in

Ashutosh Limaye

Head, Research and REIS

[email protected]

+91 98211 07054

For more information about Research

india's stock of commercial real estate report jun2014

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