jll research - indian real estate - heading towards a tectonic shift

July 2015

Is Indian real estate heading towards a tectonic shift?

2 Is IndIan real estate headIng towards a tectonIc shIft? Is IndIan real estate headIng towards a tectonIc shIft? 3

Introduction

4Ps of real estate the pillars of transition Players Process Product Places

Industrial real estate sector Traditional godowns making way for modern warehousing Changingbusinessenvironmenttoreshufflelocationcriteriaforwarehouses

Residential real estate sector Apartment sizes are falling in order to suit affordability of buyers

Branded residences have slowly caught the attention of richer Indians; trend appears lasting

Definitionofbasicamenitieshasexpandedevenformid-segmenttoaffordablehousing

New concepts in residential: senior Living, service apartments and studio apartments

Office real estate sector Migration to peripheral business districts has accelerated Real estate will see greater participation of Private Equity

and institutional investors Occupierprofileundergoesatransition

Current innovations lay foundation for future transitions New breed of developers RisingprominenceofCREteamwithinofficeoccupiers

Consistent rise in real estate market transparency appears likely A green building movement is underway in India

Retail real estate sector Frequent churn a new norm in retail malls Malls witness a divide: successful versus unsuccessful New breed of retailers to drive demand for quality retail supply

Conclusion

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Anindustrythatisrelativelynewcomparedtothebanking,finance,manufacturing, consumer goods and others, the Indian real estate sector has not seen many business cycles in the pre liberalisation era. However, post the economic liberalisation of 1991 during the IT boom in the last decade (2000s), the sector has witnessed two business cycles.Thelatestcycle(2005-10)endedupwithalotoflearningsforthe stakeholders, and has made the sector relatively more mature and transparent. In that sense, the last 10 years has been quite dynamic, as each of the fundamental 4Ps of real estate Players, Processes, Product and Places witnessed plethora of changes.

ThecoresectorsofOffice,Retail,ResidentialandIndustrialhaveindependentlywitnessedchangesoftheirown.Officemarketshavewitnessed a transition in terms of moving out of the central business districts (CBDs) to secondary business districts (SBDs) and peripheral business districts (PBDs) in search for value, while corporate occupiers'profilehavebecomemorediverseorlessconcentratedwithin few industries. Changing consumer preferences and entry of moreinternationalretailershavemadetheretailsectorcomplexanddynamic. Consequently, there is now a divide between malls that could adapt to the new dynamism and those that cannot. On the other hand,residentialsectorisfindingitsownwaysofevolvingthroughexperimentationwithconceptssuchascompacthomes,brandedhomes, senior living, and serviced and studio apartments.

Theon-goingtransitionwithintherealestatesectoroffersusaforetaste of what the near future beholds. We foresee sweeping changes in the way real estate developers conduct their business, particularly looking at the innovative practices and agility of certain new breed of developers. Corporate real estate teams will have to become more adept and skilful in order to make the most of the upcoming transition, and bring to light a rewarding portfolio for their companies. For homebuyers, the recent changes and future transition will bring about a more transparent market that is not just sensitive to their needs, but also sensitive towards the ecology at large.

Introduction1

The last 10 years has been quite dynamic, as each of the fundamental 4Ps of real estate Players, Processes,

Product and Places witnessed plethora of changes.


2.1 PLAyERSThe real estate industry has been a highly localised industry in India with each city being dominated by a select few developers. However, inthepost-globalfinancialcrisis(GFC)era,severaldevelopersstartedtoexpandtheirfootprinttonewergeographies.ForexampleKRaheja Corporation, dominant in Mumbai, forayed into the Hyderabad ITofficesegmentthroughitsMindspaceparkin2004,GodrejProperties dominant in Mumbai, forayed into Ahmedabad through its GardenCityprojectin2013andenteredthePunemarketbywayofitsHorizon project at Undri in 2012. A recent entrant in the Indian realty space and primarily on the retail segment is the Xander group, which isestablishingapan-IndiaportfolioofpropertiesspanningdiverseassettypesstartingwithitsVRMallatSurat,(completedin2013).

It is highly likely that the trend of large and well capitalized developers

4Ps of real estate the pillars of transition

2 buildingapan-Indiaportfolioofrealestateassetsmaysustainandstrengthenoverthenextdecadeasthemarketmaturesandweakerplayers get weeded out for lack of capital, corporatization, and technical prowess. Eventually, the sector would witness a period of consolidation whereinlarge,well-capitalizeddeveloperswouldgainmarketshareby either purchasing assets or acquiring smaller players. Developers holdingexcessivelylargelevelsofdebtontheirbalancesheetsandstruggling to service it would be the prime takeover candidates while professionally managed players with access to institutional funding would emerge as acquirers. The introduction of real estate investment trusts (REITs) would catalyse the transition as private equity (PE) funds wouldbeabletomakeexitsfromtheircurrentprojectsfreeingupcapitalfor more judicious deployment in future years.

GodrejProperties

Developer Name

Waterside

Project Name

Mumbai

Dominant City

Kolkata Office

Asset Type

DLF Westend HeightsDelhi NCR

Tata Housing CasacadesMumbai Bangalore Residential

KRahejaCorp Inorbit MallMumbai Hyderabad Retail

GodrejProperties GodrejSummitMumbai Gurgaon Residential

DLF Commanders courtChennai

Tata Housing LouvreMumbai Gurgaon Residential

Residential

Residential

ResidentialKRahejaCorp VivareaMumbai

ExpansionCity

Bangalore

Delhi NCR

Bangalore

Examplesofdevelopersforayingintonewgeographies

Source:JLL-REIS


2.2 PROCESSESOngoing changes in how real estate stakeholders are carrying out their business in India reveal a change in market perception

Growing acceptance of international real estate consultants

As against the 1990s, when multinationals that entered India largely adoptedtheIndianstandardsinrealestate,theIT-eragrowthpost2000 witnessed offshore companies demanding quality IT space. Besides, Indias growing prowess in the world of services, trade and business resulted in a wider participation of multinational companies, whoshiftedtheirbasetoIndiaandcreatedanaturalexpectationfor superior quality of construction, architecture and design. Local developers left no stone unturned to ensure best practices across the globe were gradually adopted.

More recently, we are beginning to witness the trend of outsourcing of AEIC (Architecture, Engineering, Interior and Contractor) practices to globally renowned agencies in an effort to make Indian cities stand-outandreflecttheirrecentlyacquiredprowess.Inthelastfiveyears, these consultants have become household names in their respectivefieldswithintherealestatesector.Theirdesignshavebeeninspiringpropertybuyersbecausetheyreflectstylesthataretrulyglobal.Theseconsultantsmanagetoinfluencemoredevelopersinto partnering with them.

Property transactions becoming increasingly legitimate

While the property market slowdown in India since 2011 has hurt many, one positive thing that has happened is the consistent fall in cash component (source of black money) in property purchases. Over the lastfiveyears,propertypriceshavealmoststagnatedagainstinflationacross major real estate markets. As a result, majority buyers who are currently active in the market are salaried people who can support a loan but cannot afford cash payments. Today, as much as 80% of buyers in top cities such as Mumbai, Delhi, Bangalore, Chennai, Pune, HyderabadandKolkataaresalariedemployees.Onthecontrary,businessmen and speculative investors were dominating the market prior to the slowdown when real estate boom was at pinnacle. Today, almost all newly developed residential properties can be bought with 100% white money. Many resale properties too are available without the cash component. Governmentsrecentbudgetarymeasuresto encourage or incentivise electronic payment for large transactions such as property purchase, and simultaneously raise punitive action against illegal transaction, will further help reduce cash dealings.

Real estate records going online

India is today at the forefront of adopting technological innovations into practice across a wide variety of businesses and public administration mechanism. Initiativessuchase-governanceand Digital India are bringing about sweeping changes in the public administration operates andrecordsaremaintained.Inthelast5-7years, few government websites have taken the lead in making critical land and registration records available online, thereby giving a new boost to market transparency.

We are beginning to witness the trend of outsourcing of AEIC

(Architecture, Engineering, Interior and Contractor) practices to globally

renowned agencies in an effort to make Indian cities standout

Following is a list of internationally reputed consultants that currently operate in India

Architecture Interiors Landscape

HOK KellyHoppen Allan Wyatt

Woha Singapore yoo Belt Collin

Callison Jade Jagger Design Concepts

Foster & PartnersCasa / Armani

Sitectonics

HB DesignPhilippe Starck

Studio Steed

Examplesofpublicportalsthatarerichwithrealestateinformation

National land records http://www.archive.india.gov.in Central government property records http://estates.nic.in

Property registration records of Maharashtra http://igrmaharashtra.gov.in

Source:JLL-REIS


2.3PRODUCTSThereisasignificantchangeinthewayconstructionqualityandtechniques have evolved over the years. By simple observation, projects completed before 2000 mostly had older design and no amenities. The buildings had no element of sustainability energy efficiency,waterharvestingsystem,securitysystems,advancesafetynormsetc.Existingmultinationals,too,hadnooptionbuttooccupysuch buildings given the limitation of technological capability to construct modern buildings.

2.4 PLACESPropertymarketsareevolvingateverystage,startingfromtier-Icitiessinceliberalisationdaystotier-IIcitiesposttheIT-ITESboominIndiaduring the late 1990s. Driven by rapid pace of growth of the services sector,officemarketstrengthenedinthetier-Icities,whichwerepredominantly occupied by sectors such as BFSI, Pharmaceuticals, FMCGandMedia.However,intheITerapost2000,offshoringofbusinessreceivedamajorfillipaftertheglobalY2Kproblemaswellasfavourable IT policies of the Indian government. Because location was less of a concern for the offshoring companies, they preferred to enter tier-IIcitiesBangalore,Hyderabad,andPune.Thesemarketshadsome inherent qualities such as good number of technical education centres, low property prices / rentals, vast availability of space to accommodatecampus-styleoffices,andpleasantweather.

Today, cities such as Bangalore and Pune are dotted with presence of large IT multinationals and the incremental space for new entrants is getting limited. Additionally, developments witnessed over the last decade or so have resulted in a steep rise in prime property prices thatmaynotbecomfortingtofewexistingITcompaniesplanningtoexpandoperations.Simultaneously,thereisawaveofinfrastructureimprovementshappeningintier-IIandtier-IIIcities,whicharefastgetting connected with todays major metros.

ITsectorhasdominatedofficespaceoccupancyforalmostadecadeandisnowexploringnewcitiesforexpansionorcreationofnewbases.Thenecessitytoexerttightcontrolonoccupancycost,tomaintaincost-competitiveness,promptIT/ITESfirmstoscoutforalternate destinations that have an abundance of skilled manpower. This is resulting into the emergence of new cities such as Chandigarh, Visakhapatnam,Vijayawada,Mysore,Kochi,Coimbatore,Tiruchi,Bhubaneswar,Ahmedabad&Gandhinagar,JaipurasthenewcentresofchoiceforsettinguplargescaleITofficeinfrastructure.

Post the beginning of IT boom in India around the year 2000, large IT companies and other MNCs who wanted to enter India in a big way, expressedtheirdesiretooccupyspaceinmodernoffices.Thesefactors led to Indian developers delivering superior construction quality thatfulfilstherequirementofMNCs&ITcompanies.Developersacross India implemented various advanced construction techniques and innovative designs to improve the quality of projects through which they have attracted more IT & MNC occupiers into their projects.

Differencesinamenitiesofold-stylebuildingsandmodernbuildings

More use of brick in construction More use of steel & glass in construction

Smallerfloorplates Largerfloorplates

Conventional construction techniques Advanced construction techniques

NoGreenBuilding RisingproportionofLEEDcertifiedbuildings

Absence of recreational facilities Importance for recreational facilities

Insufficientparkingfacilities Ample car parking facilities

Basic security system Advanced security systems

Basicfirefightingsystem Advancedfiredetectionandfirefightingequipment

Old design structures Modern design structures

Noair-conditioning Centralisedair-conditioningsystem

No power backup 100% power backup

PRE 2000

EXAM

PLES

POST 2000

NarimanBhavan-NarimanPoint,Mumbai MittalCourt-NarimanPoint,Mumbai

HTHouse-ConnaughtPlace,DelhiNCR DLFCorporateParkGurgaon,DelhiNCR

TheSenate-UlsoorRoad,Bangalore KhanijaBhavan-RaceCourseRoad,Bangalore

ITParkKharadi,Pune

PeninsulaBusinessPark-LowerParel,Mumbai Mindspace IT Park Malad, Mumbai SignatureTowersGurgaon,DelhiNCR OneHorizonCentreGurgaon,DelhiNCR TataXylemTechParkWhitefield,Bangalore EmbassyManyataTech-HebbalORR,Bangalore BlueridgeITPark-Hinjewadi-Pune

Source: JLL Research


Office Real Estate sector

3 From greater occupier diversity and migration to suburban areas to increasedparticipationofPEfundsandinstitutions,theofficesegmenthaswitnessedsignificanttransitionoverthelastdecade-atrend,weexpect,willgatherpaceintheyearstocome.3.1MIGRATIONTOPERIPHERALBUSINESS DISTRICTS HAS ACCELERATEDThetrendofcompaniesmigratingtoofficesinsuburbsandperipheralareas driven by a combination of cheaper rents and lesser commute times for workforce has risen sharply over the last decade. IT/ITES companies,whichwerelargelylocation-independentduetotheiroffshore-onsitebusinessmodel,arethetrend-settersinthisrespect.Othersectorshaveincreasinglytakenthecueinsetting-uplargeofficespaces in secondary business districts (SBD) and peripheral business districts (PBD).

DevelopershaverespondedtooccupierdemandbyexecutinglargeITparksandofficeprojectsinSBDandPBDprecincts.PBDhasseenthebiggestjumpintheshareofofficestock,risingfrom28%in2004to47%in1H2015.TheshareofSBDsinofficestockhasremainedstableoverthelastseveralyearsataround43%ofthetotalofficestock.CBD, on the other hand, has witnessed a severe attrition of occupiers andadeclineinfreshsupplyofofficespacethatsledtoasignificantdropinitsshareofofficestockfromabout33%in2004to10%in1H2015.

Migration to suburbs and peripheral areas driven by a combination of cheaper rents and lesser commute times for workforce has risen sharply

over the last decade

OFFICESTOCKBYBUSINESSDISTRICTBYCITY2004-1H2015

Allfiguresin%Note: Some percentage totals may not add-upduetoroundingoff.

Source:JLL-REIS


Reasons behind the transition

The preference for SBDs and PBDs has been largely dependent on the development of mass transit systems and social infrastructure in these locations. The availability of large contiguous land parcels and a high quality supply of buildings have been the other major factors that shaped this trend. Rental difference the principal factor drivingtherushtowardsextendedsuburbshasbeensignificant.As of 1H2015, average rental values at PBD locations in the countrywereabout45-60%cheaper than CBD rentals.

Delhi NCR has witnessed the most spectacular emergence of alternate businessdistrictsinGurgaonandNoida,whichdrawworkforcenotonly from within local municipal limits but also from Delhi and other areas of NCR.

ThetrendhasbeenespeciallypronouncedincaseofGurgaon,which has seen a meteoric rise in almost all demographic and economicindicators.Gurgaonhaswitnessedanunprecedentedurbantransformation with its urban population having clocked the fastest growthinthecountryoverthelastdecade17%compoundannualgrowthrate(CAGR)from2001to2011.GurgaonandNoidacomprisedover 80% of the lease volumes in 2015 amongst the highest proportion of lease volumes registered by peripheral destinations in any city.

MumbaihasbeenanexceptiontothetrendofofficemigrationtoPBDdue to lack of supporting infrastructure and connectivity. However, the citywitnessedasteadyshiftinofficestockfromprimeCBDareaslikeNarimanPointtoSBDprecinctssuchasLowerParelandAndheri-Kurlaroad.AnexodusofofficesoutofCBDwassparkedbylackofqualityofficestockandthecomplicatedownershipstructure.

TheopeningofBandra-WorliSeaLinkin2009enhancedconnectivity

fromtheislandcitytothesuburbswhiletheSantacruz-ChemburLinkRoad(SCLR)andMumbaimetroprojectsimprovedeast-westconnectivity.Thelackofanysignificantmass-transitprojectsalongthecrucialNorth-SouthcorridorandtoNaviMumbaioverthelastdecadehasrestrictedthedevelopmentofofficedistrictsinPBDprecincts.ThisisevidencedbythemodestincreaseinofficestockinPBDascompared to SBD.

BangaloreandHyderabadhavewitnessedasignificantshiftinofficestock to PBD mainly due to dominance of IT/ITES sectors, which have traditionallyestablishedlargecampusesatlow-costPBDprecincts.Significantprogressonringroadprojectslinkingthecityperipherieshas improved connectivity in these cities.

Pune and Chennai have witnessed greater interest in the SBD locations, which provide affordable alternatives for large occupiers lookingforGrade-Aproperties.SBDOldMahabalipuramRoad(OMR)inChennaiandHinjewadiinPuneemergedasfront-runningdestinations in the respective cities due to an abundance of large Grade-Aproperties.KolkatahasseenarisinginterestinPBDprecinctssuchasRajarhat,whichhaswitnessedasignificantriseinofficestock,driven primarily by the IT/ITES sector.

3.2REALESTATEWILLCONTINUETOSEEGREATERPE,INSTITUTIONAL PARTICIPATIONReal estate in India has seen rising participation by private equity (PE) funds over the last decade. After the election of the new government in 2014, PE deals gathered further momentum as investments acceleratedsharplyinthefirsthalfof2015.Globalfundshavemadeastrongcomebackinvestinginaffordablehousingdevelopments,officeparksandmixed-useprojects.

Reasons behind the rise of PE funds

Theeconomicslowdownwitnessedsince2012inIndiamadeitdifficultfor developers to tap the primary equity markets for funds. Banks, the biggest lenders of the sector, were also under pressure during this period due to increasing stressed assets on their balance sheets, constrainingtheirabilitytofinancenewerprojects.Makingmattersworse,theeconomicslowdowndentedthedemandfornewofficespaceduetomanycorporatesputtingexpansionplansonhold.

Thedifficultsituationoftheofficesegmentisnowevidencedintheelevatedlevelsofvacancy.Thespill-overofsupplyconceivedduringthepre-GFCperiodcombinedwithweakabsorptionhasledtopersistentlyelevatedvacancylevelsofabout15-20%onanaveragecountry-widebasis.Delhi-NCR,Kolkata,andMumbai-MMRhavebeenparticularlyhard-hitbyvacancylevels,whicharehigherthanthecountrywide average.

On the other hand, Pune, Bangalore, and Hyderabad have enjoyed lowervacancylevelsduetogreatercoordinatedsupplywithpre-commitment by IT companies in these cities. Developers in Bangalore usually commit to commercial buildings in consultation with occupiers, thereby having a better understanding of future demand.

In Mumbai, however, developers typically gauge the market sentiment and construct space on a speculative basis leading to higher vacancy duringeconomicdown-cycles.Thevacancylevelshavebeensignificantlyhigherrangingabout40-60%inlowergradeofficespaces.

OFFICE VACANCy RATES IN INDIANCITIES2005-1H2015

RISINGSHAREOFPRIVATEEqUITYLENDINGTOINDIANREAL

ESTATE

Source:JLL-REIS


OFFICESTOCKBYBUSINESSDISTRICTBYCITIES2005-1H2015

Source:JLL-REIS


3.3OCCUPIERPROFILEUNDERGOESATRANSITIONTheofficesectorhaswitnessedagradualtransitiontowardsgreateroccupier diversity after more than a decade of IT/ITES dominance. Absorptionofofficespacebroadlymirroredtheeconomicfortunesof the occupier industries through the business cycles over the last decade.

TheGFCin2008sawasignificantcontractionintheshareofIT/ITEScompaniesintotalofficespaceabsorptioninthecountryasthesefirmsreeled under the effects of widespread cuts in IT spends worldwide. Afterabriefperiodofrecoveryduring2009-10,theshareofIT/ITESsector has continued to decline as the Indian technology sector itself is transitioning from its traditional labour arbitrage model towards newer technology platforms such as cloud computing and automation a trend that cuts down on the requirement for human resources and, consequently,officespace.TheshareofIT/ITESsectorinleasingvolumeshasdeclinedfrom48%in2005to32%attheendof2q2015.

ThelowerabsorptionofofficespacebytheIT/ITESsectorwouldbecompensatedtoalargeextentbynew-agesectorssuchaseCommerce. The blistering pace of growth of the eCommerce sector in thecountryhasresultedinmassiveofficespaceabsorptionatrendweexpecttocontinueoverthenextdecadeasbroadbandconnectivityfurther penetrates to rural households.

Another sector that has undergone substantial erosion in space absorption is the manufacturing sector, whose share in leasing volumes has declined from 22.5% in 2005 to 10.8% in 2015. Domestic manufacturing continues to be highly uncompetitive, saddled by difficultiesinlandacquisition,environmentalclearancesandarchaiclabour laws.

The Modi governments renewed thrust on manufacturing through its flagshipschemeMakeinIndia,hasreceivedapositiveresponsefrommanyMNCs.Thegovernmenthasputinplaceadefinedagendaforimplementing structural reforms in labour laws and land acquisition act, which are precursors to successful implementation of Make in India. The renewed focus on the manufacturing sector would result in associated addition of manpower and space that would result in a sustained,multi-yearincreaseinofficeabsorption.

The traditionally defensive sectors such as telecom, healthcare and bio-techbehavedresilientlyintheaftermathoftheGFCwithlittleimpactontheirhiringandofficespaceabsorption.Withinthisspace,

theexport-drivensectorsofhealthcareandbio-techexperiencedrecordsalesandprofitgrowthduring2012-13,aperiodwhichwasotherwise slow for the domestic economy. This led to strong hiring and consequently, rise in share of leasing volumes by this occupier type from14%in2005to37%in2015.Theshareoftheseoccupierscanbeexpectedtoriseoverthenextdecadeashealthcaresectorsareincreasinglyexpectedtotaketheinorganicroutetofuturegrowth.

The savings accruing from lower petroleum and other commodity prices (of which India is a large net importer) would enable the governmenttobetterfundbig-ticketinfraprojectslikeDelhi-Mumbaiindustrial corridor (DMIC), the smart cities mission and construction of national highways, thereby boosting the construction and infrastructure sectorsandtheirshareinofficespaceabsorption.

The share of the BFSI sector in leasing volumes has been relatively stablethroughthelastdecade.Afterreachingalow-pointofabout8%in 2012, the share of BFSI reverted to its long term average of around 13%by2015.

Retail Real Estate sector

4SECTOR-WISESHAREOF

LEASEDAREA,2005-1H2015


ROBUSTSUPPLYOFMALLSDURINGMIDTO LATE 2000S; SLUMP IN RETAIL REAL

ESTATE SUPPLy IN THE CURRENT DECADE

RISINGNUMBEROFMALLCLOSURESORCONVERSIONS ACROSS MAJOR INDIAN CITIES

EXPECTED TO RISE IN NEAR FUTURE

The retail real estate sector has become one of the most dynamic sectors in India as consumer preferences change at a rapid pace. Frequency with which new brands enter the markets, older brands shift base,andmallsreorientthemselvesisbreath-taking.

4.1 FREqUENT CHURN A NEW NORM IN RETAIL MALLSMalls are seeing a lot of churn in recent years. So much so that it appearstohavebecomeanewnormal.Duringthemid-2000s,postthe boom in real estate and after the development of malls happened across major real estate markets in India; business conglomerates suchasReliance,AdityaBirla,Godrej,FutureGroupetc.emergedinthe business of retail and occupied large spaces in malls. Contract periodtenuresweretypicallyintherangeof18-20yearsforanchortenantswhilesmallervanillaretailersenjoyed9-10years.

More recently, contract periods have been shortened to anywhere betweentwoandfiveyearsforvanillaretailers.Asaconsequence,ina few good malls where business is roaring, the rate at which malls churn brands have increased considerably. On an average, when businessisgood,churnratesofaround15-18%havebeenrecorded.This is abnormally high considering that it used to be in the range of 4-8%inwell-managedmallsintheinitialperiod.

A combination of factors is responsible for churn rates going up so high:

Poorlyperformingretailersexitmallsmidwaythroughtheirleasecontracts

eCommerceplayersestablishing/expandingtheirbrick-and-mortar

4.2 MALLS WITNESS A DIVIDE: SUCCESSFUL VERSUS UNSUCCESSFULIn the past few years, developers reduced supply of mall space in India due to rising vacancy levels following the economic slowdown. However,priortothat,developershadresortedtobreak-neckpaceof construction of malls in response to a spurt in organised retail business. Irrespective of the design quality, mall management practicesandso-calledbestpractices,developerscontinuedtosupplyretailspaceonthebackofgrowingdemandfromexistingandnewretailers. Few developers had, back then, realised the right ingredients for constructing a successful mall. Post the slowdown in Indian economy in 2010, realisation seeped in that quality is required for enduring results.

presence possibly on the back of big funding through foreign direct investment (FDI) or private equity

Landlords (or developers) initiate churn to improve their portfolio of tenants at some locations while at unviable locations, retailers are driving the churn.

The good part of this churning, however, is that the market is realising its true value. Leading malls enjoy the privilege of deciding which brand to house and continuously monitor all stores that follow a revenue-sharingmodel,overandaboveaminimalfixedrental.Therevenue-sharingmodelhasbeenincreasinglyinusetoensurebothdevelopersandretailersputinequaleffortstodrive-inthemuch-neededfootfallstothemall.Hence,non-performingbrandsarebeingweeded-outwithinfairlyshortperiodsoftimeandothersbeingcoaxedorforcedtoshiftfloorsforbetter-performingbrandstobeaccommodated.Globalaswellasleadingdomesticbrandseitherprefer to lease space in premium malls or go for high street locations.

Inaway,thereispressureonmallstopartnerwithonlyhighly-productive brands, or risk succumbing to competition from other malls inthevicinity.Goodmallsarecurrentlyindemand.Anincreasingnumber of international brands want to enter India and lease space inhigh-performingmalls.Forinstance,allnationalandinternationalbrands want to get launched from either a SelectCityWalk or DLF PromenadeinDelhiandHighStreetPhoenix,Oberoi,orPalladiumin Mumbai. At times, the churn is so necessary and rewarding that malldevelopershavegoneaheadandbought-outcontractsofbrandsin order to accommodate a more premium brand. Therefore, from a mallmanagersperspective,locking-intenantsfor18-20yearswillgrossly inhibit the malls capability to correct its model, as and when necessary.

In the near future, we expect more malls to withdraw from the retail

realty business as a result of which, the business of average and good performing malls will improve.

ManyexpertsbelievethatmostofthepoorlydesignedmallsthatareshuttingdownorconvertingintoGrade-Bofficespacesarethoseconstructed in the early years and have become old. This is at best amisconception,becausemarketexamplessuggeststhatmanyoldmallsstillfindrelevanceinamarketthatrewardsbetterdesignandmall management.

Inthenearfuture,weexpectmoremallstowithdrawfromtheretail realty business as a result of which, the business of average andgoodperformingmallswillimprove.Thisisamuch-neededcourse correction, which will continue to happen for some time. At JLL research, we estimate around 14 malls to withdraw from retail operations,havingacombinedmallspaceof3.5-4.5millionsqft.

Unlike commercial buildings, whose tenants are stable and share commonfacilities,managementofretailmallsiscomplex.Apartfromcatering to various brand categories, mall management also involves planningtherighttenantmix,spaceoptimisationandzoning,andconstantly studying shopper behaviour. Malls need to collect feedback from visitors to be relevant in all seasons. Otherwise, they will be out of the competition. Some malls perform poorly as they are unable todefinethemalltype,lackresearchoncatchmentandselectionofwrong partners. By turn of the current decade, it was evident that mall management was not in the genes of every developer.

Thehaphazardmannerofconstructingmallswithoutdue-diligenceleftquite a few malls sick. The overall vacancy rate today stands high at ~20% in retail malls across major Indian cities. On the contrary, malls that run successfully have vacancies of not more than 10%, with a selective few ones operating near full capacities. In recent years, we have seen bad malls beginning to succumb to the business viability stress and giving up hope. Consequently, these malls are either convertingintoGrade-Bofficespacesorgettingdemolishedtomakeway for a new asset class in real estate. Source:JLL-REIS

Source:JLL-REIS

Changing contract tenures across Indias malls

Anchor brands Other brands

2002-2003 18-20yrs 9-10yrs

2010-2011 12-15yrs 5-6yrs

2014-2015 9-10yrs 2-3yrs

*Details pertain only to lifestyle brands


4.3NEWBREEDOFRETAILERSTO DRIVE DEMAND FOR qUALITy RETAIL SUPPLyForeign retailers tap rising consumer appetite in India

The Indian retail real estate sector is currently witnessing rising demand for space coming from foreign retailers. This segment of retailers previously (in 2005) occupied not more than 15% of the total retail space in organised malls, which increased to 18% as of 2010, and they currently occupy close to 22% of space. Entry of big foreign brands such as Marks & Spencer and Zara has led to a jostle for space within the good performing malls. It is the entry of these players that has resulted in a divide between successful and unsuccessful malls, as they heavily favour the former even at a higher cost.

The presence of foreign retailers is only going to rise in India, giventhatmanybrandshavealreadyexpressedtheirintentionto start operations here. The following table enlists the names of foreign brands that have recently forayed into the Indian market and have started occupying space in malls across the leading seven cities

Online retailers in quest for a hybrid model

Increasingly,onlineretailersarebeginningtoforayintooffline/physicalstorestoresformatofretailing.Whilethismaybesurprisingformany,itisawayforthesebrandstodifferentiatethemselvesamongsttheclutterofwannabeonlinebrands.Lenskart,awell-knownIndianeyewearbrand that started online, has lately opened up stores in retail malls to directly connect with customers. Another brand called Freecultr, which is afashionapparelbrandcreatedonline,hasbeenswiftlymovingontotheofflinespaceinordertogivetheircustomersachancetotouchandfeeltheirmerchandise.Thebrandisusingitsofflinespacetobetterunderstandtheneedsoftheircustomersbycollectingfeedback,providingalternatepaymentoptions,usingthestoreasapick-uppoint,etc.Interestingly,Freecultrhasaquestionpostedontheirwebsiteaskingpatronstovoteforapreferablecityfortheirnextinstallation,indicatingthatthecompanyisplanningtorolloutmorestores.

Accordingtomarketsources,in2014,over70%oftrafficoneCommercewebsitescamefromthetop-10citiesofIndia.Thismeansthatavastmajorityoftransactions,particularlyincitieswithintier-IIandbeyond,happensinphysicalstores.TheIndianRailwayCateringandTourismCorporations(IRCTC)growthinruralIndia,throughticketingkiosksisaproofthatruralIndiaisofflinesavvy.ForonlinebrandstoexploittherisingspendingpowerthatexistsinIndiasruralmarket,itisimportanttomaketheirpresencefeltinsuchplaces.Paytm,anonlinepaymentsolutionscompany,hasalreadymovedofflinewithover50,000kiosksforloadingitse-wallet.Bybeingoffline,thecompanyhasbuilttrustwithcustomerswhowouldotherwisefeellostinthealreadysignificantonlinepresenceofotherbrands.

Sostrongistheurgetomoveofflinegloballythatforthefirsttimeever,AmazonUShasopenedaphysicalstoreintheUSinearly2015,anditplanstoopenmoresuchstoresbymid-2015.Thebiggestnightmareforeveryonlineselleristodealwithashoppingcartabandonmentrateof70-80%.Thesweetspotistobeinamiddlezonewhereonlinesellersconnectwiththeactualcustomersandalsopromotetheirproductsinmultiple avenues.

The presence of foreign retailers is only going to rise in India,

given that many brands have yet to enter India but have already

expressed their intention to start operations here

BrandsFirst store opening (year)

ExistingStorecount (nos.)

ASICS shoes 2015 5

G-StarRaw 2015 1

GAP 2015 1

H&M 2015 1

Uniqlo 2015 1

BurgerKing 2014 20

Harrys Bar 2013 7

PizzaExpress 2013 8

Kidzania 2013 2

FOREIGNRETAILERSEXPANDINGREACHWITHINLEADINGINDIANCITIES

(STORE COUNT IN NOS.)LATESTENTRANT-FOREIGNRETAILERSININDIA(2013-2015)




Residential real estate

5 Justlikeretail,residentialrealestatesectortooisgettinginfluencedby the rapidly changing consumer preferences. Developers operating in the residential space are ensuring they leave nothing to chance and have been toying with many ideas to keep the customer engaged. In the process, recent years have seen few transitions falling apartment sizes, more lifestyle amenities, entry of branded apartments, and introduction of new concepts such as senior living, serviced apartments etc. These transitions have caught the fancy of Indian homebuyers and they are likely to become a trend that will sustain the test of time. 5.1 APARTMENT SIZES ARE BEINGDECREASEDTOSUITAFFORDABILITy OF BUyERS Buildersareexploringinnovativewaystomakeresidentialhousingacross major cities more appealing to potential buyers at a time when it isincreasinglybecomingdifficulttosellexpensiveapartments.Buildersaround the country are emulating the famous sachet marketing strategyadoptedbyFMCGcompaniesinthelate1990s.

Unabletosellexpensivehomesinasluggishmarket,buildersacrossIndia are making smaller apartments without lowering the price per squarefeetandcompromisingonthequalityofproduct.Inthelastfiveyears, we have seen average apartment sizes falling across all major cities of India. The following chart shows the varying degree of fall in apartment sizes:

MumbaiMetropolitanRegion(MMR)witnessedthemaximumfallinapartment sizes on annualised basis, along with Bangalore, Chennai andKolkata.Othercitiesalsowitnessedvaryingdegreeoffallinmedian apartment sizes. The dynamics of apartment sizes have a tale to tell that developers are paying conscious attention to consumers requirements.

The fall in average apartment sizes across all top seven cities is a clear indication that developers intend to make houses affordable for buyers by reducing average apartment size instead of reducing the capital values. While property prices are not purely a product of developers discretion, the decision to alter apartment sizes as per the needsandspendingpowerofbuyersisdefinitelywithintheirambit.

It is relevant to note that buyers preference is changing with time. Several urban buyers are increasingly looking for new homes near theirofficelocationswhichcouldbesmallinsize.Theypreferahousethatissufficientenoughforhisfamilyrequirements.Thisdoesnotmean that they are compromising on their lifestyle, they prefer a small compact home equipped with all basic amenities.

Buyersareincreasinglyoptingforhomesthatareclosertowork-placesinordertoreducecommutetimes.Astheselocationsareexpensivecompared to the suburbs, buyers may be able to afford smaller units, whichismorethanacceptable.Toenjoytheluxuryofbiggerhomeswith good amenities, they prefer to buy homes in peripheral areas of the cities, from where the concept of second homes is emerging at outskirts of the cities.

DECREASINGAPARTMENT SIZES

ACROSS INDIAN CITIES

Source:JLL-REIS


5.2 BRANDED RESIDENCES HAVE SLOWLYCAUGHTTHEATTENTIONOF RICHER INDIANS; TREND APPEARSLASTINGThe increase in Indias economic prosperity has increased the number ofsuper-richpeopleinthecountry,anumberthathasgrownbymorethan200%inthepasttenyears,andnowaccountsfor3%oftheworldsmulti-millionaires[1].Asaresult,luxuryconsumerismhascontinuedtoincrease.Veryoften,exclusivityisexpressedthroughluxuryspending,whichisshownthroughthewearingofpremiumapparel,finediningatexpensiverestaurants,buyingofexpensivecarsandalsoowningaluxurioushome.

Currently, as consumers seek fashionable amenities in their residences,brandedhomesarequicklygainingprominenceinIndia.Typically,theseareluxuriousapartmentscombinedwithhospitalityservices provided by the likes of Hyatt, Four Seasons, Le Meridien and JW Marriott, renowned globally for their superior hospitality services. Someotherapartmentsarejoint-ventureswithwell-knownfashion

5.3DEFINITIONOFBASICAMENITIES HAS EXPANDED EVEN FORMID-SEGMENTHOUSINGOn the back of changing demographics (a population that is becoming younger)andrisingincome,Indianshaveexpressedtheirdesiretoalter their lifestyles as we have witnessed over the last few years. Be itshoppingforpremiumbrands,demandingqualityofficespaces,andpreference for quality amenities at residences, real estate sector has been witness to this stellar transition in consumer preference through these years.

Earlier, apartments with amenities such as swimming pool, gymnasium, club house, open green lawns, jogging tracks, etc. were limitedtohigh-endapartmentsonly.However,latelywehaveobservedthatconsumersofmidandupper-midcategoryhomeshavealsoshown strong preference for such amenities in a bid to improve their quality of life. This is despite having to pay slightly more for such amenities. Realising the demand for such apartments, developers have offered projects that meet both ends affordability for the city homebuyersaswellasqualityoflifeexperience.

City year

Mumbai 2011

Delhi NCR 2012

Pune 2010

Bangalore 2013

houses such as Armani and Swarovski, which lend their names while designing the interiors.

From the above table, it can be seen that Indian developers have startedtotie-upwithinternationalbrandnamesfromearly2010andthe trend of partnership with such brand names is increasing by the year.Typically,projectsinthiscategory,tomaintainexclusivity,resortto less number of units. Also, developers prefer to choose prime residentiallocations,preferablyintier-Icities.Also,suchprojectshaveatendencytocommand25-30%higherpricesthantheaverageforthesub-market,dependinguponthebrandingandfacilities.

Thetablebelowshowstheyearinwhichfirstbrandedprojectswerelaunched in different cities.

INDIAN DEVELOPERS AND THEIR INTERNATIONAL BRAND PARTNERS

Status and demonstration of success are the decisive factors for the rich, especially the nouveau riche, when buying these properties, forinvestment-drivenpurchasesareveryfew.Luxuryspacewithcommensurateamenitiesin top locations and targeted at the right class of people ensures that demand in this niche segment market is met with the right product. More and more developers are now working on this segment and we should see more launches inthenextfewmonths.Whilethetopdevelopersare roping in international designers to build luxuryresidencesinTierIcities,lesserknowndevelopersareemployingwell-knowndomesticdesigners to do the same in Tier II cities.

[1]WealthIndexbyNewWorldWealth,June2014hasrankedIndiaeighthandhometo14,800multi-millionaires(anindividualwithnetassetsofatleastUSD10million),belowcountriessuchastheUS,China,GermanyandtheUK,butaboveSingaporeandCanada.

Indian Developer International Brand Name Location

LodhaGroup Armani / Casa, Jade Jagger, Philippe Starck, DonaldTrump,KellyHoppen

Mumbai

A & O Realty F.TV Mumbai

Suntech Realty Disney MumbaiHomestead Michael Schumacher, Maria Sharapova Delhi NCR

Brys Tonino Lamborghini CASA Delhi NCRSupertech Disney, JW Marriott, Armani, Swarovski Delhi NCRPrestigeGroup Disney BangaloreEquinoxRealty Jade Jagger Bangalore

Bramha Corp F.TV Pune

Panchshil DonaldTrump,KellyHoppen,PhilippeStarck Pune

City Corp Swarovski Pune

Source:JLL-REIS

Source:JLL-REIS


Followingareexamplesofmid&upper-midsegmentprojectswithlifestyleamenities

Asaresult,theamenitiesofferedbyresidentialcomplexes,bothonaunit and project level, now represent one of the pillars of success for any residential project the other three being location, construction quality and pricing. This holds true for all segments of housing, frommid-segmenttoupper-midandhigh-endapartments.Theonlyexceptionherewould.behousingforlowincomegroup(LIG)andaffordable homes where price overrides all other requirements or criteria.

Definitionofbasicamenitieshasevolvedtoincludeallthosefacilities,whichareessentiallynon-luxurious.Intheforeseeablefuture,mid

5.4EMERGINGCONCEPTS:SENIORLIVING,SERVICEDAPARTMENTS,STUDIO APARTMENTS 1. Senior Living:

Senior living is a new category of residential real estate that is emerginginIndia.Currently,thereareapproximately30-35seniorliving projects at various stages of construction in the country. Since the concept is new, its contribution relative to the global senior living sector is minimal. As opposed to that, senior living homes accommodate 10% of the senior citizens in the United States and 4% inAustralia.Thereisahugedemand-supplygapwithinthesector,which suggests the growth potential is immense.

Senior living concept took hold in India in the early 2000s, but the sector started gaining any kind of serious momentum only after 2010. Also, growth in this sector has been happening in pockets rather than holistically. Most of the countrys senior living projects have cropped up in the western and southern regions. This is because these regions have:

Greaterprevalenceofnuclearfamilies

Higher literacy levels

A more pronounced desire among young professionals to migrate to other countries

Higher purchasing power, resulting in reduced dependency of seniors on family members

Having witnessed higher acceptance rate for senior living projects in the western and southern cities of India, developers in the northern and eastern cities of India are also jumping onto the bandwagon. FollowingaresomeexamplesofSeniorLivingprojectsacrossIndia:

PROJ

ECT

NAME

KalpataruAura

CITy

Mumbai%

UNI

TS S

OLD

90-95

NO. O

F qU

ARTE

R SI

NCH

PROJ

ECT

LAUN

CH

33

Lodha Splendora Thane 95-100 26

IndiabullsGreensNavi

Mumbai95-100 23

GodrejSummit Gurgaon 95-100 14

3CLotusBoulevard Noida 95-100 24

Prestige Tranquility Whitefield 95-100 16

Tata Housing New Haven

Tumkur Road

65-70 9

PRA Realty Lake District

Pune 85-90 19

KoltePatilLifeRepublic

Hinjewadi 85-90 14

Akshaya Homes Today

OMR 60-65 10

Clubhouses,gymnasium,swimming/toddlerspool,luxuriousspa/steam/massagerooms/jacuzzi,multi-functionallounge,Indoorgames/yogaroom,squash/tennis/half-basketballcourt,mini-theatre/amphitheatre,landscapedgarden / childrens play area

Landscapedgarden,clubhouse,swimmingpool,sportcourts,footballfield,cricket pitch, jogging track, auditorium, amphitheatre, caf, party hall, library

Club-house,swimmingandtoddlerspool,gymnasium,healthclubwithsteam/sauna room, jacuzzi, badminton court, indoor games, landscaped pathways around jogging circuits, cycling tracks and childrens play area

Multi-purposehall,fitnesscentre,amphitheatre,meditation/yogaarena,skating rink, swimming pool, indoor / outdoor games, kids play area

Swimming pool, amphitheatre, party lawn, jogging track, indoor / outdoor games, cricket academy, club house, gymnasium

Gymnasium,partyhall,indoor/outdoorgames,swimmingpool,kidsplayarea, yoga terrace, health club, amphitheatre, jogging Track

Childrens play area, indor / outdoor games, skating rink, green landscaped area, walking pathways, swimming pool, gymnasium, multipurpose hall

Large central park with botanical garden, clubhouse with swimming pool, gymnasium, retail mall, hospital, jogging track, cafeteria

Clubhouse, sports facility, kids play area, swimming pool, gymnasium, landscape garden / park,meditation center, multipurpose hall

Clubhouse, swimming pool, gymnasium, aerobics zone, indoor / outdoor games, mini theatre, party lawns, jogging track, childrens play area

andupper-midsegmentswillcontinuetowitnessincreasingallocationof space for such lifestyle amenities, now that the trend has set in. However, whether this trend will percolate further into affordable housingcategoryaswellisdebatable.Whileitisano-brainerthatincomes are rising faster and people occupying affordable homes in future would also prefer to have few of those basic amenities. However, given that pricing becomes an overriding factor, many affordableprojectswillhavetodependonexternalfacilitiessuchasprivatesportscomplexes,privategymnasiums,etc.Thephenomenonmaybelargelyrestrictedtomid-segmenthousingonly.

Project Name Developer Nameyear of Launch Location

Ashiana Utsav Ashiana Housing 2011 Pune

AthashriParanjape Schemes Construction Ltd

2010 Pune

Clover Renaissance Clover Builders 2014 Pune

Ashiana Nirmay Ashiana Housing 2014 Bhiwadi

The Nest AakritiGroup 2014 Bhopal

Primus EdenMantri Primus Lifespaces Pvt. Ltd

2014 Bangalore

Riva Tata Housing 2013 Bangalore

AntaraAntara Senior Living Limited

2013 Dehradun

2nd Innings Antara Senior Living Limited

2013 Surat

Ashiana Shubham Ashiana Housing 2015 Chennai

Source:JLL-REISSource:JLL-REIS


2. Serviced Apartments

AgrowingnumberofexpatprofessionalsarelookingtooverseebusinessoperationsinIndia.Andthisisexactlythefraternitythatispushing demand for serviced apartments in India.

Theconcept:Aservicedapartmentisoftenafully-furnishedaccommodation,whichisavailableforshort-termorlong-termstays.These apartments come with basic amenities for daily use, which include a kitchen with cooking range, kettle, microwave, a washing machine etc. If you dont want to cook or do the routine chores, you can even sign up for a complimentary breakfast, laundry etc.

The concept of serviced apartments works very well in the metros andlargertier-IIcities,wherestarredhotelsarenotoriouslyoverpriced.Often,theexecutivetrafficofmanyMNCsanddomesticcompanies is too erratic to justify a standalone company guesthouse. The best locations for serviced apartments are in and around the citys CBD and SBD areas. Currently, Indias highest demand and rate of development in serviced apartments is in Bangalore, Pune, Mumbai, Delhi, Chennai and Hyderabad.

3. Studio Apartments

Technically, studio apartments comprise of single large rooms that accomodate bedroom, living and dining areas, with compact kitchens andbathroomsattached.Whentheyfirstmadetheirappearancein the Indian residential landscape, studio apartments found favour largelywithbachelorsandDINK(Double-IncomeNoKids)familieswhospend most of their time at work. Nearly 80% of the overall demand forstudioapartmentsinMumbai,Delhi-NCR,Bangalore,PuneandChennai are driven by software professionals and recently relocated manufacturingsectorexecutives.Suchprofessionalshavegenerallyspentoverayearstationedinametroandfindthattheyprefertopayequated monthly installments (EMIs) on affordable homes that require minimalmaintenanceratherthanpayhighrentsforflatsandservicedapartments.

Studioapartmentsareusuallythefirsttobesoldoutinaresidentialprojectthatfeaturesthem.Theyarethemostcost-effectiveresidentialoptions for people who prefer to own rather than rent, especially in locations close to workplace hubs. Another factor that drives demand for such units is the ease with which they can be rented out or sold at aprofitonthesecondarymarket.Thisalsomakesstudioapartmentsaprime target for investors. Moreover, studio apartments do not attract highmaintenancecostsandmakeforhassle-freepurchasesaswell as resale.

FollowingaresomeexamplesofStudioApartmentProjectsinIndia:

Project Name Developer NameLaunch

yearCity

Callista JoyGroup 2012 Mumbai

Hiranandani Solitaire

Hiranandani Constructions Pvt. Ltd.

2014 Mumbai

Supertech Upcountry

(Safari Studio)Supertech 2010 Delhi NCR

Earth Studios Earth Infra 2012 Delhi NCR

Rohan Iksha Rohan Builders 2015 Bangalore

Esperanza UKnPropertiesPvt.Ltd. 2011 Bangalore

Blue Ridge Paranjape Schemes 2010 Pune

Megapolis Pegasus Properties 2009 Pune

Ekanta UnitechGroup 2013 Chennai

Xanadu SiddhaGroup 2008 Kolkata

Opting for a serviced apartment makes sense when the comparative cost of aqualityhotelroomforanextendedstay is prohibitive. It is a good option forinternationalexecutiveswhoshuttlebetweencitiesandrequirecost-effectiveshort/medium/long-stayoptions,andfordomestic business travellers shuttling internallybetweenregionaloffices.Thenextwaveofdevelopmentwithinthe hospitality sector would be in terms of an increased supply of such apartments. Hence, industry players including international ones such Ritz Carlton, Four Seasons, The Ascott Ltd., etc.arereadywithexpansionplanstoexploretheirpotentialandopportunitiesin India.

Project Name Developer Nameyear of Launch

City

Lalco Residency LalcoGroup 2011 Mumbai

Oberoi Oasis Oberoi Realty 2014 Mumbai

OhMyGod Baya Weaver 2014 Delhi NCR

Four Seasons Private Residences

3CCompany 2013 Delhi NCR

Ascott The Residence Ireo 2013 Delhi NCR

Vice Royale AjnaraGroup 2012 Delhi NCR

Homestead Service Residences

BrigadeGroup 2008 Bangalore

Triangle Skypark Apartment

Anish Projcts 2013 Bangalore

Oakwood Premier Panchshil Realty 2009 Pune

Seasons Naiknavare Developers

2009 Pune

ExamplesoffewServicedApartmentProjectsinIndia




Industrial and Warehousing sector

6 MajorchangesforeseeninIndiastaxationreformsandimprovementsin the physical infrastructure could bring about a tectonic shift in the way warehousing business is done in India. From merely being storage units,warehouseswouldbeupgradedandpositionedasasupply-chain partner to companies trying hard to meet the growing customer expectationsofquickdeliveryandmorevariety.TRADITIONALGODOWNSMAKINGWAYFORMODERNWAREHOUSINGIndias growing economic prowess has been primarily fuelled by the Services sector, whereas industrial sector remain languished, contributingmerely24%toGDPin2014.ThesectorscontributiontoAsiasGDPaveragesover30%.Asaconsequence,activityintheindustrial warehousing segment in India has remained lacklustre.

Economic hurdles in the form of inadequate support infrastructure, irregular power and water supply, poor logistical integration etc. resulted in industrial warehousing sector falling short of meeting occupier needs. Few high quality industrial warehouses therefore commandrentalpremiumsofabout30-40%.Arenewedfocusofthe union government on the manufacturing sector, combined with animprovinginfrastructureandimpendingtaxstructurereformsisexpectedtobringinsustainedmodernizationofthecountrys industrialwarehouseinfrastructureoverthenextdecade.

Godowns Modern warehouse

Typical area Under 50,000 sq ft 1 million sq ft or more

Typical rents INR12-15persqftpermonth or lower

INR18-21persqftpermonth

Cost of construction

INR1,000-1,200persqft INR1,500-2,100persq ft

Typical clients

Companies seeking makeshift arrangement

Companies seeking long-termpartnerships

Typical design

Plain vanilla structure Built-to-suitstructure

Contract period / terms

9-12months 5-6years(lock-in)

Difference between traditional godowns and modern warehouses

Twotypesofwarehouseexistscurrentlytraditionalstoragefacility(also called godowns) that largely operate in the unorganised warehousing space, and modern logistics centers operated by players in the organised sector. Market estimates suggests the organised warehousingsectorhasaminisculeshareofmerelyaround10-11%in terms of total warehouse space. However, in terms of value, they generatearound18-20%ofthetotalwarehousingrevenuesastheycommand a premium on account of superior quality and greater efficiencyofoperation.

The low share of modern warehousing as of today is because of two reasons outsourcing of warehousing and supply chain is still very limitedinIndia.Around40%ofwarehousesarestillcompany-ownedand the shifts from storage godowns to modern warehouses have only just begun.

Existingsetup Ongoing/Future development

Location planning driven by taxsavings

Location driven by supply chain efficiency

Economies of scale acheived withlimitedSKUs

Economies of scale acheived with largenumberofSKUs

Less automation, less usage of technology

Higher mechanization, use of latest technology

Small sized godowns, poor in design

Large warehouses




Changing business environment to reshuffle location criteria for warehouses

TheuniongovernmenthasannouncedApril,2016asthedeadlineforthecountry-widerolloutofGoodsandServicesTax(GST).Oncethereformisinplace,localtaxconsiderationswillhaverelativelylessimportance in deciding the location of a warehouse, whereas more operationalefficiencyparametersandcustomer-centriclocationsaregoing to become key parameters.

Themeteoricriseofe-commerceinIndiahasboostedthedemandfor allied industries and services, including warehousing. Warehouses areexpectedtotransformintomulti-modalconsolidationcentresformultiplesourcinglocations,cross-dockingcentresforretaildistribution,sorting centres for customer door deliveries, an assembly facility for finalfabrication,bundlingandloading.

Theimportanceofzero-defect,high-speedwarehouseshandlingbulkofsmalltransactionsandgreaterproductvariety,othervalue-addedservices etc., is much higher than what it was a decade ago. There will be fewer warehouses, but each of them will be bigger, faster, and more technologically advanced than their prototypes in the past.

The changing business dynamics is largely driven by increased customer focus and growing support from government. Customers of today demand more variety, higher quality and faster shipments. This hasresultedinexponentialriseinnumberofStockKeepingUnits(SKUs,orvarietyofproducts)thatwarehousesneedtostore.Demandforhub-and-spokemodelwarehousesisexpectedtoriseoverthenextdecadeonthebackofexpectationsofsamedaydeliveryorexpressshipment options by customers.

Schemes such as Make in India, Smart Cities, and Digital India provide incentivesformultinationalcompaniestoset-uplargemanufacturingfacilities in India. With low cost of labour along with governments push to enhance skills of rural Indians, as well as advancement of infrastructureintheformofGoldenquadrilateralroads,dedicatedfreightcorridors,theIndianindustrialwarehousesectorisexpectedtomakeaquantumleapoverthenextdecade.

Current innovations lay foundation for future transitions

7Location criteria for warehouses

Current ranking

Likely shift in rank

Presence in Major warehousing hub 1

Proximitytocustomercentres 2

Accessibility from main transit zones 3

Localtaxationrules 4

Availability of power, water etc. 5

Availability of labour 6

Proximitytofirestation,hospitalsetc. 7

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dignissim, magna vitae tempus ultrices, massa velit volutpat nisi, sed

finibus nibh ipsum vitae massa.


Real estate in India is still nascent compared to prominent cities inAsiaPacific(APAC),andthereisaconstantendeavourbyall stakeholders to make it grow faster and accomplish maturity. Inthecurrentmarketscenario,whereexistingdevelopersorsuppliershavescaleduptheiroperationssignificantly,newbreedofdevelopersarefindinginnovativewaystogrowandcarve-outa niche segment of their own. On the other hand, occupiers are strengthening their internal real estate teams to optimise on their portfolio of realty assets. Also, there is growing realisation that transparency, governance, and sustainability are important factors that will help catapult Indian real estate to international standards, attracting global recognition and more investments.

7.1NEWBREEDOFDEVELOPERSThe last decade has witnessed emergence of a new breed of developers in India who have made rapid inroads in the market outpacing older, more established rivals by adopting some unique selling propositions, which have fuelled their growth.

LodhaGroup,adeveloperwhocametoforeduringthelastdecade made its presence felt across the value spectrum has projects that range from affordable homes such as Palava (near Mumbai) andBelmondo(inPune)toluxuryprojectssuchasFiorenzaandWorld Towers (in Mumbai). This is quite unlike the conventional practices of developers such as Hiranandani and Oberoi who restrict their product categories to the premium segment only. Another developerwhoachievedexplosivegrowthinthelast10yearsis Omkar Realtors, having tapped into a niche segment of Slum Rehabilitation Authority (SRA) projects. Omkar rose to prominence afterthelaunchoflarge-scaleSRAprojectssuchasCresccentBay(inJVwithL&TRealty)(Bhoiwada,Mumbai),Altamonte(Kurarvillage,Malad),andOmkar1973(Worli).

FewotherdeveloperssuchasJaypeeGroup,IndiabullsRealEstate,andKoltePatilhaveexcelledinsecuringlandparcelsforlargetownshipsandmixed-useprojectsatsuburbanlocations.OtherssuchasMayfairRealtyhaveasignificantfootprintinredevelopment projects.

Innovativefinancingschemessuchasguaranteedrentalincomeforthefirst2-3yearsthatwereintroducedbydeveloperssuchasLodha (Dombivali project) and Rustomjee at its Urbania project (in Thane)areexamplesofotherinnovationswitnessedinthesector.

Marketingtacticstoohaveundergoneasea-changeoverthelastdecade with developers now rechristening precincts to make them more marketable Upper Worli (for Lower Parel in Mumbai) and New Cuffe Parade (for Wadala in Mumbai) by Lodha and Upper Juhu (for DNNagar,Andheri)byRustomjeeGrouparesomeofthecasesinpoint.

The equity IPO style marketing of apartments is increasingly being adoptedbydevelopersTataHousingconductedanonlineIPO-stylesaleofapartmentsinmultipleprojectsin2013,andLodhamarketedits upcoming Thane (Clariant Chemicals) project codenamed Big Bangin2015.Morerecently,developersaretoyingwiththeideaofsellingapartmentsonline,havingtied-upwithe-commercecompaniesTataValueHomestied-upwithSnapdeal.

Thenewbreedofdevelopersareextremelynimble-footedandareopentoinnovativepracticesinmarketingandfinancingstrategies,also focusing on untapped niche segments where they can specialise and sustain.

7.2RISINGPROMINENCEOFCRETEAM WITHIN OFFICE OCCUPIERS The current geographic scope of corporate real estate (CRE) teams responsibilitiescouldbelargelycityorcountryspecific.Thetrendis shifting towards scaling it up to a region or global level so as to optimizeworkspaceandcapturebenefitsfromworkforceproductivitygains.

CRE teams are increasingly becoming centralised and global, being moreformallyconnectedtotheC-suiteandbetterempoweredtodrivechange. This means, companies are beginning to view their property footprint on a global, portfolio basis. This should enable CRE heads to act with greater consistency across borders.

AconflictofinterestariseswhenCREteamsreportintothefinancedepartment as they promote a myopic view of cost rather than value generation from synergies. In the West, the strength of the CRE teams mandateiscurrentlystrongerthanwhatitwasthreetofiveyearsago,and the trend appears to be gradually percolating into APAC too, as pertherecentJLLsGlobalCorporateRealEstateTrends,publishedinJune 2015.

A centralised CRE team that has healthy interaction with various business functions will be able to actively challenge the business about

itspresumedspacerequirements,encouragingrationalexpectationsofrealestate.Increasingly,CREteamsareexpectedtodealwitharangeof tactical and strategic activity, thereby challenging the composition and skills of CRE teams amongst occupiers.

ExpectationsfromCREteamswouldincludeimproveworkplaceproductivity, improve asset (real estate) productivity, improve business productivity, and improve people productivity. A notable area in which CRE teams will be realigning with broad corporate strategy is sustainability.DecisionstooccupyGreenBuildingspaces,EnergyEfficiency,Portfolio-wiseriskassessment,Socialperformancetrackingetc. will be anticipated from CRE teams. This will compel CRE teams tohirecompetentpeoplewhocandeliveronsuchhighexpectationsthat will be placed upon their shoulders.

Practice of outsourcing CRE management may come to fore as the area becomes increasingly specialised or niche. CRE teams will requirescientificapproach,data-drivenstrategicvision,forward-looking and proactive style of delivery.

Itmaybedifficultatthispointintimetoascertaintheproportionof occupiers in India who have a dedicated CRE teams, although onaglobalscaleclosetoone-thirdoccupiershavemaintainedadedicated CRE team. A dedicated CRE team acts as a bridge between organisation structure and the strategic intent.

USP Examples

Presence across value-luxuryspectrum

Lodha,Kalpataru

ExpertiseinSRAOmkarRealty,NeumecGroup,

Shapoorji Pallonji

ExpertiseinRedevelopmentMayfair Housing, Man infra,

Paranjape Schemes

Skills in land acquisitionJaypee,Indiabulls,KoltePatil,

Lodha

Ability to attract massive PE funding

3C/LotusGreens,ATS,Embassy,RMZ, Panchshil

Innovativefinanceschemes Lodha, Indiabulls, Rustomjee

Innovative marketing tacticsLodha,TataHousing,Kanakia,

Dosti Realty

Online salesTataHousing,GodrejProperties,

Sobha, PurvankaraSource:JLL-REIS


7.3CONSISTENTRISEINREALESTATEMARKETTRANSPARENCYAPPEARSLIKELYTheJLLsGlobalRealEstateTransparencyIndex,whichisreleasedevery two years and evaluates and ranks 102 countries worldwide for their real estate transparency quotient ranks India the 40th most transparent market.

Consideringthetopcities(tier-I)inIndia,theirrankinghassignificantlyimproved from 50th position in 2008 to 40th position as of latest 2014 study. As per the report, the improvement was largely made on the back of advancement in market data availability. However, in the past, India has been subject to drop in ranking (in 2008 and 2012) owing to reasons such as lack of transparency in its transaction processes, high costs of investment transactions, and weak professional standards of localagents.GiventhatmanyAPACcitiesaremovingfastintermsof improving their transparency quotient, thereby becoming more attractive to global investors; Indian cities must make faster progress.

It appears, however, that recent developments with regards to property marketregulationandintroductionofnewfinancinginstrumentshaveimmense potential to improve Indias position. Indian government is likely to enact the Real Estate (Regulatory) Bill soon, seeking to improve regulation over real estate agents and quality of land registry records.

After several rounds of discussions on introduction of REITs in India, lastyearthegovernmentfinallymadetheplungeandintroducedit.REITsarehighlysuccessfulandbeneficialinseveralcountriesworldwide in terms of providing less risky investment options in real estate to small and big investors, regular dependable income to unit holders,drawingmassiveFDIinthesector,providingeasierexitoptionsandliquiditytocash-strappeddevelopers.

More generally, India is likely to see faster improvements in real estate transparency, with the new government undoubtedly in a stronger position to push through economic reforms.

7.4AGREENBUILDINGSMOVEMENTIS UNDERWAy IN INDIA

JLLS REAL ESTATE TRANSPARENCy INDEX

GREENBUILDINGREGISTRATIONSONASTEADy RISE IN INDIA

INDIAMILESTONESONGREENBUILDINGSBYIGBC

2003

Police Bhavan at Gulbarga,Karnataka:Indiasfirstgreenbuilding

2012

KarnatakaStatePoliceHousingProject:firstpre-fabricatedbuildingIGBCcertified

2008

LaunchIndiasfirstgreen homes rating program for residential projects

2014

India crosses 2 billion sq. ft. of green building footprint

2008

RajivGandhiInternational Airport, Hyderabad: First green airport facilitatedbyIGBC

2015

Indiacrosses3billion sq. ft. of green building footprint

2001

IndianGreenBuildingCouncil(IGBC)formedby CII

2011

LaunchofIGBCgreentownships rating system; MOU with CREDAI (a builders association) to promote green buildings

JLL global researchSource:IGBC

Source:IGBC

Being the fastest growing nation in the world, India also faces the challenge of balancing between industrial advancement and rising levels of pollution / depleting natural resources. Needless to say, sustainable development will be increasingly sought to effectively address these concerns. Real estate, on its part, can help by designing and constructing buildings that conserve resources such as water and electricity, and increase usage of recycled materials.

Inlightoftherequirement,theIndianGreenBuildingCouncil(IGBC),partoftheConfederationofIndianIndustry(CII),wasformed in the 2001 with a vision to encourage sustainable practices and make India one of the global pioneers in sustainable builtenvironmentby2025.Overtheyears,theIGBChascreateda reputation for driving the change amongst builders and other real estate stakeholders.

The importance of the impact that buildings have on human health, environment and the economy is dawning fast on developers. It is encouraging to see that a growing number of private developers inIndiaplananddesigntheirprojectswithaviewtomaximizingenergy conservation and environmental sustainability. As of June2015,atotalof3,191projectsareregisteredwiththegreenbuildingscouncil(theIGBC)havingacombinedfootprintof3.05billionsq.ft.ProjectsregisteredwiththeIGBCisincrementallygrowingataCAGRofover50%inthelast10years.


CONCLUSIONTheon-goingtransitionintheIndianrealestatesectorisinterestingandactsasareflectionofwhatliesahead.AsIndianarrowsitsgapwith real estate trends and practices of more advanced nations in the West and APAC, everyone from local developers, government, institutional investors and occupiers / homebuyers have got things to look up to. The relationship between developers and investors is poised to become more synchronised, enabling transition from family-drivenrealestatebusinesstowardsamoreinstitutionalisedset-up.Thiswillbeabigpositiveformarkettransparency,asdomesticrealestatesectorswillcriss-crosstonewheights.Ontheotherhand,occupiers and consumers will have a variety of options of choose from, given the market segregation and growth of niche segments, whichwillenablechoiceonthebasisofcorporate/individualprofile.The governments role as an enabler for smooth sailing through this new course of transition will be keenly watched by domestic and international stakeholders.

Authors

Suvishesh Valsan

Assistant Vice President, Research [email protected] +912239851309

SuvisheshjoinedJLLin2013andisresponsiblefordrivingthoughtleadershipandresearchpublications,beenpartof the Research & Real Estate Intelligence Service (REIS) team. Based in Mumbai, he also contributes to bespoke researchpublicationsforallsectorsoftherealestate.InhisoversixyearscareerpriortojoiningJonesLangLaSalle,hehasservedinfinancialinstitutionsandresearchconsultancyfirms,specialisinginmacroeconomics,assetallocationstrategyandbusinessresearch.SuvisheshholdsaMastersdegreeinEconomicsfromtheGokhaleInstituteofPolitics& Economics, Pune.

Vinay Upponi Assistant Manager, Research [email protected] +919930205302

Vinay is responsible for Real Estate Intelligence Service (REIS) analytics, bespoke assignments, and research whitepapers.Hehasextensivebackground,spanningover6years,inbusinessresearchhavingworkedatShoppersStop,CRISIL,andEmiratesGroup.Hehasworkedonconsumerdemographicsandrealestateresearchwithparticularfocus on commercial real estate. He has passed 2 Levels of the CFA (AIMR US) programme and is a Bachelor of Commerce from University of Mumbai.

Ketan BhingardeAnalyst, Research & [email protected] t:+912239851310

KetanBhingardejoinedJLLResearchteamin2013.BasedoutofMumbai;heleadstheMumbairesidentialmarkettowards research and REIS and contributes to the quarterly reports on Mumbai residential market along with the monthly newslettersandbespokeresearchassignments.KetanisaMBAinUrbanInfrastructure&RealEstateManagementfrom Amity University and Bachelor in Mechanical Engineering from Mumbai University having more than 2 years of experienceinResearch&REISwithinJLL.

Ashutosh LimayeHead, Research and REIS +912239851319 [email protected]

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jll research - indian real estate - heading towards a tectonic shift

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