India: Opportunities in real estate

It may have been a tough year for India’s economy, but the real estate sector continues to defy the sceptics, offering compelling opportunities for investors and developers alike. For those willing to look in the right places, the sector still has much to offer the discerning investor.

This was not necessarily the consensus position at the start of 2012. Several firms were warning of a downturn in the sector, with Fitch Ratings downgrading its 2012 outlook for real estate to negative. According to a statement by the company in January of this year, “Fitch Ratings says it has a negative outlook for the Indian real estate sector in 2012 due to weak overall demand and higher construction costs, which are likely to continue to squeeze margins. Improved macro-economic conditions leading to improved demand would have the potential to improve cash flows to real estate companies and see the outlook revised to stable”.

While this scenario has not fully played out, with the Indian economy stagnating somewhat and facing its lowest growth rate in almost a decade at 6%, it is not all bad news for the real estate sector. Indeed, both the structural issues that the government is facing, and the nature of the country’s current growth, offer certain opportunities for developers in the sector. India’s worrying current account deficit, for example, has not had an entirely negative effect on real estate demand.

The deficit, which narrowed to 3.9% of GDP in the second quarter of this year, has weakened the rupee. This is a cause for concern, but it seems to have stimulated additional demand for property investment among non-resident Indians (NRIs). According to a survey carried out by Sumansa Exhibitions, the organisers of the Indian Property Show in the UAE, 89% of NRIs in the UAE are considering using their additional purchasing power to invest in property back home.

Honey Katiyal, the CEO of Investors Clinic, a Dubai-based Indian real estate consultancy, told local media, “Properties continue to be a preferred choice for expat Indians for investment and asset creation. What they look for is a good brand to invest in and a price point that is good to enter. For NRIs, a reputed developer with a good track record, quality and possible price appreciation is an important factor”.

Perhaps more importantly, the government has been looking at ways to encourage capital inflows to deal with the problematic current account deficit. This has led to allowing majority foreign ownership in multi-brand retail outlets, which could support activity in the real estate sector. Indeed, greater foreign participation in the retail segment is likely to push up demand for retail space, a welcome trend for an increasingly important segment of the market.

Nonetheless, it is likely to be the commercial office segment that continues to receive the most attention. While economic growth slowed to 6.5% in the 2011/12 fiscal year, the services sector, a core component of white-collar office jobs, grew by 8.5%. As such, Jones Lang LaSalle, a global real estate services firm, argued in a September report that the office sector is unlikely to witness a slowdown.

The report noted, “This indicates that a major slowdown in office real estate demand is not likely to occur – the services sector generates the highest demand for office space in the country”. Indeed, the services sector accounted for 63% of GDP in 2011/12 and as much as 70% of the demand for commercial office space in India’s seven major cities, according to Jones Lang LaSalle.

Given these core favourable demand dynamics, the commercial office segment seems to be attracting the most investor interest. In October, for example, Blackstone, the US private equity firm, closed on the biggest-ever commercial real estate acquisition in India, buying a 50% stake in Embassy Property Developments for $200m. The Bangalore-based company owns three business parks, totalling more than 10m sq ft.

This deal follows a Citigroup transaction earlier in 2012 in which the company acquired a Mumbai office building for Rp9.85bn ($124.62m). This suggests that confidence remains in the commercial real estate segment, particularly for tenant-occupied space with a track record.

Indeed, in certain locations, this is still a good time for Indian office real estate. For example, the central business district (CBD) of Delhi continues to experience strong rental growth, driven by continued demand and limited supply. According to a report by BNP Paribas, office rents in the CBD had increased by 16.7% in the second quarter of 2012, compared to the same period in 2011. Office space in the CBD can now command rents of Rp350 ($6.37) per sq ft per month.

With such figures, one may have a hard time telling landlords in the capital that the market is struggling. Therefore, while the economy has dampened enthusiasm in the sector, there are still opportunities if you know where to look.

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