The Government has recently announced a quarterly growth rate of 7.9% in the last quarter of FY2016, which is among the highest reported GDP growth rates over the past few years in India. Therefore, despite a muted global economic scenario, India's domestic economy has been on the recovery curve. In line with macro-economic growth trends noted in the quarter, several sectors also witnessed an annual growth rate higher than 7%, including the real estate services sector, which noted the highest growth of 10.3% for the period.
Underlining India's position as a robust commercial real estate market, its appeal as an established outsourcing hub, is expected to continue to fuel expansion initiatives from corporate real estate occupiers based out of the US and the European Union (EU). With the overall sentiment among corporate space, occupiers having been optimistic in recent times. India will continue to retain its position in the global economy, with better growth prospects expected to support commercial real estate transactions in 2016.
Corporate Office Market
Following a particularly strong fourth quarter of 2015, the first quarter of 2016 was comparatively sluggish as most corporate space occupiers were still strategizing their real estate plans for the year, with limited transaction decisions being implemented during the January–March 2016 period. Corporate office space take-up during the quarter was led by Delhi National Capital Region (NCR) with a share of 31% of total transacted space in the leading cities, followed by Mumbai (23%) and Bangalore (17%).
Industry sectors such as IT/ITeS and banking / financial services are likely to remain the dominant demand drivers for office space in the country, with manufacturing / engineering, e-Commerce, and pharmaceuticals being the other active sectors that are likely to generate demand for corporate real estate space. Occupiers are also likely to keep a strong check on space utilization ratios and innovate their workplace strategies. Demand for SEZ space and pre-commitments in projects nearing completion are expected to continue to improve in the coming months.
Rental values were largely stable across most Central Business Districts of leading cities in the first quarter. Furthermore, increased occupier demand in quality IT and SEZ projects in Mumbai, NCR, Chennai, Pune, and Hyderabad, resulted in a quarterly rental appreciation of 2–10%.
Office space leasing demand is expected to remain steady in the coming months, backed by new and expansionary activities from technology firms, domestic / multi-national financial institutions, engineering / manufacturing firms, along with the culmination of pre-leased space in newly completed developments.
In contrast to developments in the corporate office space, demand for residential space remained subdued during January–March 2016 period. Despite price movements remaining stable, home buyers' demand remained low in recent months due to existing high price points coupled with a cautious buyer sentiment. In many ways, the year 2015 was a defining one for the residential real estate segment in India. This was the period when the market began to evolve, along with customer expectations as well as market dynamics. The most important change among these, perhaps, came about in the outlook of the home buyer.
Unlike previous years, we were no longer dealing with end-users who were satisfied with offers and property brochures alone. The key words in customer satisfaction for home purchases in 2015 became project delivery, pace of construction progress, and product quality. The inventory of completed and available housing units in most micro-markets of leading cities in the country, moreover, helped home buyers to make their purchase decisions. Much like the home buying process evolved markets around the world, the residential real estate segment in India caught up with the going trend as well, by enabling investors and end-users to take informed decisions with ready products rather than on the basis of launch information and product literature.
Apart from the Government's renewed focus on large scale urban infrastructure and development of affordable housing, the Central Bank, for its part, remains accommodative towards further easing of interest rates. These moves could help spur property purchase decisions, propelling the market forward. Several regulation and policy initiatives launched recently—such as the Real Estate Bill—are also expected to boost home buyer sentiments.
The residential market is expected to see a qualitative change, going forward. While home buyers will continue to remain discerning in terms of quality products delivered without delays; development firms will likely turn their focus on quality construction and on timely delivery of their projects. Monetary easing, meanwhile, is expected to be fully passed on to end-users by 2016. It is hoped that the Government will continue to provide incentives to sectors such as construction materials, while aggressively driving urban infrastructure projects.
On the commercial retail real estate front, brands displayed robust leasing demand in key cities with a number of new retailers who entered the market, while others expanded their presence. Although the lack of quality supply and scalability remained the key challenges for the Indian retail market, foreign retailers continue to view the country as a positive market and a key growth priority within the Asia Pacific region. Alongside the rise of online retail, physical stores continue to remain strong as well.
Overall market sentiments during the first quarter of 2016 remained upbeat as the economy continued to improve. European brands accounted for the bulk of shopping space demand in Q1 2016, followed by US groups. Within the country, domestic retailers have been expanding steadily, especially in tier-II and III cities and towns, largely led by F&B groups. Overall, retailer demand was broad based in Q1 2016, although fast fashion and F&B remained the two most active retail segments. The most popular formats within the F&B segment continued to be quick service restaurants (QSRs), coffee shops and cafés. The growth of the mid-range fashion sector continued. The F&B and fast fashion segments are expected to remain the primary retail real estate demand drivers.
By and large, the year 2016 is perceived as a positive year for the Indian retail market. Leasing activity is expected to witness an uptick over the next few months. Although shopping centers are the focal point of F&B and fashion brands, retailer interest is going to be mainly confined to the top shopping centers run by the most reputable operators.
Recent quarters have seen several shopping center landlords reduce shop sizes to create space for new overseas brands. More retailers are also implementing omni-channel retail strategies by establishing online portals as well as strengthening their network of physical stores.
Opportunities with New Policy Regulations
Apart from India's sound economic growth environment, several policy initiatives undertaken by the Government in recent times are viewed as opportunities for the sector to grow further. The much awaited Real Estate (Regulation and Development) or RERA Bill was approved by both houses of the Parliament during March 2016—covering residential as well as commercial realty segments. Although the actual implementation of the Bill can only be effected once all states create their respective state level authorities, an effective implementation of this Bill can be a game changer for the real estate and construction sector in India.
Key Challenges Faced by India's Realty Sector
espite positive policy initiatives for the sector and a robust macro-economic growth story, a number of issues continue to plague India's real estate market. The most important among these is perhaps the awaited passage of the Land Acquisition Bill. Stringent land acquisition norms currently hinder the development of large scale infrastructure and urban development schemes. A political consensus has to be reached and uniform policy across states has to be implemented for faster project execution.
Sustainable development of our urban built environments is another key challenge. It is important to ensure that our cities are SMART. This could be achieved by enhanced focus on mass transit systems, Green construction methods, creation of Green spaces, and sustainable technologies for managing water, waste and energy resources, among other aspects.
Despite the directive for a regulatory authority for the sector under the RERA Bill, decentralized implementation under the aegis of a central planning authority may pose a challenge. The responsibility for implementation must rest with state governments and city municipal authorities, however, with an effective monitoring mechanism in place. Private participation is yet another challenge, especially for Affordable Housing and large scale infrastructure creation. Policy and process barriers should be addressed to increase private participation in key infrastructure projects. This will bring in the necessary capital and management experience needed for successful project execution. Lastly, the ease of investment flows into the sector from overseas as well as domestic sources is an area that would need careful attention for further development of the sector.
Overall, however, the abundance of a technically skilled workforce and India's demographic and economic dividend have created immense opportunities for a thriving real estate market. Furthermore, these factors are likely to help override most concerns posing as challenges for the growth of India's real estate sector.
India will continue to retain its position as a bright spot in the global economy, with better growth prospects expected to support office space leasing in 2016. Even though the global economic scenario remains muted, India's appeal as an established outsourcing market will still continue to fuel expansion initiatives from corporate firms based out of the US and EMEA. Positive domestic macro-economic sentiments are likely to propel leasing from domestic corporate firms as well. Additionally, reforms such as clearance to REITs, relaxed foreign investment norms in the real estate sector, and the implementation of the RERA Bill (which also covers the commercial segment) might work towards enabling ease of doing business in the country; while supporting corporate entities entering or expanding their footprint across leading cities.
The Government's recent GDP growth announcement, moreover, is expected to impact consumer sentiments positively. Coupled with targeted Government initiatives, this is likely to boost real estate growth in the country—particularly in the residential segment. Several cities continue to face subdued home buyer demand, resulting in unsold inventory levels. Against this backdrop of improving economic growth, therefore, it is imperative that the Central Bank work with various commercial banks to ensure that the full impact of monetary easing is passed on to home buyers. In addition, the Government should take steps to ease regulatory, infrastructure and policy bottlenecks that are currently stifling the revival of the housing sector in India.