PREDICTIONS FOR INDIAN REAL ESTATE - 2009 by JLLM

JONES LANG LASALLE MEGHRAJ: PREDICTIONS FOR INDIAN REAL ESTATE - 2009


Asset class: Office

• Even the well–established CBDs markets are likely to face vacancies in 2009, as the first impact of the global recessionary economy is being felt by the financial and other fore-runner organizations. The vacancy may be further fuelled in CBD areas by the consolidation moves of many organizations.

• We will also see a reversal of the trend witnessed over the last two expansionary decades where large organizations moved from owned to leased assets. Given the drop in prices and availability of choice properties, this will be a good time for surviving organizations to announce their new leadership positions through trophy purchases. Jones Lang LaSalle Meghraj is currently transacting in many such mandates.

• This CBD vacancy rate, if triggered, can add significant pressure to the upcoming/newly developed premises in upcoming front-office districts such as Lower Parel in Mumbai and Nehru Place in Delhi.

• While the sentiment in the US and Europe towards outsourcing is positive in the long term, as the corporations there realize its need more than before, the active decision-taking for expansion by BPOs is totally suspended for the moment. We do not expect this to change in the 2009. Hence, the pressure on upcoming and announced projects –especially SEZs – will continue in 2009.

• In 2009, IT SEZs will also experience further pressure from the fact that the STPI concessions may be extended for another couple of years. While these concessions are important for IT companies’ survival during the recession, they will adversely impact SEZ developments.

• In 2009, the peripheral areas of metros as well as the Tier II/III cities will need to compete with the central or secondary business districts for the same set of talents, thus dissolving the clear segmentation which was emerging and separating various micro-markets over the last couple of expansionary years. Newly developed or announced projects are especially going to suffer and may see continued vacancy in 2009.


• However, 2009 will also see practices in the real estate business become more organized and professional, as they did in the late ‘90s and early 2000s with the introduction of FIs, foreign money and the creation of Government-supported large development formats. This time around, a similar professional approach may reach warehousing land acquisitions.






Asset Class: Retail

• 2009 is expected to be a year of consolidation for Indian retail sector. As a result of adoption of best practices and restructuring of business models by the retailers, organized retail is expected to realign itself to the market conditions and create new areas of growth in 2009.

• Given the market malady being faced by developers and retailers alike, it is possible that partnership models of growth through mechanisms such as revenue sharing would become more prominent.

• More deals are going to get renegotiated as priced drop in over-priced locations. The process of rationalization should reach its peak by March, 2009.

• In 2009, it is anticipated that the supply pipeline may witness further stalling

• Most players’ expansion plans for 2009 will slow down considerably. However, Projects that are planned well (incorporating approaches like proper zoning, optimal tenant mix strategies), implemented with high quality standards and incorporating appropriate mall management practices are anticipated to be successful

• In 2009, premier brands will look at Tier II cities, but certainly not Tier III. Luxury brands will stick to metros.

• Pan India mall developers will look at more practical rentals in 2009.High streets may see consolidation with a high possibility of a revenue-sharing model in terms of the overall cost-to-retailer on many high streets.

• For 2009, Jones Lang LaSalle Meghraj has seen a decisive upscale in transactions in the hypermarket category. However, the demand is clearly higher for stand-alone high street locations rather than mall-based locations.


Asset Class: Residential

• Much of the previously anticipated demand for 2009 will not see the light of day due to a confluence of various factors. Developers have only now begun to come down on their rates, and a lot depends on whether how many of them will follow suit in the coming year. The much-awaited drop in interest rates for home loans has happened, but not at a level sufficient to boost the residential sector out of the doldrums entirely.

• In response to the considerable demand for such formats, we anticipate more national players to launch affordable housing projects in 2009. However, since different cities will have different costs for land and construction of such homes, developers will have to define ‘affordable housing’ on a city level.

• We expect that at least 20% of the current players in residential real estate will begin to think on a portfolio rather than project level. So far, developers have been pricing their projects according to their expected profit margins vis-à-vis the cost of land in different locations. Buyers, however, are now not prepared to consider the initial and appreciated cost of land as a valid component of the buying price. When we speak of ‘portfolio level’, we mean that at least one fifth of these developers will now cross subsidize their construction costs internally and sell their project at prevailing selling rate.

• In terms of sales volumes and market recovery for 2009, there are two distinct and equally possible scenarios:

a) Buyers who were waiting for rates to drop to levels they could afford will make their moves when rates fall into their budget range. If this happens, developers will be able to move on to more projects and pull the market out of stagnation.

b) Buyers will continue to wait for the period in time that delivers the best rates – a point that may come and go without them being aware of it. They would, in other words, act more in the capacity of investors rather than end users. The fact that the purchased properties will appreciate over time in any case would be ignored in such a scenario. If this happens, market recovery for residential real estate would be further delayed.

• If rates drop by between 20-25% in the mid-level and high-end home segments, we will see a return of the previous effervescence. If they do not, developers will put on hold their expansion plans. This would lead to a clear shortage over 2-3 years, which would not be addressed, since there would be neither buyers nor sellers. In such a scenario, we will see complete stagnation in residential real estate.

• For 2009, Homebay Residential agency (a wholly owned subsidiary of Jones Lang LaSalle Meghraj) has registered deals in the luxury housing segment, but the overall demand remains muted. There is a significant NRI component to the overall buyer corpus, but the watch-and-wait stance is still evident. A certain number of transactions in the luxury segment that have remained on hold due to conflicting rumors concerning the optimum time to buy may crystallize in 2009.


Real Estate Capital Markets

• Judging from the mandates chalked up for execution, 2009 will see a good number of capital markets transactions. Then period from March 2009 to December will be a decisive time. All business sectors have been hit by the economic meltdown, and many will generate liquidity by divesting non core assets such as real estate.

• Type of enquiries are likely to be in the higher risk adjusted return segment with Greenfield opportunities seeing limited interest as most investors will be investing in Asia with chasing liquidity and not higher return. Residential projects in the middle income segment are likely to see renewed interest with interest rates declining in 2009.

• In 2009, we will also see the decisive arrival of sale-and-lease-back deals, in which owners currently occupying their properties will sell them and continue as lease tenants. Corporates have to address liquidity issues in their core businesses and are now eager to unlock the value of their non-core assets.

• In 2009, the biggest buyers would be FDI-compliant India-dedicated funds, domestic funds, high networth individuals and cash-rich corporate houses.


Projects & Development Services

2009 will be guided by dynamics of two contradictory forces:

1. Recession trend guided by capital market slow down, decrease in demand, caution in cost and spending.

2. Governmental and social efforts to regain growth momentum.

We feel that for first 3 to 6 months the impact of point 1 will be more significant while in the later half of 2009 the impetus and support to growth from government and global community will be more visible. Also it has been observed that a fall in economy is followed by increase in construction activity.

• The life cycle of projects normally last from 6 to 36 months and the revenue flow for projects are in general predictable. The finances and end use for most big projects are well planned and hence, significant proportion of ongoing projects of 2008 will go on in 2009 and construction at site will continue.

• While there has been slow down in new projects, the requirements for special use like consolidating operations of different offices of a company into one office, re-stacking and optimizing use of existing facilities, low cost housing etc will increase

• A segment of clients also feel that this period is apt for construction with lowering of prices for construction items and consultants fees and will look forward to use this lean period for construction and be ready for launch when the cycle again peaks.

• Individual office buildings as company’s corporate office use will increase due to reduction in the cost of acquisition.

• There will be more focus on seeking expert advice for risk analysis, cost control and efficient project management services. The demand for development advisory services like feasibility study, pre-investment due diligence, procurement strategy, value engineering etc should increase.

• Sectors like Infrastructure, Industrial, Health care, Life sciences, Logistics, R&D, Educational centers should get more attention in 2009

• Innovative and new methods of construction will be sought to reduce time and cost & increase quality of projects.