Middle Income Housing (MIH)– the next big real estate opportunity

Reveals Cityscape India 2009 survey

Mumbai, September 4, 2009: An all India survey conducted by Cityscape India reveals that real estate consumers across India are rooting for projects in the MIH (middle income housing) segment, which the real estate industry needs to introspect closely. Over 53% respondents felt that developers are not catering to the rising emerging middle class in India. Over 79% of the respondents with income of Rs. 6L per annum stated that the ideal affordable home would be in the range of Rs. 20Lacs – Rs. 30Lacs. Qualitative response indicates that most affordable housing projects are located in areas which are extremely distant from the main city and also lack infrastructural eco-systems.

Majority of the respondents felt that reputed developers only cater to the upper classes and do not have anything to offer the middle of the pyramid. The survey also revealed that ‘low cost housing’ projects of 400sq.ft were not typical projects that the middle class would buy into due to lack of infrastructure, poor quality of materials and lack of space for family.

Graham Wood, Cityscape India Group Director comments, “The Indian real estate industry need to listen actively to consumers across India. Their feedback is clearly indicating that MIH is a segment which they need to now focus upon actively. Affordable housing is a different category from MIH; and as the real estate market matures – developers will specifically need to come up with MIH solutions in various cities. Developers have to innovate to bring prices to realistic levels to win back their trust”

Consumers also feel that the 2006 real estate boom was primarily driven by investors and builders, not the real buyers. Today, very few developers are able to keep commitments on timely delivery of projects as banks have stopped lending and genuine buyers have lost trust in the industry.

The Cityscape India conference will have an opening session in Mumbai on December 2009 to discuss the above with leading influencers in the real estate industry.

About Cityscape India

India’s largest and only business-to-business real estate investment and development exhibition and conference will once again take place from 9 – 11 December 2009. The world’s top, real estate developers, leading architects, consultants, engineers and other professionals involved in the design and construction of real estate will attend Cityscape India to create joint ventures partnerships, source investment opportunities, build profitable relationships and access unbiased, in-depth information on the Indian real estate market

For more information please visit www.cityscape-india.com

JLLM Update - OFFICE SPACE TRENDS - Q2-Q3 2009

OFFICE SPACE TRENDS – Q2-Q3 2009

Pawan Swamy, Managing Director ( Western India) Jones Lang LaSalle Meghraj

Since the last quarter, there has been increased office space off-take in the top cities of Mumbai, Delhi and Bangalore. Vacancy levels have actually decreased as a result of a pep-up in office space transactions. This has taken the pressure off rentals, and we have not seen a dip in these values in the recent past. In other words, the hitherto witnessed downward trend in rental values has actually been arrested now. We expect them to stay flat the levels they are right now over the next quarter.

RENTAL VALUE MOVEMENT

In these three key Tier 1 cities, there has definitely been a declining trend from the peak rental values witnessed a year back. Depending on locations, project and sub-market dynamics, this decline has been anywhere between 25-40%. However, values have remained steady over the last quarter, showing no significant decline.

Interestingly, while rental values have remained steady, capital values are beginning to strengthen and the yield has started to compress more. This can be attributed to the fact that a number of office space owners began selling their holdings a couple of quarters ago in response to the liquidity crunch. There has been a significant improvement on the liquidity front of late; Mumbai was the first to witness this, followed by Delhi and Bangalore. The result of the improved fiscal situation has resulted in fresh access to debt for developers and investors, enabling them to assume a holding position on their properties.

DEMAND

In the current context, we note an indubitable improvement of overall sentiments in the commercial space sector. In clearer terms, we are now looking at a significant increase in demand, which is a decisive change from the scenario just a few months ago. The pattern that emerges is one of multinational occupiers beginning to look more favourably at a market where values have rationalized by 25-40% over the last 12 months. These occupiers justifiably anticipate that values are likely to strengthen again over the next 12-14 months, encouraging them to take a position in this market. They are now keen to lock the best of the available opportunities so that their firms can derive consummate value in the long term.

MICRO TRENDS

Of late, we have seen an emerging trend of Indian companies preferring to buy rather than lease space. Religare, the Stockholding Corporation and the National Stock Exchange have already made purchase decisions, and we anticipate that more companies will see the value that the actual possession of office space assets adds to their balance sheets going forward. As of now, multinationals are still displaying a degree of scepticism about taking a ‘buy’ position.

In terms of segments, there been no significant growth in the IT segment - most of the activity we are witnessing is on the corporate side, predominantly among multinationals with multiple offices in the same cities that are looking at consolidation. These entities are now actually signing deals. However, we have noted that most of these are pre-lease transactions, and not necessarily in context with ready buildings.

THE WAY FORWARD

It is critical that one understands that among all the asset classes, the one impacted most the by the global economy is office space. Residential demand has already made a remarkably fast comeback, and capital markets are opening up with the return of liquidity. Hotel rates are also beginning to firm up under the improving economy. However, the health of the Indian office space sector depends on how multinational occupiers fare at the global level. While the sentiments in country in terms of the economy in particular and the market in general are definitely positive now, it will take a while before India sees a significant surge in the rental and capital values of office buildings.

OVERSUPPLY?

There is also a large amount of supply coming in at the Tier 1, Tier 2 and Tier 3 city levels, and we must consider the possibility of an oversupply situation in certain markets. However, if we believe that the markets will make a comeback in next 12-18 months and factor in the consolidation approach by both foreign and Indian firms are taking as well as the expanded demand, there is a good probability that a large percentage of this excessive supply will be absorbed.

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.