PUNE RETAIL REAL ESTATE – THE PREMIUM BRANDS REVIVAL

Anand Dutta, Head (Retail) Pune, Jones Lang LaSalle Meghraj

In Pune, retail transactions have picked up noticeably, following a marked upsurge in shopper sentiments and a generalized correction in retail real estate rentals. Properties are now more viable for retailers, and the current scenario is now considered far more amenable to their bottom lines than it was before. Moreover, an increasing number of retail landlords in Pune’s malls and on key high street locations have opened up to the minimum guarantee and revenue sharing models. The general stance now is that if a retailer is making money, landlords are willing to offer reductions on rentals if the retailer is willing to sharing his topline. As a result, a number of retailers in Pune are now once again looking at expansion. The number of retail space deals has gone up significantly after the Dussera-Diwali period, which many players agree was better this year than in the previous year. Retailers are understandably displaying a predilection for ready properties.

Interest has revived not only in malls but also on Pune’s more prominent high streets of MG Road, JM Road, Aundh’s Parihar Chowk and Kothrud’s Karve Road. The highest activity levels in terms of expansion are currently being witnessed among vanilla retailers in the apparel, accessories, hypermarkets and jewelry categories. As before, value retail rules the roost in a budget-conscious city like Pune. However, we are also seeing a surprisingly fast

revival in terms of premium brands, and transactions for retail spaces in advantageous

locations in malls and on high streets are picking up.

The latest addition to Pune’s high-value retail sphere is Jewel Square at Koregaon Park, next

to Hotel Blue Diamond. This is naturally a premium location with an excellent high-profile shopper catchment, though this exclusive shopping centre encompasses only about a lakh

square feet, the occupier profile over its four levels is remarkable. Jewel Square, which is now

almost 90% booked out, is defined by premium brands who are eager to take advantage of this unique location, which is accessible to the affluent crowd of Pune and also close to other important micro markets such as Vimannagar, Kalyaninagar, Camp - and, of course, Koregaon Park.

Significantly, high-end brands like Mango, Promod, Aldo, Charles & Keith and Tommy Hilfigher are entering Pune’s mall territory for the first time with this project, which launches on 21st November, 2009. Other premium brands at Jewel Square include La Senza, Esprit, Calvin Klein, Forever New, Da Milano, Nike, Apple I Store, After Shock, Hi Design, Ritu Kumar, Chemistry, BIBA, Jashn, Satya Paul, Tie Rack London, Reliance Time Out and BJN Hotels.

Earlier, these high-end brands were shying away from entering the city. The fact that this mall

has garnered such concentrated enthusiasm by premium brands will give a big boost to mall developers for their upcoming projects and open up potential for other high end retailers to look at Pune as a suitable market.

CURRENT PUNE RETAIL RENTALS:

• MG Road: 140 - 170

• JM Road: 160 - 200

• Aundh: 125 - 150

• Karve Road: 100 - 120

PUNE REAL ESTATE - THE ADVENT OF INNOVATIVE FINANCIAL STRUCTURING

Mohammed Aslam, Head - Pune, Jones Lang LaSalle Meghraj

The slowdown in for real, and it calls for innovation among Indian real estate's primary stakeholders. In Pune, we have witnessed some truly innovative financial structuring schemes - schemes that, by addressing the needs of clients rather than merely the developer's business aspirations, truly add real value in a changing world.

Mont Vert offers potential buyers the option of renting a 2BHK at a minimum rent of Rs. 12000 per month and with a deposit of Rs. 1 lakh, and buying the rented flat at a later date. The payments made should purchase of the flat ensue are then treated as down-payments. A lock-in period of three years is also part of the agreement. This allows occupants to either continue on a rental basis or to buy a flat they have grown familiar with at a date when the rates would conceivably have sunk to more rational levels.

Rohan Builders takes a down payment on an under-construction flat in any of six ongoing projects and offers to pay back the difference in the current and future market rates should the market correct further at a later stage. Yet another entity agrees to shoulder part of the interest rate on the buyer’s home loan for a year, but again introduces a lock-in period of three years. Such offers are, quite simply, aimed at encouraging fence-sitting buyers to either absorb existing ready inventory or to book flats in under-construction projects.

Pune represents a very individualistic real estate market for various reasons, and it comes as no surprise that we should see the genesis of such proactive measures in this city. However, it is our opinion that the customer-centric movement being launched there would do well to spread beyond this city's borders, as well. To a certain extent, it has.

In the metros, we are seeing a unique phenomenon among established development houses like DLF who are willing to pay buyers back the difference in price brought about by market correction. To a large extent, this is to prevent such buyers from demanding an outright refund. Certain builders also offer to shoulder the financial burden of Stamp Duty and registration due on the purchased property, and to pay the buyer's EMIs right until actual possession, these funds to be refunded at that stage.

Across the country, buyers find their negotiation power vis-à-vis the price of the property increasing when they bring 50% of the price or more to the bargaining table. These are the first responses to the clarion call for taking the lead on making home purchase a more financially feasible proposition for buyers. We applaud it and await the spread of this movement of innovation - especially since it makes sense both to buyers and sellers. In the current market scenario, the focus must often be re-directed from profitability to loss-cutting. While the primary objective has always been to turn a profit, this consideration takes a back-seat in the current slowdown scenario, when projects are not moving fast enough on the market to enable builders to meet their own financial obligations. Whether or not the builder is making an actual loss, there is certainly a loss on previously anticipated margins involved.

So far, these schemes are being witnessed only in the residential segment, and the more innovative ones may soon be evident in cities other than Pune. Commercial real estate is still a straight transaction segment in which negotiation potential is based on the stage of the project construction. Unlike residential, it is typified by customers who have the required buying power and/or funding avenues, and whose cost-sensitivity is only limited to their interest in securing the best possible deal.

The response to such financial structuring schemes has been varied, with the final asking price, location and exact specifications of the properties remaining important criteria. Where the location and client catchment for a project is good, such financial schemes have proved to be real market movers and have made a difference of up to 25% in a project’s selling potential. However, it is clear that the ultimate differentiators will still be a rationalized price and the builder’s overall market standing and credibility. Another model that works well even in the slowdown scenario is linking the payment instalments to the stage of construction.

PUNE - OVERALL REAL ESTATE MARKET OUTLOOK

Source : Jones Lang LaSalle Meghraj


Residential Property Markets

After witnessing tremendous growth from 2003, Pune’s residential property markets have slowed down over the last 3 to 4 quarters. Sales for most projects have dropped significantly and are presently the lowest observed over last few years. Increase in property prices, coupled with upward movement in the interest rates for housing loans, are the key reasons for drop in demand.

Developers are still holding on their prices, but there are increasing instances cash discounts during negotiations or offers of incentives such as:

• Developer paying part or all of the EMI amounts during the construction period
• Developer paying part or full amount of stamp duty charges
• Developer offering free white goods/partly furnished homes
• Developer offering four/two wheelers with every flat booking

However, such offers and schemes are predominantly observed for projects at peripheral locations, and they are primarily by Tier II/III developers and fringe players on the market.

Developers are consciously making a shift towards budget/mid segment homes with product offering between Rs. 30-35 lakh for 2 BHK apartments.

Considering the trend over the last 6 months, there are limited possibilities of demand picking up over the next two to three quarters. Customer sentiments are at their lowest, and most buyers are anticipating further reduction in property prices before making their decision. There are chances of a meltdown in property prices by about 10-15% over the next few months. The suburban areas are most likely to be affected during this downturn. Also, considering the liquidity issues, there are high chances of projects getting delayed.


Commercial Property Markets

Pune has emerged as one of the prominent destinations for IT/ITeS spaces over the last few years. About 6 IT/ITeS SEZs are in various stages of construction. These SEZs are likely to add about 10 million square feet over the next two years. Most of the anticipated supply is in the PBD, while moderate and limited supply is anticipated in the SBD and CBD respectively.

In fact, the demand for commercial spaces is primarily driven by the IT/ITeS sector. Approximately 50% of the absorption for 2008 is in IT SEZs, about 45% in STPI units and the remaining 5% in non IT/ITeS office spaces. The absorption for 2008 till date is estimated at about 3.2 million square feet.

Apart from the competing supply from within the city, Pune is also competing with cities like Bangalore, Chennai and Hyderabad. During such times, apart from real estate costs, the city level infrastructure (hard and soft) also plays an important role in attracting clients for IT/ITeS and office spaces.

Over the last few years, strong demand from IT/ITeS players as well as corporates had driven the lease rents and occupancy levels northwards. However, in light of the global financial meltdown, the demand from corporate clients has slowed down. Most companies are treading a cautious path, with a focus on cost control, and are delaying decisions on expansion plans.

Sluggish demand over the last few quarters has reflected on the lease rents for IT SEZs as well as office spaces. The prevailing rents for IT SEZs are in the range of Rs. 30-34/sq.ft. (apart from EON and Blueridge, which are quoting in the range of Rs. 38-40/sq.ft). These rental figures have witnessed a dip of about 10-15% over the last quarter. Similarly, the average asking rents for office spaces in the SBD have witnessed a drop of about 5-10% and are presently in the range of Rs. 60-75/sq.ft. pm.

The pressure on lease rents is likely to continue in the short term due to competing supply and the global financial scenario. Developers have adopted a wait-and-watch approach and have delayed plans of launching new projects.


Retail Property Markets

Pune is yet to witness its first complete mall development – a development catering to retail, leisure/entertainment and eateries under a single roof. The existing retail developments are predominantly clusters consisting of one anchor tenant and vanilla retailers.

That said, Pune is likely to witness a retail revolution in the next two to three years, with a supply of about 7 million square feet to be delivered in various pockets of the city. Three 1-million square foot+ malls are under construction, apart from numerous malls ranging between 2-5 lakh square feet. Most of this supply (over 80%) is anticipated in eastern Pune (Yerawada, Nagar Raod, Vimannagar, Kalyaninagar, Koregaon Park and Hadapsar).

Considering the general slowing down of the economy, a definite impact has been observed in transactions for spaces in malls. This is also accentuated by the wait-and-watch approach adopted by retailers and delay in moving forward with their expansion plans. Transactions have been observed at high streets, as there is demand from retailer’s for ready properties.

Considering the competition, the pressure on lease rentals is high and there are strong chances of the rents moving downwards.

Tier II/III developers with plans for malls have adopted a wait-and-watch approach.


Land Markets

Land markets have been extremely sluggish over the last two to three quarters. Transactions have drastically reduced and developers – the prominent buyer segment have in most cases stopped buying land. Key reasons being:

 Drop in demand for ongoing projects
 Pressure on prices of ongoing projects
 Liquidity crunch

Developers are offering joint venture/joint development proposals instead of outright purchase to reduce the entry cost. Liquidity crunch has forced the developer to focus on completion of existing projects rather than venture out for buying land.

Land prices are still intact in most micro markets inspite of pressure on the sale prices for constructed assets. Some marginal movement downwards is anticipated in land prices in the next few quarters.

Pune Vis-à-vis Other Markets

Pune has the distinction of having more than one economic engines of growth. Apart from the burgeoning IT / ITeS Sector, the economy is also strongly driven by manufacturing sector (auto & auto ancillaries). Education and Administration are also the other prominent economic generators for the city.

Advantages of Pune

• Proximity and excellent connectivity with Mumbai
• Pleasant weather year round
• Availability of talent pool and resource pool
• Stable political and social environment

Limitations of Pune

• Infrastructure projects like airport, road, metro rail etc need to be given a priority. Most of these projects are delayed/slowed down
• Public transport system needs improvement

The property prices in the city are still realistic and reasonable in comparison to several similar cities in the north. The average property prices for residential apartments at suburban location are in the range of about Rs. 3000-3500/sq.ft.

The growth in Pune property markets has been on the back of strong end-user demand. Speculators operating in the market at any point in time were extremely low, and this has benefited the markets as property prices have not witnessed high correction despite sluggish demand over the last few quarters. Going forward, there would be pressure on prices, but the downward movement is anticipated to be between 10-15%.

It can be definitely said that strong demand still exists in the market, and that there are still buyers at the right price.


Guidance for the Future

In a falling market, it is important for developers to be realistic in the pricing structure. As discussed earlier, there is still demand for the right price and right product. Developers should also:

• Demonstrate cost control by either adopting new technologies or improving existing processes
• Focus on customer satisfaction and ensure timely delivery
• Focus on affordability of the target consumer and right pricing of products
• Offering better quality products and differentiate from competition
• Having another look at specifications and reducing unnecessary items