THE TIER II / III REAL ESTATE STORY – THEN AND NOW

Sanjay Dutt, CEO – Business, Jones Lang LaSalle Meghraj

The demand fundamentals of the India story are now focused around all cities that have sufficient economic activity, be it industrial, service sector-driven or incentive-driven programs by the State Government. In Gujarat, which has seen considerable industrial progress, the key cities of Ahmedabad, Surat and Vadodara come readily to mind. Baddi in Himachal Pradesh and Pantnagar and Rudrapur in Uttaranchal attracted a lot of residential developers that met with success, thanks to proactive Government policies. In the South, Coimbatore, Vizag and Kochi emerged, either thanks to a large investor segment or as the outcome of sufficient economic activity. Towards the West, Pune, Nasik and Nagpur are noteworthy in this context. In all cases, developers positioned their development close to industrial hubs, targeting a totally different price segment and making the most of it.

WHAT WENT WRONG

This said, every developer was inspired to create a national footprint three to four years back. While this was a worthy ambition, it was poorly conceived as a plan since many of them did not factor in State Government-level regulatory challenges such as local municipal laws. They also did not consider that they may not have had the requisite financial resources, organizational depth and knowledge of the local markets to manage and execute projects in Tier II and Tier III cities. Nor had they accurately gauged the demand fundamentals of these locations.

Such developers proceeded to enter into land acquisition on their own equity and were caught short-footed, not realizing that the property cycles were then at their peak, and that there was bound to be a correction – if not a fall.

THE DAWN OF REASON

Major players are now going to re-align their positions vis-à-vis unexplored territories. There is now a very clear realization that it is extremely difficult to become a genuine Pan India player in every geography and real estate segment. Moreover, developers today have woken up to the fact that there is only limited capital available to real estate players today – capital that is earmarked for residential projects, construction funding against achieved leases and signed contracts, or for cities displaying sufficient demand even in subdued market conditions.

In the current context, it makes sense for developers to re-strategize and focus on their core geographies. For example, if a certain developer is extremely accomplished as a residential players in the South, having high credibility and sufficient brand recall in this region, such a company would ask itself how wise it is to experiment in the North or the West, and whether it would not make more sense to expand in the South.

Likewise, developers accomplished in IT projects would now concentrate on geographies that feature a healthy IT component, and avoid branching out into cities that lack a sufficient volume of such activity. Such developers would see the virtue of focusing on IT-centric cities such as Bangalore, Hyderabad, Chennai, Mumbai, Gurgaon and Pune, and re-think on plans to invest in cities that lack Information Technology activity.

THE RISE OF THE LOCAL DEVELOPER

Tier II and Tier III cities still represent a great story, especially in terms of affordable housing for industrial workforces. However, this story may no longer be suitable for some of the larger developers. These are locations where the strength of regional players will come into play.

There is at least one strong developer in every region. For instance, Panchshil Realty, Magarpatta, Paranjape Builders and Kumar Builders are very powerful local brands in Pune, with a company like Pharande Spaces practically spearheading the residential drive in Pune’s PCMC area. These brands have demonstrated that they understand their geographies better than any players who arrive from the outside to experiment on the Tier II / Tier III story.

The success of these local developers will inspire larger developers from beyond a region’s borders after the fundamentals of that area’s demand are captured sufficiently and the markets are sanitized in terms of municipal and financial market stabilization. In the next one to two years, developers will have realigned their business strategies sufficiently to leverage the potential of Tier II / III cities that have sufficient market drivers or are witnessing considerable investor activity (such as Kochi, Surat, Mohali and Chandigarh).

DELHI-NCR REAL ESTATE SECTOR UPDATE

Source : Jones Lang LaSalle Meghraj

Pankaj Renjhen – Managing Director (North India) Jones Lang LaSalle Meghraj
Gaurav Wahi – AVP, Strategic Consulting (North India)

PREDICTIONS FOR THE FOLLOWING YEAR

The real estate market in Delhi-NCR, like in other parts of the country, is witnessing some slowdown and price correction in certain corridors and this trend may continue for some time. The slowdown may result in:

• Price rationalization in real estate products
• Price correction in select corridors
• Delay in project completions
• A continued wait-and-watch sentiment amongst end user and investor alike
• Reduction in demand for the developments across sectors

The booming Indian Information Technology (IT) sector is witnessing a slower growth in the current fiscal (08-09) due to the global economic slowdown and lower technology spending in the US and UK. US companies that had bought stakes in Indian real estate companies are facing a cash crunch, thereby slowing the demand in IT-led real estate development in NCR.

Project spans may witness an increase for existing projects and real estate developers may find it difficult to complete their projects, as the cash flows have become difficult to obtain from most sources (viz. financial institutions, funds, investors and even end users which actually drive the core consumption in real estate.)

However, recent relief measures announced by various Government institutions targeting the demand in the middle income segment have provided impetus to developers to position residential sector developments in this segment. Moreover, well-planned, branded and properly positioned projects are currently witnessing demand in prominent growth corridors. The present year may see rationalization of real estate products in terms of their quality, pricing and positioning; which, coupled with improvement in market sentiment, will boost demand in times to come.

CURRENT PROMINENT PROJECTS

- Residential Projects

• Gurgaon: Magnolias by DLF and Nirvana Country (integrated township) by Unitech
• Faridabad: The Forest by Omaxe, BPTP Grandeur, Pranayam by Puri Constructions
• Noida: Jaypee Greens by Jaypee Group, Unitech Grande, Assotech Celeste Towers
• Ghaziabad: Orange County by Meriton Group, Shipra Suncity by Suncity Projects

- Corporate Projects

• Gurgaon: Palm Drive by Emaar, DLF Corporate Park, Vatika Atrium
• Faridabad: Saffron Square, Charmswood Plaza
• Noida: Corenthum, Logix Cyber Park
• Ghaziabad: lacks any prominent commercial development

MAJOR DEVELOPERS IN THE DELHI AND THE NCR REGIONS

Among the major developers in Delhi-NCR region are:

• DLF
• Unitech
• Parsvnath
• Omaxe
• Ansals
• Supertech
• BPTP
• Emaar MGF
• Vipul Group
• Vatika Group
• JMD Group
• Logix

MAJOR AREAS OF REAL ESTATE ACTIVITY

The major areas in Delhi NCR witnessing developments in real estate sector are:

• Gurgaon: NH-8, Golf Course Road, Southern Periphery Road and Sohna Road
• Faridabad: NH-2 and areas across Agra Canal
• Noida: Sectors 18, 37, areas along Taj Expressway and Greater Noida Expressway
• Ghaziabad: Indirapuram and NH-24

The global financial crisis and the subsequent slowdown in real estate sector have led to A slowdown in investment activities across all segments of investors, viz. funds, HNIs, etc. Most investors are holding off their investment plans at present. However, a market scan for potential lucrative projects is an ongoing process.

TARGET CUSTOMER PROFILE/SEGMENTS FOR DEVELOPERS

At present, the focus of developers is to complete ongoing projects being developed for the HIG and MIG segments. However, given the incentives of targeting the middle income segment of the population in the wake of the recent relief measures, many developers are planning to position developments targeting the MIG and upper LIG segments. That said, as an after-effect of the economic slowdown and ongoing market sentiment, consumers are less inclined to buy real estate at present, and may stall their real estate procurement plans for some time. However, the softening of capital prices may act as a catalyst to boost demand.

CURRENT STATE OF THE REAL ESTATE MARKET

The real estate market in present times is experiencing a great turmoil in terms of project timelines/completions, pricing strategies and intensity of demand for the developments across all its sectors. As for the different sectors of THE real estate industry - the financial crisis has resulted in noticeable price corrections across all sectors. For instance, in the retail realty sector, the impact of the recent slowdown has resulted in an overall price correction of approximately 15-20% in Delhi NCR region.

The impact has been observed to be more on the organised retail malls, where the retailers are under severe pressure due to major decrease in sales and high rentals. This has even forced some retailers to vacate space taken in operational malls, while the retailers who have signed agreements in upcoming malls have stepped back and have even withdrawn from their agreements. The high streets markets of the city have also experienced the impact of the retail slowdown, which has been reflected in a correction of rental values from those prevailing in the last 2-3 months. However, the market is witnessing price stability or correction depending on the supply situation from micro market to micro market.

Non IT and IT-BPO sector is also witnessing impacts that include lowering of contract rates with further delay in signing of contracts, decrease in growth rate of the IT sector and restricted employment in the sector. All these factors are resulting in the rapid lowering of rentals in IT/ITeS complexes, thereby creating severe problems for the developers. However, though some small and medium-sized companies are experiencing a heavy impact due to the slowdown, large IT companies (both Indian and MNCs) are likely to prevail.

The residential sector has also experienced the brunt of the slowdown. This has been evident from the major decrease in demand for residential projects among both investors and end users. The result is a lowering of sales of residential projects over the last 3-4 months, thereby leading to major problems for the developers.

Real estate developers are seriously affected by the severe fund crunch and are experiencing in executing projects. Many intend to delay their projects due to lack of demand. Major real estate developers like DLF etc. have not been as seriously affected, as they have been able to raise equity/debt from large private equity players, banks and hedge funds. However, there are some large developers who may be seriously impacted if they are not able to raise funds to meet ongoing commitments.

In all, major developers - irrespective of their leverage positions -, are seeking additional funds to complete their under-construction projects or pay off expensive loans.

India gets realty check from Gulf investors

3rd Nov 2008 - Gulf property majors shun India’s
economic indicators and dig-in for the long haul - India’s real estate market estimated to grow to $60 billion by 2010

Despite the current economic downturn, India’s real estate is said to be worth about $16 billion and is estimated to post annual growth rate of 30 per cent to reach $60 billion by 2010 according to research outfit ‘Çityscape Intelligence’.

As a consequence a large contingent of regional real estate investors and developers are poised to descend on Cityscape India to further their long term ambitions in the sub-continent.

Graham Wood, Exhibition Director for Cityscape India said, “The internal demand for commercial and residential real estate in India is undeniable. The investment climate may be difficult but developers will benefit from lower land prices, lower material and labour costs. Providing that the finance is in place, many developments may be approaching completion after the downturn has bottomed-out.”

Dubai-based Limitless is confident about the long term prospects of India’s real estate sector. "India is currently facing a shortage of some 21 million homes, and more than 300 million people are expected to migrate to urban areas over the next 20 years. At Cityscape India, we will showcase 11 global projects including Bidadi -- our proposed 4,000 hectare mixed-use development near Bangalore -- which will house around 750,000 people," said Saeed Ahmed Saeed, CEO of Limitless.

In addition Mohamed Binbrek, Group Chief Executive Officer of Dubai Properties recently confirmed that the company hopes to expand its development projects into India. He went to say that whether the scheme would be residential, commercial or mixed-use, the project would be funded by the firm itself.

Dubai-based real estate developer Majid Al Futtaim (MAL) has announced it is investigating India ‘a market to be in’ as a possible region for investment and development. Younis Al Mulla, MAL business development officer, said that the firm was looking to enter a joint venture with a local firm to help it build a mixture of residential and commercial real estate in the country.

The investment arm of Ras al-Khaimah also plans a $5 billion business centre at Hyderabad. Ras Al Khaimah Investment Authority (RAKIA), which manages funds of the emirate, part of the United Arab Emirates, said recently it had signed an initial agreement with Andra Pradesh Industrial Infrastructure Corp to set up Hyderabad Economic City, which will offer financial and healthcare services. Indeed demand for affordable housing is an issue that Kumari Selja Minister of State (Independent Charge) for Ministry of Housing and Urban Poverty Alleviation will address during the opening of the Cityscape India Conference.

“With 70% of India’s 1.2 billion people categorized as lower class, the demand for affordable housing is immense and potentially the long term returns for investors and developers is colossal,” said Wood.

This year’s Cityscape India, which is due to take place at the Bombay Exhibition Centre on 8-10 December 2008 will host major real estate players such as RAK properties, Dubai Investments, Tanmiyat, Gulf Finance House and Limitless.

In total Cityscape India is set to welcome more than 7,000 participants from around the world. "In addition, leveraging its relationships in the global investment market place, Cityscape will reach out to over 350,000 senior decision makers seeking to invest in one of the world’s fastest growing economies," added Wood.

Another highlight this year will be two parallel conferences, ‘Infrastructure Finance & Investment’ and ’Retail City Summit Day’. Notable participants include the Trump Organisation of the United States, Al Futtaim Group Real Estate, UAE, Merrill Lynch, India and Ansal API Group, India.

Platinum sponsors of Cityscape India 2008 are Limitless a Dubai World company and Soundlines, a diversified company with offices in UAE, Saudi Arabia, Qatar, India, Nepal and Bangladesh. Leading real estate and investment company Tanmiyat are the Gold sponsors.