Investors Bullish on ‘Grade A’ Office & Alternate Real Estate Asset Classes in India

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Rajat Kapoor, Head Data Centre – North India & Senior Director – Office Leasing Advisory, Jones Lang LaSalle Property Consultants (India) Pvt Ltd shares his views with Sapna Srivastava, Editor Realty+ on investments and raising capital across real estate verticals. Due to the pandemic, real estate businesses are looking at options to raise capital and manage short-term cash flow requirements. What are the challenges faced by the developers to raise capital? While the government is doing its best to support the growth in economic activity, real estate as a sector needs a much greater push as it is the second highest employment generator in the country and has the potential to attract billions of dollars as investment every year. However due to the Covid-19 pandemic small and mid-size real estate developers have been hit by a liquidity crunch and have not been able to raise funds to meet their working capital requirements. Reduction in demand has also disrupted the debt and interest coverage ratios which resulted in lenders re-evaluating their funding strategies to developers. Overall quantum of fresh lending by the banks and NBFCs to the real estate developers has not been very encouraging as the focus lately has been on restructuring of existing loans. Your views on the requirement of last-mile funding for stalled residential projects During the post covid era we witnessed last-mile funding activity, especially by SWAMIH Fund 1, which invested INR 12,000 crore in unfinished projects to ensure completion of such projects. Projects which already had received a financial closure and were at the verge of completion got preference by the lenders over funding of new projects. In order to maximize returns and value from any real estate project it is important for the project to be delivered to the buyer / end user / occupier. In case the developer is unable to complete the project then its an overall loss for developer, lenders and buyers. Also it impacts the confidence and trust of other potential buyers and market at large. Thus to ensure a healthy and viable real estate ecosystem it is critical that the projects get delivered within committed timelines with quality specifications and requisite support is extended by the lending institutions. With the office sector facing uncertainty in the short term, what are the present challenges and future prospects for the segment? While a hybrid work model has been adopted by many for the immediate future, Corporates are taking affirmative steps to bring back a minimum of 50% of their workforce by Q1- Q2 2022. While employee health & safety continues to be an important priority, occupiers have been working extensively to ensure that employees and their families are being vaccinated for a more sustainable return to work in the future. There is a growing acknowledgement amongst large corporates that work from home is not a feasible, long term solution and will have an adverse impact on productivity, collaboration & physical & emotional well-being of the employee. There is a revival in the market sentiment as cities begin to unlock & Occupiers are cautiously optimistic in spite of the lurking risk of the 3rd wave. Compressed demand coupled with increase in unleased inventory both old & new, has resulted in increasing vacancies in most of the key commercial markets of the country. The lease restructuring trend continues with companies seeking discussions with landlords to leverage softening market conditions for improved terms. Occupiers are seeking improved quality of buildings & developments with wellness & safety being the cornerstone for new offices choices. This should motivate developers to construct and offer higher grade and better quality buildings as compared to conventional structures. Flex spaces– business centres, co-working offices, managed office setups, continue to enjoy favourability for short to midterm growth plans as they offer enhanced flexibility & relief from upfront capex investment to occupiers. From an investment perspective, which asset classes do you believe are relatively less risky and will provide higher returns in the current market? Post covid world has shown us that essential goods and services will always be in demand and the infrastructure required to ensure the functioning of such businesses will continue to gain traction. There is an active interest in alternate RE asset classes in India & investors/ fund have been bullish in investing in Industrial & Warehousing assets, manufacturing facilities, data centres, health care & Grade A office developments in key micro markets. Responses are based on personal opinion of the interviewee.