2018 - A Watershed Year

The year 2017 was one of short-term disruptions for the Indian economy. Now various global and Indian think tanks and multilateral institutions have projected relatively stronger growth in 2018. In the long run, the Indian real estate is expected see greater investment flows across sectors, a CBRE Research reports. The investment market was buoyed by several government initiatives in 2017 as the new policies were expected to increase transparency and enhance consumer and investor confidence in the real estate sector, thereby resulting in significant interest from offshore equity investors, large Indian corporates and high net-worth individuals (HNI). With valuations remaining attractive and quality assets being available in core and core-plus locations, investment activity in the segment has remained hectic. The coming year is only going to build upon the stepping stones that 2017 has provided, with more money expected for existing as well as newer asset classes. Quality is likely to remain the overriding theme as good quality assets would continue to attract a majority of this money. As fewer assets compete for these investments, the market is likely to witness increased consolidation among developers as well as large land owners. While the past two years have witnessed numerous steps to ease the investment environment, further streamlining of the regulatory environment would be key to attracting and sustaining investor interest and confidence. The International Monetary Fund (IMF) expects India’s real GDP growth to reach 7.4% in 2018 and 7.8% in 2019, thereby reinstating the country as the world’s fastest growing major economy. Office Segment The office market in 2017 continued to breach the 40-million mark in terms of space take-up despite a dip in supply across key markets during the year. Leasing activity was dominated by the three cities of Delhi-NCR, Bangalore and Hyderabad. Despite the cautionary trends permeating the office sector, we expect 2018 to be a positive year, with a healthy play between supply and demand. Flexibility in work spaces is expected to emerge stronger, with landlords expected to better align spaces with the needs of occupiers. As availability of ready-to-move-in spaces remains constrained (particularly in core locations) amid sustained rental growth, pre-commitment activity is likely to remain strong, especially in cities such as Bangalore. What to Expect:  

• Infrastructure initiatives are likely to play a significant role in influencing demand-supply dynamics, leading to rental growth
• Developers would increasingly customise supply to meet individual occupier needs
• Owing to disruptions in the tech sector, leasing activity might dip marginally, but would be compensated by demand from other sectors
• Occupiers are expected to continue to deploy modern workplace strategies – efficient space utilisation, flexible working and optimum hiring
• Advances in technology are likely to impact both occupier and developer decisions
• Office properties would remain high on investor radar, with PE and institutional firms increasingly acquiring/expanding real estate portfolios to hold quality office assets

Retail Sector The retail sector remained stable in 2017 with the addition of about 3.4 million sq. ft. of supply across seven key cities – almost in line with the supply in 2016. A majority of the supply was concentrated in Mumbai, Delhi-NCR, Pune, Bangalore and Kolkata. In terms of new global entrants, 2017 witnessed the entry of almost 15 global brands. In 2018, we expect supply to be led by the southern cities of Hyderabad and Bangalore. While traditional factors (such as availability of new supply, government initiatives and supply-demand gap) would continue to shape the retail segment, new-age developments (rise of sharing economy, flexible leases, etc.) would result in a better alignment with global trends. What to Expect:

• Nearly 6 million sq. ft. of retail supply is expected to be added across the key seven cities, with Hyderabad and Bangalore leading the way
• Several national retail players would look at tier II and III cities for expansion due to the lack of quality mall supply and expansion opportunities in tier I cities
• Retail would be everywhere; the quality of retail in transit spots is likely to move beyond kiosks to formal retail and full-fledged stores
• Omni-retail is likely to be more commonplace; retailers are expected to adopt IoT and AI to provide a physical shopping experience with a digital filter

Logistics Segment The logistics sector continued to tread on a strong growth trajectory, with leasing activity reaching an all-time high of approximately 17 million sq. ft. in 2017. We expect this momentum to continue into 2018 as existing and new occupiers consolidate/expand their operations across the country. Sustained demand from sectors such as third party logistics (3PL), e-commerce, FMCG, retail, and engineering and manufacturing is expected to drive transaction activity. The government’s impetus to formalise the sector by granting it infrastructure status as well as the implementation of the GST have also propelled investments / supply creation in the sector. This new investment-grade supply by prominent Indian and global players is expected to start getting operational from mid-2018. It is likely to have a positive impact on transaction activity and propel leasing volumes even further in 2018. What to Expect:

• Demand for warehousing space is anticipated to remain robust in 2018 as existing players expand operations and new players enter the market
• While large urban centres such as Delhi-NCR, Mumbai and Bangalore are expected to continue dominating transaction activity, the real growth would be witnessed in smaller cities such as Chennai, Pune, Hyderabad and Kolkata
• As leading real estate developers acquire large land parcels for development of warehousing facilities, the supply of modern warehouses and industrial parks is expected to increase
• Rental growth is expected to diverge across markets. The northern corridor of Hyderabad and western / eastern corridor of Bangalore are likely to lead growth

Residential Sector The residential segment was seen reeling under the impact of demonetisation and implementation of the Real Estate Regulatory Act (RERA), as sales and new project launches declined to historic lows in 2017. Although homebuyer sentiments improved marginally in select cities such as Bangalore, Hyderabad, Chennai, Mumbai and Pune, the sector continued to suffer from subdued sales and select / intermittent supply addition. As the developer community gets used to RERA, we expect the residential segment to show some signs of recovery in 2018. Affordable housing as a segment is also expected to see greater interest, as incentives offered by the government are likely to result in better end-user and developer participation. Overall, in 2018 we expect the market to undergo a sieving process, with credible and sustainable developers differentiating themselves from other players, and the focus steadily moving towards end users. What to Expect:

• Despite RERA, read-to-move-in properties are likely to remain high on the radar of homebuyers
• Consolidation among developers and landowners as well as more joint ventures are expected
• Private participation in affordable housing is likely to pick up pace; however, land availability for affordable housing projects in key markets would remain the chief concern
• Technology would improve buyer experience and transform developers’ marketing strategies as the use of online sales channels, mobile apps and virtual tours grows
• Overall investor confidence is likely to improve, resulting in the inflow of institutional capital
• Increased fund inflows would rationalise cost of capital as RERA would reduce the risk perception associated with real estate in India

Capital Markets With the availability of well leased assets across core locations, PE investments in core assets are likely to continue. Yields are expected to remain stable, resulting in the continued attractiveness of core assets for investors. Also, developers are particularly keen on the commercial segment and have been displaying increased interest in commercial projects. The reason behind this is that the office sector is likely to maintain its growth momentum in 2018 with an anticipated absorption of 40 million sq. ft. The combined effect of RERA and REITs is likely to result in better compliance as well as standardisation of space, resulting in the emergence of more investment-grade office space. While investors continue to invest in completed assets, a key trend over the past year or so has been selective development equity. Further consolidation expected – Consolidation among developers as well as large land owners is likely due to subdued market conditions, with smaller players expected to look for avenues for funding or resort to asset monetisation. Credible developers are likely to benefit the most as a majority of land owners (and smaller developers) are entering into joint development agreements and development management structures with well-capitalised/credible developers and corporate players. Corporates keen on monetising their land assets and smaller developers looking to retire debt are also bringing attractive land deals to the market. In addition to transactions for the residential segment, the land market is offering opportunities for office, retail and industrial developments. What to Expect:

• Enhanced transparency is likely to result in a more secure environment for investors and better exit opportunities
• Average ticket size of investments is expected to increase. The office segment would continue to attract interest, while warehousing and retail segments would also gain momentum
• Focus on corporate governance would be key to attracting funding; equity to witness incremental interest Investor focus is expected to remain on quality of assets; core and core plus assets would also generate significant interest
• Easing and streamlining of regulatory environment would be key to attracting and sustaining investor interest and confidence