Is Indian real estate heading towards a tectonic shift?
The on-going transition within the real estate sector offers us a foretaste of what the near future beholds. We foresee sweeping changes in the way real estate developers conduct their business, particularly looking at the innovative practices and agility of certain new breed of developers.
Corporate real estate teams will have to become more adept and skillful in order to make the most of the upcoming transition, and bring to light a rewarding portfolio for their companies. For homebuyers, the recent changes and future transition will bring about a more transparent market that is not just sensitive to their needs, but also sensitive towards the ecology at large. The report highlights on various components of real estate:
The trend of companies migrating to office spaces in suburbs - driven by a combination of cheaper rents and lesser commute times for workforce - has risen sharply over the last decade. Not only the location-independent IT/ ITeS companies but other sectors too are setting up office spaces in secondary business districts (SBDs) and peripheral business districts (PBDs).
The migration is driven by occupier demand for large IT parks and office projects in SBD and PBD precincts. PBD has seen the biggest jump in the share of office stock, rising from 28 per cent in 2004 to 47 per cent in first half of 2015. While the share of SBD in office stock has remained stable over the last several years at around 43 per cent of the total office stock, CBD has witnessed a severe attrition of occupiers and a decline in fresh supply of office space that has led to a significant drop in its share of office stock from about 33 per cent in 2004 to 10 per cent in first half of 2015.
Delhi-NCR has witnessed the most spectacular emergence of alternate business districts in Gurgaon and Noida. Mumbai has been an exception to the trend of office migration to PBD due to lack of supporting infrastructure and connectivity. However, the city witnessed a steady shift in office stock from prime CBD areas to SBD precincts.
When it comes to occupier profile, the share of IT/ITeS sector in leasing volumes has declined from 48 per cent in 2005 to 32 per cent at the end of second quarter in 2015. This lower absorption, though, is compensated to a large extent by new-age sectors such as eCommerce. While space absorption declined in the manufacturing sector, it increased in export-driven sectors of healthcare and bio-tech. Banking, financial services and insurance (BFSI) has been relatively stable through the last decade.
Malls are seeing a lot of churn in recent years. On an average, when business is good, churn rates of around 15-18 per cent have been recorded. In India, the range was 4-8 per cent in well-managed malls during the initial years. Poorly performing retailers exit malls midway through their lease contracts or landlords initiate churn to improve their portfolio of tenants at some locations while at unviable locations, retailers are driving the churn. Contract periods have shortened to 2-5 years today from 9-20 years seen in the mid-2000s.
The overall vacancy rate today stands high at ~20 per cent in retail malls across major Indian cities. On the contrary, malls that run successfully have vacancies of not more than 10 per cent, with a selective few ones operating near full capacities. In recent years, we have seen bad malls beginning to succumb to the business viability stress and giving up hope. Consequently, these malls are either converting into Grade-B office spaces or getting demolished to make way for a new asset class in real estate.
In the near future, few more malls are expected to withdraw from the retail realty business as a result of which, the business of average and good performing malls will improve. This is a much-needed course correction, which will continue to happen for some time. JLL research estimates around 14 malls to withdraw from retail operations, having combined mall space of 3.5-4.5 million sq ft.
Unable to sell expensive homes in a sluggish market, builders across India are making smaller apartments without lowering the price per square feet and compromising on the quality of product. In the last five years, we have seen average apartment sizes falling across all major cities of India.
Mumbai Metropolitan Region (MMR) witnessed the maximum fall in apartment sizes on annualised basis, along with Bengaluru, Chennai and Kolkata. Other cities also witnessed varying degree of fall in median apartment sizes. The dynamics of apartment sizes have a tale to tell - that developers are paying conscious attention to consumers´ requirements.
The fall in average apartment sizes across all top seven cities is a clear indication that developers intend to make houses affordable for buyers by reducing average apartment size instead of reducing the capital values.
Transition of the 4Ps
The last 10 years have been quite dynamic, as each of the fundamental 4Ps of real estate - Players, Processes, Product and Places - witnessed a plethora of changes. Players: From local domination, large and well-capitalized developers are expanding to build pan-India portfolios. This trend will only grow further as the market matures and weaker players get weeded out for lack of capital, corporatisation and technical prowess.
The sector would witness a period of consolidation wherein large, well-capitalised developers would gain market share by either purchasing assets or acquiring smaller players.
Processes: Today, about 80 per cent of buyers in top cities such as Mumbai, Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata are salaried employees. They prefer taking a home loan but cannot afford cash payments. This has resulted in property transactions increasingly becoming legitimate and more transparent. Almost all newly developed residential properties can be bought with 100 per cent white money. Many resale properties too are available without the cash component. Government´s move to raise punitive action against illegal transaction will further help reduce cash dealings.
The trend of outsourcing of architecture, engineering, interior and contractor practices to globally-renowned agencies in an effort to make Indian cities stand-out and reflect their recently-acquired prowess is catching up.
Products: Construction quality and techniques have evolved over the years, starting from early-2000s. Projects completed before 2000 mostly had older design and no amenities. The buildings had no element of sustainability - energy efficiency, water harvesting system, security systems, advance safety norms, etc. With various advanced construction techniques and innovative designs to improve the quality of projects, developers have attracted more IT and MNC occupiers into their projects.
Places: As incremental space for new entrants is getting limited in cities like Bengaluru and Pune, the Indian IT sector, which has dominated office space occupancy for almost a decade, is now exploring new cities for expansion or creation of new bases. The necessity to exert tight control on occupancy cost and maintain cost-competitiveness is prompting IT/ITeS firms to scout for alternate destinations that have abundance of skilled manpower.
Simultaneously, there is a wave of infrastructure improvements happening in tier-II and tier-III cities, which are fast getting connected with today´s major metros. This is helping cities like Chandigarh, Visakhapatnam, Vijayawada, Mysore, Kochi, Coimbatore, Tiruchi, Bhubaneswar, Ahmedabad, Gandhinagar, and Jaipur as the new centres of choice for setting up large-scale IT office infrastructure.
"Indian real estate has undergone a lot of change in the last 10 years. As its core sectors - office, retail, residential and industrial - evolve, the latest Whitepaper by JLL Research tracks the industry´s transition and reveals the key trends in this journey," said Anuj Puri, Chairman, CII WR Real Estate Conclave 2015.