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A Happier New Year? written by Subhankar Paul , published in Financial Chronicle. January 1, 2014


The property market is inevitably linked to economic growth. And 2013 was certainly not bright for the Indian economy, which slowed to around 5 per cent for the FY13 compared to 6.2 per cent in the previous financial year. The rupee hit an all time low of 68.80 against the US dollar. Monetary tightening resulting from RBI's measures to control inflation was the major macro influence on the real estate business in India, through most part of the year. High interest rates, spiralling vacancy levels and lower margins arising from inflationary pressures too, led to a slowdown of construction activity. This meant drop in new launches and delayed project delivery by several months. Property developers dealing in residential projects are particularly worried because of slowing sales resulting in a situation of oversupply in many parts of the country.


As Shishir Baijal, chairman and MD, Knight Frank India, says: "Not only did Indian economy grow at the slowest pace, policy inconsistency and apathy towards the sentiments of the international and domestic business community have aggravated the agony. Hopefully, policy makers will realise that relaxing FDI norms alone will not attract foreign investment. Con­ducive business environment promoting transparency and policy consistency is a greater prerequisite."


The underlying reason for these moves is that the Indian real estate story continues to be tremendously attractive. While there is a sort of saturation in tier-I cities, the good news is that tier-II cities have started growing with the IT and industrial sectors investing in such places. Thus, Indian real estate is poised for a boom, taking the rest of the economy with it. The notion that Indian real estate is expensive is based more on the cost of undeveloped land, which is becoming a scarce commodity, than finished residential or office space, which is still available at reasonable prices in most places.


"The momentum remains positive, if we can get the investment story right, lower the fiscal deficit and have more progressive monetary policies being drafted by the RBI, there's nothing that can restrain us from coming back on the growth track by the second half of 2014," Baijal adds.


AS Ravi Saund, COO of CHD Developers points out: "In a striking contrast to previous years, even the festive season this year witnessed a lull across the asset classes. Regardless of market sentiments, residential property prices showed skyward progress. This further led to a decline in absorption compared with the same period last year. Cities that exhibited a sharp upsurge in the supply observed a higher decline rate in the absorption. Conversely, affordable locations and a few evolving markets in and around suburbs proved trade pundits wrong. The top emerging destinations of 2013 were Sohna and Dwarka expressway in Gurgaon. Though the year was lacklustre for the sector, introduction of Real Estate Regulatory Bill and Land Acquisition Bill in Parliament brought in some solace."


India's office market continued to take cues from the prevailing economic sentiment in the country. With cost reduction being a primary focus, occupier sentiment remained cautious and most companies continued to review expansion plans by focussing on improving existing space utilisation to control costs. The first quarter of 2013 saw fresh commercial office space supply to the tune of approximately 10 million sq ft across the leading cities while absorption stood at about 6.6 million sq ft. Transaction activity was dominated by Mumbai, Bangalore, Chennai and the Delhi National Capital Region (NCR), representing about 90 per cent of the total transacted space during the quarter. By the first half of 2013, more than 20 million sq ft of new office space had been added, with supply growing by 16 per cent YoY. Absorption, however, stood at approximately14 million sq ft in the first half of 2013.


The last few months of the year, however, seemed to have witnessed the beginning of a gradual recovery curve for the economy at large and by extension the commercial office segment. According to estimates by CBRE Research, the year may end with a total office space absorption in the range of 25-30 million sq ft, as against 26 million sq ft of office space absorption in 2012. Tra­nsaction activities seem to have improved slightly over the last few months, as market sentiments have begun to revive to some extent.


Anshuman Magazine, CMD, CBRE South Asia says, "Against the present economic backdrop, demand for commercial real estate is likely to remain cautious in the medium term. Companies are expected to continue their focus on optimal space utilisation and cost cutting measures and transaction activity is expected to be mainly restricted to take up small and medium sized space. Recent indications of revival in the global and domestic economy, however, should contribute to better performance and improved economic prospects towards the second half of 2014."


The top three cities of Delhi NCR, Mumbai and Bangalore continued to dominate transactions in the first half of 2013. By the third quarter, less than 3 million sq ft of office space entered India's prime real estate market — supply dropping by more than 75 per cent QoQ and by nearly 50 per cent over the same period last year. The July-September period witnessed the lowest addition of office space over the past several quarters, according to CBRE Research. This rationalisation of office space supply across the top urban centres of the country was largely attributed to prevailing vacancy pressures in completed projects and weak commitment levels for under-construction properties.


"The commercial office segment of India's top cities is expected to see fresh supply addition of about 140-150 million sq ft by end-2017. With a considerable level of this upcoming supply lined up for 2014-15, rental values of select micro-markets such as Gurgaon, ORR, Thane and Navi Mumbai are likely to remain under pressure," Magazine adds.


In the commercial retail space sector, shopping malls seem to have been doing quite well across the country. Delhi NCR and Mumbai have been leading in terms of the highest concentration of shopping malls. As of now, Delhi and Mumbai together account for 62 per cent of the pan-India mall stock. They are followed by Bangalore and Chennai, which together constitute around 20 per cent of the pan India mall stock.


The net addition of shopping malls from 2013 to 2015 is expected to be around 24.9 million sq ft. In 2010, the stock of shopping malls in India stood at around 53.3 million sq ft and by the end of 2017, it is expected to reach 107.8 million sq ft.


Pankaj Renjhen, MD–retail services, Jones Lang LaSalle India says, "In 2013, an estimated supply of around 5.2 million sq ft was registered — a 22 per cent increase over last year's supply of shopping mall space. Chennai led with 1.95 million sq ft of supply in 2013, followed by Mumbai and Pune. In 2014, Delhi NCR is expected to hold the dominant position in terms of expected net addition of shopping malls."


The pan-India mall stock for the top seven Indian cities — Bangalore, Chennai, Delhi, Kolkata, Hyderabad, Mumbai and Pune — is expected to increase from 76 million sq ft in 2013 to 95.7 million sq ft in 2015.


As Indian real estate is yet to enter a mature stage, it is quite difficult to forecast trends in the new year. What is certain about the market is that 2014 is bound to reflect the regulatory changes that were implemented in 2013. The year brought some decisive changes to the Indian real estate market. The Real Estate Regulation Bill and the Sebi Regulations have brought hope regarding transparency in the market. RBI ruled out such schemes at the dubious 20:80, reducing risk for the buyer. But it doesn't look like the law has done enough to convince the buyers. Cautionary winds are likely to blow into the new year. High inflation and increased loan rates will deter investors and the first half of 2014 is likely to be ruled by end users. The general elections are being seen as a game changer, and might boost confidence in long-term investments.


Abhay Kumar, chairman and MD of Griha Pravesh Buildteck, says: "The last year has been a mixed bag of both negative as well as positive events and outcomes. While the first half was faced with economic slowdown, demand did pick up in the second half. Confidence has returned and we expect this trend with increase in investor demand to accelerate in 2014."


So, is the worst over for real estate?


Pradeep Jain, chairman of Par­svnath Developers, says:"There is no doubt that the demand revived in the last six to seven months and the industry also saw some new launches. Government agencies and authorities also came out with some favourable steps like the regulatory bill and REITs that have further strengthened sentiments. Going forward, the trend is expected to continue for another four to five months. However, it will be interesting to see how the market reacts post the general elections. Though, I am confident that with the kind of reforms proposed by the government over FDI and retail, the real estate sector is going to witness fairly transparent and shiny days in the year 2014 with many new launches in affordable and mid premium segments in areas like Greater Noida, Sohna Road New Faridabad and Manesar/Dharuhera. Commercial space will also witness a boom with the expansion of Delhi Metro in NCR. Overall the market is expected to see an uptrend in terms of demand and supply."


Aman Agarwal, director, KV Dev­elopers, agrees. "Delhi-NCR will see an upsurge in queries getting converted into actual sales, especially in affordable housing. I think the upcoming general elections will also play a key role in the realty market with buyers waiting for the new government and price corrections to happen. But overall, the year promises to be a good one for developers and buyers with demand expected to overcome supply in NCR," he said.


Amit Oberoi, national director — valuation and advisory services and research, Colliers International says, "The real estate market is primarily sentiment-driven. Due to the adverse economic climate, the general perception is that the residential sector will witness further price correction until the elections. While it is difficult to predict when real estate prices will bottom out, we believe that for people looking at a longer term investment this is a good time to buy a property as……(a) Property today is available at good discounts and (b) The year saw 30 per cent lesser new units launched. With prospects of a stable government the demand is likely to rebound and catch up with supply in attractive micro-markets."


In the primary market, developers in 2013 did not reduce the base selling price (BSP), but many were willing to negotiate and offered various incentives, Oberoi says, adding that in the secondary market, a substantial discount was available and prices were well below that of the primary market. Due to the pessimistic economic outlook, sales volumes were lower in 2013 than in 2012 by 15 per cent to 40 per cent in Bangalore, Delhi NCR and Mumbai. This is primarily because investors shied away from the market, as they found it difficult to flip units and did not foresee significant capital appreciation in the realty sector in the short term. On the other hand, projects that were close to completion witnessed robust demand from end users (especially in Gurgaon).


At the same time, Oberoi points out, new launches were also down in Mumbai and Delhi by 38 per cent and 28 per cent respectively. Bangalore bucked the trend and more units were launched in the city in 2013 as compared to 2012. However, the new launches that dried up across major cities were in the reasonably affordable segment. For example, 57 per cent in Gurgaon and 51 per cent in Mumbai. Investors in the luxury real estate segment preferred global markets and as per an estimate, approximately AED 8 billion was spent by Indians buying houses in Dubai.