Major office markets in India will revive by Q2 2010 with increased interest from tenants and a downward correction in rentals taking place, according to DTZ’s latest research, ‘The Second Coming’ issued on 10 December.

Marred by a liquidity crunch, slackening demand, piling inventory and falling rentals for over a year , the real estate markets of India breathed a sigh of relief with visible signs of recovery towards the third quarter of 2009. At a time when the worst for commercial real estate seems to be over and recovery appears visible, DTZ undertook a study to examine how this recovery will come about and analyse what this means for the future.

The study reviews the last twelve months performance of commercial real estate markets across six Indian cities (namely Delhi NCR, Mumbai, Bengaluru, Kolkata, Pune and Chennai) against its estimates of 12 months ago and predicts the recovery path and key drivers for each market going forward over the next five quarters.

Priyankar Bhikshu, head of India Research at DTZ comments: “The pace and scale of market recovery will be led by the Tier 1 cities of Delhi NCR, Mumbai and Bengaluru. Tier 2 cities such as Kolkata and Chennai will see a gradual recovery in the later part of 2010 while the Pune market is unlikely to see any major changes.”

Of the 84 million sq ft of supply scheduled for completion across these six key Indian cities, only 66 million sq ft will become available in the next five quarters. This moderation in supply of approximately 18 million sq ft is expected to ease the downward rental pressure in major markets.
After correcting between 25 to 40 per cent across almost all markets over the last year, rentals are now getting support at the development cost level in some markets. No further significant price correction is expected for the next six months.

Vacancy levels, despite healthy absorption, are likely to increase in the first half of 2010 and then stabilise or fall in the later part of next year. This will prevent any substantive price revival in the market.

IT-ITES will continue to drive the absorption volume. The Telecom sector is expected to be another significant demand driver over the next 12 months whereas the banking, financial services, insurance and manufacturing sectors will drive local market dynamics for some cities.

It is only after peak vacancy is attained that a price revival can be expected. Total market revival is likely to be achieved by Q2 2010.

Source: DTZ Research

Duvvuri Subbarao, the Reserve Bank of India (RBI) governor, left key interest rates unchanged in the second quarter monetary policy review. However, by tweaking a few provisions, he signaled his focus on controlling asset prices and monetary inflation.

“The RBI has focused on controlling asset prices and inflation by using alternative measures instead of hiking interest rates since sustainable signs of economic growth are not yet fully visible and credit growth has not picked up meaningfully,” said Vikram Kotak, chief investment officer, Birla Sun Life Insurance.

The RBI raised the provisioning requirement for loans to the commercial real estate sector to 1% from the current 0.4%. What this means is that banks, which so far had to set aside Rs4 as provision for every Rs1,000 loan to real estate companies, will now have to keep aside Rs10.

This underlines the RBI’s concern over the growth in loans to real estate firms.

For a one-year period till August 28, 2009, banks had lent Rs28,353 crore to the real estate sector, up 41.5% in comparison to the same period last year. In contrast, home loans amounted to Rs14,668 crore, up by only 5.4% over the same period last year.

These loans have helped developers keep the prices up, even in a relatively weak market. “The central bank will have to keep a vigil on any an asset bubble building due to excess liquidity,” said Navneet Munot, chief investment officer of SBI Mutual Fund. Harsh Roongta, CEO, Apna Paisa, added: “It (the move) will serve to increase the cost of landing to the real estate sector. It is possibly a welcome step to ensure that no bubble gets built up based on loans.”

The stock market did not take kindly to the change. The 30-share BSE Sensex ended the day 387.1 points, or 2.31%, down to close the day at 16353.40 points. Bank and realty stocks fell even more, with the 18-share BSE Bankex falling 3.8% and the 14-share BSE Realty Index falling 6.24%.

Big developers haven’t liked this move either. “Increasing, the risk weightage for commercial real estate is a negative signal, and is perhaps not required at this early stage of economic revival. If the same had been pushed down a few quarters later, it would have been better,” said Rajeev Talwar, executive director, DLF Ltd Group. He felt the move would discourage developers from going ahead with commercial projects. “To send a negative signal to any segment of the realty sector is not called for at the moment,” he said.

Industry experts believe that the move will prompt banks to be cautious while disbursing loans to avoid further non performing assets (NPAs) on their books. Ravi Ramu, director of Bangalore-based developer Purvankara Projects Ltd, said, “Banks will not lend to smaller developers who run the risk of getting into project execution problems.”

An increase in provisioning requirements would also mean that banks will now lend to developers at higher interest rates. This, in turn, may force developers to push prices up, at least marginally which could mean higher prices for buyers. “Developers would find the cost of loans going up, which can adversely impact their liquidity position and might force them to pass on the prices to the end users,” said Priyankar Bhikshu, head of consulting & research – India, DTZ.

This could also mean higher prices — at least in the affordable housing segment as no developer would like to pay from their pockets.Hari Prakash Pandey, vice-president (finance), Housing Development and Infrastructure Limited (HDIL), said, “Currently prices have already moved up. Even if HDIL has to increase price then it would not be more than 5% of the flat price.”

Demand is increasing for 2 and 3 bedroom homes in India a new research report from Jones Lang La Salle has stated.

When the downturn set in developers moved away from developments of large luxury apartments and villas that targeted foreign buyers, to concentrate on affordable schemes that would appeal to locals.

The key word in that is luxury, not large. Of course a natural progression of building affordable housing leads to the development of family homes.

The initial wave of affordable housing development targeting the growing middle class as thousands left Indian universities each year, was for apartments for the new single working man, a logical progression is that they would meet members of the opposite sex and start a family.

However, it is likely that speculative investment in Indian property will also restart very soon, because of the country’s continued economic growth throughout the global downturn.

The current trend in property investment is to look for solid rental income, and Indian property is among the best in the world for residential rental potential, because of the massive population growth and continued shortage of affordable housing.

The Jones Lang La Salle report mentioned the reduction in prices on large residential properties as a factor in the increased demand. The report seems to indicate that this demand is being driven by local and resident buyers at the moment, but if that is the case now it will only be a matter of time before non-resident Indian’s are driving up prices in the country once again.

According to a report prepared by property consultant Knight Frank on Public-Private-Partnership model on housing in India, an estimated 11.84 million dwelling units are required to be built in India by the end of 2013-14 across all income segments in 37 Indian cities.

The need from the economically weaker section (EWS, lower income group (LIG) and lower mid income group (MIG) is nearly 90 per cent of the total housing requirement, it said.

“The cumulative task of delivering over 10 million units in affordable housing category in top 37 cities of India quantifies to a business opportunity in excess of Rs 5,00,000 crore,” the report, prepared for realty body NAREDCO, said.

Commenting on the potential of the segment, the report said though the margins realised from affordable Indian homes are comparatively lesser, the segment offers an opportunity to exploit volume of transactions to derive higher profits.

HYDERABAD: After almost a year of lull that had the real estate sector deeply worried, there seem to be some signs of construction activity picking up a bit and sale numbers rising slightly.

Though there are more enquiries from prospective buyers and more units sold when compared to last few months, the construction industry is yet to recover from an uncertain situation where it had landed after an unprecedented boom.

Some of the projects have announced positive results and these include Cybercity Builders and Developers which sold the entire Phase-I of its Rainbow Vistas project in just 110 days and also the Water Front project launched by Prajay Engineers.

At the same time, there are scores of small, medium and also huge projects that are in various stages of completion and waiting to find buyers.

Builders do concede that such is the continuing state of confusion that some kept their projects on the drawing board itself and are waiting for the situation to improve while others who took advances from buyers and have not yet started construction, are in a bind.

“Those who have completed say 50 per cent of their projects, have no other option but to sell it fast. Most avail loans from financial institutions and there will be pressure for repayment forcing them to reduce the pricing and sell the units,” says a builder.

Cancellations

Cancellations too have started and builders delaying projects face the prospect of having to return advances.

There is a slight improvement in the situation and sales are marginally up but the trend does not match the hopes of industry, the builder community bemoans. Huge projects, that are yet to find buyers, are coming up in different points along the suburbs, it is said.

Pricing

The pricing did start climbing down but majority of the prospective buyers are still in the ‘wait-and-watch’ mode hoping for the prices to drop further.

In some areas that were most sought after till last year-end, the price tags are 20-25 per cent less now.

“The focus is shifting from ultra luxury to affordability, but the industry in the city is yet to concentrate fully in this direction.

In most cases, the land component came at high cost during the boom and the builders find it hard to balance it.”

As far as construction material cost is concerned, prices of steel and labour have come down.

“There is not much change in cement prices but steel has come down a bit. With less work these days, the demand for labour is not there as it was earlier and hence their charges too are less now,” says C. Prabhakara Rao of Greater Hyderabad Builders Federation.

Political developments

The recent political developments in the State too are cited as one of the reasons for Hyderabad not joining other cities which have started coming out of the slowdown more strongly.

The political scenario that unfolded after the death of Y.S. Rajasekhara Reddy did affect the industry and it might take few more months for the situation to stabilise, adds Mr. Prabhakara Rao.

It’s perhaps the best time to look around for a value buy in real estate reports Neha Dewan, ET Bureau. With lower price points in locations which were not earlier within reach, Indian buyers are scouting for good ‘value’ bargains at this time.

And with Indian developers going big on affordable home launches, the timing may just be one of the best for buyers seeking a steal deal.

Anshuman Magazine, CMD of global real estate consultancy CB Richard Ellis (CBRE) says that value buying is happening mostly in Indian suburban locations as that is where the current supply is.

“Certain pockets in Gurgaon and Noida, where the price earlier used to be Rs 65 lakh-Rs 1.5 cr, today have deals to offer anywhere between Rs 35 lakh to Rs 50 lakh! Indian developers have reduced the total ticket sizes, adjusted area, price and given amenities. This has got people back and is making them hunt for value deals right now.”

Indian home buyers will now know if the land on which their building stands is free of outside claims after a recent Reserve Bank of India (RBI) circular mandating builders mortgaging the land to raise money to disclose it in all advertisements and brochures.

The Economic Times reports the RBI has asked Indian lenders to ensure that all publicity material relating to the sale of real estate make a mention of the bank’s lien on the property so that home buyers are not kept in the dark about this legal claim or ‘hold’.

RBI aims to prevent prospective Indian buyers from being lulled into the belief that the flats they own are on ‘free-hold’ land through this move.

Anuj Puri, country head of real estate consultant Jones Lang LaSalle Meghraj said “The RBI circular will bring transparency and accountability on the part of developers. It would also give a chance to buyers to see the viability of projects especially when the loan amount is very high.”

DLF, the India’s largest property developer, will soon conduct a poll among Indian property brokers to decide the pricing and number of apartments to be offered in the second phase of its Capital Greens project in West Delhi.

It’s a novel experiment, but property brokers in Delhi say the company is trying to test the waters in view of the vastly changed situation in the Indian real estate market.

Developers such as DLF, Unitech, Omaxe, Parsvnath and HDIL were among those that cut Indian property prices or forayed into mid-income housing, which were 25 to 30 per cent lower than prevailing prices, in the last quarters of 2008-09, as the economic slowdown and fears of Indian job losses impacted home sales. Indian property sales fell 50 per cent from their peak in 2007-08 (when prices had more than doubled froom 2004-05) as buyers stayed away.

Those days are rapidly becoming a distant memory, with many Indian developers increasing prices 15 to 30 per cent the moment they became sure of demand returning.

The Indian real estate is expected to enter the recovery phase by end-this year and macro-economic and sector-specific factors will act as catalysts in this recovery, a leading real estate consultancy said. “Economic recovery during CY 2010-11 is likely to reinvigorate the interest of foreign investors in India’s real estate market. We expect enhanced capital inflow in the real estate sector in the medium-to-long-term,” Jones Lang LaSalle said in its report.

Initial yield is expected to show compression during CY 2010-11 and capital values are likely to decline during 2010 before recovering in 2011, the company said in the report. “Initial yield has already started to show a declining trend during 2009 which is likely to be the case in the near-term. Yield on 10-year Indian Government Bonds is likely to harden due to higher fiscal deficit,” it said.

Indian property investors intending to sell could do well waiting for about six more months to get some added advantage, say experts. “It depends on at what level they had entered. In another three to six months the Kolkata market will be stable and input costs are anticipated to rise after that. Since there are no major projects that have been announced, there will be strain on supply. People should wait for at least six months before starting to sell,” said Pradeep Sureka, managing director of Bengal Park Chambers Housing Development Ltd. He added that ideally a two year wait would bring in maximum returns.

Debjani Mukherjee Sarkar, general manager — marketing of Bengal NRI and Varun Kathotia, director — marketing of Fort Group agreed. “In the past two months, the trend has shown that the market is picking up. The Bengal NRI, however, believes that people should wait for around six months to get an appreciation of about 10 to 15 per cent,” she said. “Land prices have not changed much and unless one can strike a very good deal, it is better to wait another four months before one sells a property,” Kathotia said. Some said in a couple of years, there would be major rise in property prices. “Those who had invested between 2005 and 2007, early 2008 had been the best time to sell off. At the moment, the market is slightly down and it is the right time to buy rather than sell. By 2011, there will be another 20 to 30 per cent jump in the market and that will be the ideal time to sell,” said Mayank Saksena, associate director of Joneslang Lasalle Meghraj.

“Two years from now, there will be a more than 30 per cent rise in prices,” said Sumeet Dabriwala, managing director of United Credit Belani Group. He added that people should wait for six months to one year because the condition at present was just the beginning of an uptrend. Many divided investors into different categories. “Selling will depend on when the person had taken possession of the property. If he is an old investor, this time is good enough to fetch him a profit and if he has been a recent investor, it will be better for him to wait for some time as the market has stabled and from here, it will only improve. In another year, the market will improve at least 10 per cent,” said Rahul Todi, managing director of Shrachi.

Rajesh Somani of Somani Realtors classified investors according to the amount of money they had spent. “People who had put in their money in properties of over Rs 40 lakh can sell them off as market growth in that segment is very slow but for investors under Rs 30 lakh, it will be advisable to wait for another six months, because the market is showing a positive trend,” he said. “The market has stabilised. People who had bought a correctly priced property will get better returns than bank interest, but those who purchased at exorbitant prices, expecting to make a fortune, will suffer a loss. Sellers who can afford to wait for another six months will get better return. .