Tuesday, February 5, 2013

India Real Estate Outlook 2013

India real estate 2013. Not just that! Image:
We spent most of last year building clients, doing city researches and miraculously ended up with a couple of nice private and government assignments. A year of being right in the middle of things throws up a few insights. So we will list them here.

For a start, India Ratings has revised its outlook for the Indian real estate sector to 'negative to stable' for 2013, from negative in 2012. For people who are following updates like these, its the time for hope, recovery and an indication for better ahead. If you just wanted to know what is most likely to happen in a nutshell, then you should be happy with what you have already read! However, noted below is what we have experienced first hand. We try and make a simple note of things.

Residential: Till mid 2012, stuff did not move. Period. Associated with various projects across the country, the off take of residential stock we experienced was slow. We converted a lot of good folks into what they call 'fence sitters' (people sitting on the fence, undecided about their buying). Most of those fence sitters remain perched there even as we write this. Across markets, as migration into urban areas increases, so does the demand for homes in the affordable category.

People get jobs, they have aspirations and some savings, but Hey!, these people cannot afford INR 50 Lac and above homes. The key to faster sales, cash flows and profitability for the residential developer lies in designing and pricing his residential units for the common man. A city specific research would help to design and launch the right residential product.

Listening to that local broker and consultant would also help. We think that till a point, everything seems to work but inevitably, the market forces will take over. That is not a great space to be in for a developer.

2013 started with an interest rate cut. Home loans are slightly cheaper but not to that point where an interest rate cut alone could tip the scale in favour of more residential sales.

All over the country, joint venture land deals between over optimistic land owners and cash strapped builders have been signed like nobody's business. The result is that a lot of projects selling cheap right now and seeming to be once in a lifetime investment deals will; 1) Not be completed 2) Will be way behind schedule 3) Will be built much below the specs promised, (any of these could happen) ultimately wiping that happy grin off the investor's face. You see, if the deal sounds too good to be true, walk away from it.

The big, reputed players are seeing an increase in sales gradually. Established real estate builders continue to sell stock through their large base of established customers/ investors and their references. NRIs are investing more into real estate back in India as the rupee is weak and their foreign currencies, upon conversion are giving them more square feet than normal!

Commercial/ Office: The India Ratings report states "Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 has been around 28%-32% lower than in the previous two years.” That converted into layman talk means that hiring has been substantially lower for some time and thus, the demand for office spaces has softened.

We are a very small and insignificant consultancy setup in terms of size, yet we were approached by some big builder brands to get some office spaces leased out in east and north India. Going by basic laws of business, when a deal from there comes to a small start up like ours, it means only one thing. Things are not going right for builders.

Smaller towns are witnessing some demand increase though. Automobile companies, banks, other service providers are looking at the larger Indian story and spreading inwards. This has opened up the demand for quality office spaces in the tier 2 and tier 3 cities of India. The problem in such cities today, is the absolute lack of quality work places, improper understanding of the leasing concept and unrealistic rent expectations by the builders. The few developers who have the vision, insight and deep pockets are swiftly closing leasing deals with large corporations setting up new offices or expanding existing set ups.

We, at Pillars Consultancy reckon that the high dependency on the IT/ ITES Sectors will shift more towards a wholesome, ‘across the industries’ outlook. In 2013, this expected overall growth and office space demand from various industries and players will move commercial stock steadily. The spillover into the innards of India is underway now. And that is where the action will be, in the near future.

Retail: We downloaded all kinds of reports from yesteryear on Indian Retail. Many of the big retail chains holding the highest hopes 5 years ago are struggling to stay afloat today. Some have sadly perished. Ditto some very hyped malls and retail centres. We have seen our fair share of PIMs (Project Information Memorandums) and if we had to believe the experts, we would be writing this post from a high end café on the moon.

Applying the laws of retail which prevail in the Western World to India, is like trying to fix a wrist watch with a sledgehammer.

In reality, we struggled to lease out even some of the best small retail and commercial buildings in the Tier 2 and 3 cities we were working in. A few of these buildings were ready for fit outs. Come 2013 and we do see some movement happening (the boys are out for meetings and site visits and not playing Deus Ex on their desktops for a change).

There are many premium retail store spaces on high streets that have been vacated by brands that could not make money from that location or went plain bust altogether. Some of these spaces are being filled out by first time ‘unheard of’ brands. Established brands continue to look for locations, spaces and facilities that exist only in virtual reality. While every single brand wants that ‘frontage wala’ unit on the ground floor of the mall!

The India Ratings report says “Demand for retail space is likely to be muted in the near term.” Our men on the field feel the same. More than anything, there seems to be a gaping crater between what the builders and retailers really want from each other. They seem to come from different worlds. 2013 promises to be not really different for retail in India unless both the ends bridge the gap!

-written with "excerpts" from the India Ratings report for 2013.

Related Articles:

1. Jan Feb March 2013 India real estate progress report.

2. Will European Investors look at India as an investment opportunity again?

3. Nice homes for just Rupees 1500 per Sq ft. Is everything okay?


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