Is Indian real estate heading towards a tectonic shift?
July 2015 2 Is Indian real estate heading towards a tectonic shift?
1 Introduction 4P’s of real estate – the pillars of transition • Players • Process • Product 2 • Places
Office real estate sector • Migration to peripheral business districts has accelerated • Real estate will see greater participation of Private Equity and institutional investors 3 • Occupier profile undergoes a transition
Retail real estate sector • Frequent churn – a new norm in retail malls • Malls witness a divide: successful versus unsuccessful 4 • New breed of retailers to drive demand for quality retail supply Contents Is Indian real estate heading towards a tectonic shift? 3
Residential real estate sector • Apartment sizes are falling in order to suit affordability of buyers • Branded residences have slowly caught the attention of richer Indians; trend appears lasting • Definition of basic amenities has expanded even for mid-segment to affordable housing 5 • New concepts in residential: senior Living, service apartments and studio apartments
Industrial real estate sector • Traditional godowns making way for modern warehousing 6 • Changing business environment to reshuffle location criteria for warehouses
Current innovations lay foundation for future transitions • New breed of developers • Rising prominence of CRE team within office occupiers • Consistent rise in real estate market transparency appears likely 7 • A ‘green building’ movement is underway in India 8 Conclusion 4 Is Indian real estate heading towards a tectonic shift?
Introduction1 Is Indian real estate heading towards a tectonic shift? 5
An industry that is relatively new compared to the banking, finance, manufacturing, consumer goods and others, the Indian real estate sector has not seen many business cycles in the pre liberalisation era. However, post the economic liberalisation of 1991 during the IT boom in the last decade (2000s), the sector has witnessed two business cycles. The latest cycle (2005-10) ended up with a lot of learnings for the stakeholders, and has made the sector relatively more mature and transparent. In that sense, the last 10 years has been quite dynamic, as each of the fundamental 4Ps of real estate – Players, Processes, Product and Places – witnessed plethora of changes.
The core sectors of Office, Retail, Residential and Industrial have independently witnessed changes of their own. Office markets have witnessed a transition in terms of moving out of the central business districts (CBDs) to secondary business districts (SBDs) and peripheral business districts (PBDs) in search for value, while corporate The last 10 years has been quite occupiers' profile have become more diverse or less concentrated dynamic, as each of the fundamental within few industries. Changing consumer preferences and entry of 4Ps of real estate – Players, Processes, more international retailers have made the retail sector complex and Product and Places – witnessed dynamic. Consequently, there is now a divide between malls that plethora of changes. could adapt to the new dynamism and those that cannot. On the other hand, residential sector is finding its own ways of evolving through experimentation with concepts such as compact homes, branded homes, senior living, and serviced and studio apartments.
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 skilful 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. 6 Is Indian real estate heading towards a tectonic shift?
4P’s of real2 estate – the pillars of transition Is Indian real estate heading towards a tectonic shift? 7
2.1 Players The real estate industry has been a highly localised industry in India building a pan-India portfolio of real estate assets may sustain and with each city being dominated by a select few developers. However, strengthen over the next decade as the market matures and weaker in the post-global financial crisis (GFC) era, several developers started players get weeded out for lack of capital, corporatization, and technical to expand their footprint to newer geographies. For example – K prowess. Eventually, the sector would witness a period of consolidation Raheja Corporation, dominant in Mumbai, forayed into the Hyderabad wherein large, well-capitalized developers would gain market share IT office segment through its Mindspace park in 2004, Godrej by either purchasing assets or acquiring smaller players. Developers Properties dominant in Mumbai, forayed into Ahmedabad through its holding excessively large levels of debt on their balance sheets and Garden City project in 2013 and entered the Pune market by way of its struggling to service it would be the prime takeover candidates while Horizon project at Undri in 2012. A recent entrant in the Indian realty professionally managed players with access to institutional funding space and primarily on the retail segment is the Xander group, which would emerge as acquirers. The introduction of real estate investment is establishing a pan-India portfolio of properties spanning diverse trusts (REITs) would catalyse the transition as private equity (PE) funds asset types starting with its VR Mall at Surat, (completed in 2013). would be able to make exits from their current projects freeing up capital for more judicious deployment in future years. It is highly likely that the trend of large and well capitalized developers
Examples of developers foraying into new geographies
Developer Name Dominant Expansion Project Name Asset City City Type
Godrej Properties Mumbai Kolkata Waterside Office
Godrej Properties Mumbai Gurgaon Godrej Summit Residential
Tata Housing Mumbai Bangalore Casacades Residential
Tata Housing Mumbai Gurgaon Louvre Residential
DLF Delhi Bangalore Westend Heights Residential NCR
DLF Delhi Chennai Commander’s court Residential NCR
K Raheja Corp Mumbai Hyderabad Inorbit Mall Retail
K Raheja Corp Mumbai Bangalore Vivarea Residential Source: JLL-REIS 8 Is Indian real estate heading towards a tectonic shift?
2.2 ProcessES Ongoing changes in how real estate stakeholders are carrying out We are beginning to witness the their business in India reveal a change in market perception trend of outsourcing of AEIC Growing acceptance of international real estate (Architecture, Engineering, Interior consultants and Contractor) practices to globally renowned agencies in an effort to As against the 1990s, when multinationals that entered India largely make Indian cities standout adopted the Indian standards in real estate, the IT-era growth post 2000 witnessed offshore companies demanding quality IT space. Besides, India’s growing prowess in the world of services, trade and business resulted in a wider participation of multinational companies, who shifted their base to India and created a natural expectation for superior quality of construction, architecture and design. Local developers left no stone unturned to ensure best practices across the globe were gradually adopted.
More recently, we are beginning to witness the trend of outsourcing of AEIC (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. In the last five years, these consultants have become household names in their respective fields within the real estate sector. Their designs have been inspiring property buyers because they reflect styles that are truly global. These consultants manage to influence more developers into partnering with them.
Following is a list of internationally reputed consultants that currently operate in India –
Architecture Interiors Landscape
HOK Kelly Hoppen Allan Wyatt
Woha Singapore Yoo Belt Collin
Callison Jade Jagger Design Concepts
Casa / Foster & Partners Sitectonics Armani Philippe HB Design Studio Steed Starck
Source: JLL-REIS Is Indian real estate heading towards a tectonic shift? 9
Property transactions becoming increasingly legitimate
While the property market slowdown in India since 2011 has hurt many, one positive thing that has happened is the consistent fall in cash Examples of public portals that are rich with real estate information component (source of black money) in property purchases. Over the National land records last five years, property prices have almost stagnated against inflation http://www.archive.india.gov.in across major real estate markets. As a result, majority buyers who are Central government property records currently active in the market are salaried people who can support http://estates.nic.in a loan but cannot afford cash payments. Today, as much as 80% of buyers in top cities such as Mumbai, Delhi, Bangalore, Chennai, Pune, Property registration records of Maharashtra Hyderabad and Kolkata are salaried employees. On the contrary, http://igrmaharashtra.gov.in businessmen and speculative investors were dominating the market prior to the slowdown when real estate boom was at pinnacle. Today, almost all newly developed residential properties can be bought with 100% white money. Many resale properties too are available without the cash component. Government’s recent budgetary measures to encourage or incentivise electronic payment for large transactions such as property purchase, and simultaneously raise punitive action against illegal transaction, will further help reduce cash dealings. Real estate records going online
India is today at the forefront of adopting technological innovations into practice across a wide variety of businesses and public administration mechanism. Initiatives such as e-governance and Digital India are bringing about sweeping changes in the public administration operates and records are maintained. In the last 5-7 years, few government websites have taken the lead in making critical land and registration records available online, thereby giving a new boost to market transparency. 10 Is Indian real estate heading towards a tectonic shift?
2.3 ProDUCTS There is a significant change in the way construction quality and Post the beginning of IT boom in India around the year 2000, large IT techniques have evolved over the years. By simple observation, companies and other MNCs who wanted to enter India in a big way, projects completed before 2000 mostly had older design and no expressed their desire to occupy space in modern offices. These amenities. The buildings had no element of sustainability – energy factors led to Indian developers delivering superior construction quality efficiency, water harvesting system, security systems, advance safety that fulfils the requirement of MNCs & IT companies. Developers norms etc. Existing multinationals, too, had no option but to occupy across India implemented various advanced construction techniques such buildings given the limitation of technological capability to and innovative designs to improve the quality of projects through which construct modern buildings. they have attracted more IT & MNC occupiers into their projects.
Differences in amenities of old-style buildings and modern buildings
PRE 2000 POST 2000 More use of brick in construction More use of steel & glass in construction Smaller floor plates Larger floor plates Conventional construction techniques Advanced construction techniques No Green Building Rising proportion of LEED certified buildings Absence of recreational facilities Importance for recreational facilities Insufficient parking facilities Ample car parking facilities Basic security system Advanced security systems Basic firefighting system Advanced fire detection and firefighting equipment Old design structures Modern design structures No air-conditioning Centralised air-conditioning system No power backup 100% power backup
Nariman Bhavan - Nariman Point, Mumbai Peninsula Business Park - Lower Parel, Mumbai Mittal Court - Nariman Point, Mumbai Mindspace IT Park – Malad, Mumbai HT House - Connaught Place, Delhi NCR Signature Towers – Gurgaon, Delhi NCR DLF Corporate Park – Gurgaon, Delhi NCR One Horizon Centre – Gurgaon, Delhi NCR The Senate - Ulsoor Road, Bangalore Tata Xylem Tech Park – Whitefield, Bangalore Khanija Bhavan - Race Course Road, Bangalore Embassy Manyata Tech - Hebbal ORR, Bangalore IT Park – Kharadi, Pune E xamples Blueridge IT Park - Hinjewadi - Pune
Source: JLL Research Is Indian real estate heading towards a tectonic shift? 11
2.4 PLACES Property markets are evolving at every stage, starting from tier-I cities since liberalisation days to tier-II cities post the IT-ITES boom in India during the late 1990s. Driven by rapid pace of growth of the services sector, office market strengthened in the tier-I cities, which were predominantly occupied by sectors such as BFSI, Pharmaceuticals, FMCG and Media. However, in the IT era post 2000, offshoring of business received a major fillip after the global Y2K problem as well as favourable IT policies of the Indian government. Because location was less of a concern for the offshoring companies, they preferred to enter tier-II cities – Bangalore, Hyderabad, and Pune. These markets had some inherent qualities such as good number of technical education centres, low property prices / rentals, vast availability of space to accommodate campus-style offices, and pleasant weather.
Today, cities such as Bangalore and Pune are dotted with presence of large IT multinationals and the incremental space for new entrants is getting limited. Additionally, developments witnessed over the last decade or so have resulted in a steep rise in prime property prices that may not be comforting to few existing IT companies planning to expand operations. 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.
IT sector has dominated office space occupancy for almost a decade and is now exploring new cities for expansion or creation of new bases. The necessity to exert tight control on occupancy cost, to maintain cost-competitiveness, prompt IT/ITES firms to scout for alternate destinations that have an abundance of skilled manpower. This is resulting into the emergence of new cities such as Chandigarh, Visakhapatnam, Vijayawada, Mysore, Kochi, Coimbatore,Tiruchi, Bhubaneswar, Ahmedabad & Gandhinagar, Jaipur as the new centres of choice for setting up large scale IT office infrastructure. 12 Is Indian real estate heading towards a tectonic shift?
Office3 Real Estate sector Is Indian real estate heading towards a tectonic shift? 13
From greater occupier diversity and migration to suburban areas to increased participation of PE funds and institutions, the office segment has witnessed significant transition over the last decade - a trend, we expect, will gather pace in the years to come. 3.1 Migration to peripheral business districts has Migration to suburbs and accelerated peripheral areas – driven by a The trend of companies migrating to offices in suburbs and peripheral combination of cheaper rents areas – driven by a combination of cheaper rents and lesser commute and lesser commute times for times for workforce – has risen sharply over the last decade. IT/ITES workforce – has risen sharply companies, which were largely location-independent due to their over the last decade offshore-onsite business model, are the trend-setters in this respect. Other sectors have increasingly taken the cue in setting-up large office spaces in secondary business districts (SBD) and peripheral business districts (PBD).
Developers have responded to occupier demand by executing 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% in 2004 to 47% in 1H2015. The share of SBDs in office stock has remained stable over the last several years at around 43% of the total office stock. CBD, on the other hand, has witnessed a severe attrition of occupiers and a decline in fresh supply of office space that‘s led to a significant drop in its share of office stock from about 33% in 2004 to 10% in 1H2015.
Office stock by business district by city 2004-1H2015
All figures in % Note: Some percentage totals may not add-up due to rounding off.
Source: JLL-REIS 14 Is Indian real estate heading towards a tectonic shift?
Reasons behind the transition
The preference for SBDs Office stock by business and PBDs has been largely district by cities 2005-1H2015 dependent on the development of mass transit systems and social infrastructure in these locations. The availability of large contiguous land parcels and a high quality supply of buildings have been the other major factors that shaped this trend. Rental difference – the principal factor driving the rush towards extended suburbs – has been significant. As of 1H2015, average rental Source: JLL-REIS values at PBD locations in the country were about 45-60% cheaper than CBD rentals.
Delhi NCR has witnessed the most spectacular emergence of alternate from the island city to the suburbs while the Santacruz-Chembur business districts in Gurgaon and Noida, which draw workforce not Link Road (SCLR) and Mumbai metro projects improved east-west only from within local municipal limits but also from Delhi and other connectivity. The lack of any significant mass-transit projects along the areas of NCR. crucial North-South corridor and to Navi Mumbai over the last decade has restricted the development of office districts in PBD precincts. The trend has been especially pronounced in case of Gurgaon, This is evidenced by the modest increase in office stock in PBD as which has seen a meteoric rise in almost all demographic and compared to SBD. economic indicators. Gurgaon has witnessed an unprecedented urban transformation with its urban population having clocked the fastest Bangalore and Hyderabad have witnessed a significant shift in office growth in the country over the last decade – 17% compound annual stock to PBD mainly due to dominance of IT/ITES sectors, which have growth rate (CAGR) from 2001 to 2011. Gurgaon and Noida comprised traditionally established large campuses at low-cost PBD precincts. over 80% of the lease volumes in 2015 – amongst the highest Significant progress on ring road projects linking the city peripheries proportion of lease volumes registered by peripheral destinations in has improved connectivity in these cities. any city. Pune and Chennai have witnessed greater interest in the SBD Mumbai has been an exception to the trend of office migration to PBD locations, which provide affordable alternatives for large occupiers due to lack of supporting infrastructure and connectivity. However, the looking for Grade-A properties. SBD Old Mahabalipuram Road city witnessed a steady shift in office stock from prime CBD areas like (OMR) in Chennai and Hinjewadi in Pune emerged as front-running Nariman Point to SBD precincts such as Lower Parel and Andheri- destinations in the respective cities due to an abundance of large Kurla road. An exodus of offices out of CBD was sparked by lack of Grade-A properties. Kolkata has seen a rising interest in PBD precincts quality office stock and the complicated ownership structure. such as Rajarhat, which has witnessed a significant rise in office stock, driven primarily by the IT/ITES sector. The opening of Bandra-Worli Sea Link in 2009 enhanced connectivity Is Indian real estate heading towards a tectonic shift? 15
3.2 Real estate will continue to see greater PE, Rising share of private Institutional participation equity lending to Indian real estate Real estate in India has seen rising participation by private equity (PE) funds over the last decade. After the election of the new government in 2014, PE deals gathered further momentum as investments accelerated sharply in the first half of 2015. Global funds have made a strong comeback investing in affordable housing developments, office parks and mixed-use projects. Reasons behind the rise of PE funds
The economic slowdown witnessed since 2012 in India made it difficult for developers to tap the primary equity markets for funds. Banks, the biggest lenders of the sector, were also under pressure during this period due to increasing stressed assets on their balance sheets, constraining their ability to finance newer projects. Making matters worse, the economic slowdown dented the demand for new office space due to many corporates putting expansion plans on hold. Source: JLL Research The difficult situation of the office segment is now evidenced in the elevated levels of vacancy. The spill-over of supply conceived during the pre-GFC period combined with weak absorption has led to persistently elevated vacancy levels of about 15-20% on an average Office vacancy rates in Indian cities 2005-1H2015 country-wide basis. Delhi-NCR, Kolkata, and Mumbai-MMR have been particularly hard-hit by vacancy levels, which are higher than the countrywide average.
On the other hand, Pune, Bangalore, and Hyderabad have enjoyed lower vacancy levels due to greater coordinated supply with pre- commitment by IT companies in these cities. Developers in Bangalore usually commit to commercial buildings in consultation with occupiers, thereby having a better understanding of future demand.
In Mumbai, however, developers typically gauge the market sentiment and construct space on a speculative basis leading to higher vacancy during economic down-cycles. The vacancy levels have been significantly higher ranging about 40-60% in lower grade office spaces.
Source: JLL-REIS 16 Is Indian real estate heading towards a tectonic shift?
the export-driven sectors of healthcare and bio-tech experienced 3.3 Occupier profile record sales and profit growth during 2012-13, a period which was undergoes a transition otherwise slow for the domestic economy. This led to strong hiring and consequently, rise in share of leasing volumes by this occupier type The office sector has witnessed a gradual transition towards greater from 14% in 2005 to 37% in 2015. The share of these occupiers can occupier diversity after more than a decade of IT/ITES dominance. be expected to rise over the next decade as healthcare sectors are Absorption of office space broadly mirrored the economic fortunes increasingly expected to take the inorganic route to future growth. of the occupier industries through the business cycles over the last decade. The savings accruing from lower petroleum and other commodity prices (of which India is a large net importer) would enable the The GFC in 2008 saw a significant contraction in the share of IT/ITES government to better fund big-ticket infra projects like Delhi-Mumbai companies in total office space absorption in the country as these firms industrial corridor (DMIC), the smart cities mission and construction of reeled under the effects of widespread cuts in IT spends worldwide. national highways, thereby boosting the construction and infrastructure After a brief period of recovery during 2009-10, the share of IT/ITES sectors and their share in office space absorption. sector has continued to decline as the Indian technology sector itself is transitioning from its traditional labour arbitrage model towards newer The share of the BFSI sector in leasing volumes has been relatively technology platforms such as cloud computing and automation – a stable through the last decade. After reaching a low-point of about 8% trend that cuts down on the requirement for human resources and, in 2012, the share of BFSI reverted to its long term average of around consequently, office space. The share of IT/ITES sector in leasing 13% by 2015. volumes has declined from 48% in 2005 to 32% at the end of 2Q 2015.
The lower absorption of office space by the IT/ITES sector would be compensated to a large extent by new-age sectors such as Sector-wise share of leased area, 2005-1H2015 eCommerce. The blistering pace of growth of the eCommerce sector in the country has resulted in massive office space absorption – a trend we expect to continue over the next decade as broadband connectivity further penetrates to rural households.
Another sector that has undergone substantial erosion in space absorption is the manufacturing sector, whose share in leasing volumes has declined from 22.5% in 2005 to 10.8% in 2015. Domestic manufacturing continues to be highly uncompetitive, saddled by difficulties in land acquisition, environmental clearances and archaic labour laws.
The Modi government’s renewed thrust on manufacturing through its flagship scheme ‘Make in India’, has received a positive response from many MNCs. The government has put in place a defined agenda for implementing structural reforms in labour laws and land acquisition act, which are precursors to successful implementation of ‘Make in India’. The renewed focus on the manufacturing sector would result in associated addition of manpower and space that would result in a sustained, multi-year increase in office absorption.
The traditionally defensive sectors such as telecom, healthcare and bio-tech behaved resiliently in the aftermath of the GFC with little impact on their hiring and office space absorption. Within this space, Is Indian real estate heading towards a tectonic shift? 17
Retail4 Real Estate sector 18 Is Indian real estate heading towards a tectonic shift?
The retail real estate sector has become one of the most dynamic presence – possibly on the back of big funding through foreign direct sectors in India as consumer preferences change at a rapid pace. investment (FDI) or private equity Frequency with which new brands enter the markets, older brands shift • Landlords (or developers) initiate churn to improve their portfolio of base, and malls reorient themselves is breath-taking. tenants at some locations while at unviable locations, retailers are driving the churn. 4.1 Frequent churn – a new The good part of this churning, however, is that the market is realising norm in retail malls its true value. Leading malls enjoy the privilege of deciding which brand to house and continuously monitor all stores that follow a Malls are seeing a lot of churn in recent years. So much so that it revenue-sharing model, over and above a minimal fixed rental. The appears to have become a new normal. During the mid-2000s, post revenue-sharing model has been increasingly in use to ensure both the boom in real estate and after the development of malls happened developers and retailers put in equal efforts to drive-in the much- across major real estate markets in India; business conglomerates needed footfalls to the mall. Hence, non-performing brands are such as Reliance, Aditya Birla, Godrej, Future Group etc. emerged in being weeded-out within fairly short periods of time and others being the business of retail and occupied large spaces in malls. Contract coaxed or forced to shift floors for better-performing brands to be period tenures were typically in the range of 18-20 years for anchor accommodated. Global as well as leading domestic brands either tenants while smaller vanilla retailers enjoyed 9-10 years. prefer to lease space in premium malls or go for high street locations. More recently, contract periods have been shortened to anywhere In a way, there is pressure on malls to partner with only highly- between two and five years for vanilla retailers. As a consequence, in productive brands, or risk succumbing to competition from other malls a few good malls where business is roaring, the rate at which malls in the vicinity. Good malls are currently in demand. An increasing churn brands have increased considerably. On an average, when number of international brands want to enter India and lease space business is good, churn rates of around 15-18% have been recorded. in high-performing malls. For instance, all national and international This is abnormally high considering that it used to be in the range of brands want to get launched from either a SelectCityWalk or DLF 4-8% in well-managed malls in the initial period. Promenade in Delhi and High Street Phoenix, Oberoi, or Palladium A combination of factors is responsible for churn rates going up so in Mumbai. At times, the churn is so necessary and rewarding that high: mall developers have gone ahead and bought-out contracts of brands • Poorly performing retailers exit malls midway through their lease in order to accommodate a more premium brand. Therefore, from a contracts mall manager’s perspective, locking-in tenants for 18-20 years will grossly inhibit the mall’s capability to correct its model, as and when • eCommerce players establishing/ expanding their brick-and-mortar necessary.
Changing contract tenures across India‘s malls
Anchor brands Other brands
2002-2003 18-20 yrs 9-10 yrs
2010-2011 12-15 yrs 5-6 yrs
2014-2015 9-10 yrs 2-3 yrs
*Details pertain only to lifestyle brands Is Indian real estate heading towards a tectonic shift? 19
Many experts believe that most of the poorly designed malls that are 4.2 Malls witness a divide: shutting down or converting into Grade-B office spaces are those successful versus constructed in the early years and have become old. This is at best a misconception, because market examples suggests that many old unsuccessful malls still find relevance in a market that rewards better design and In the past few years, developers reduced supply of mall space in mall management. India due to rising vacancy levels following the economic slowdown. In the near future, we expect more malls to withdraw from the However, prior to that, developers had resorted to break-neck pace retail realty business as a result of which, the business of average of construction of malls in response to a spurt in organised retail and good performing malls will improve. This is a much-needed business. Irrespective of the design quality, mall management course correction, which will continue to happen for some time. At practices and so-called best practices, developers continued to supply JLL research, we estimate around 14 malls to withdraw from retail retail space on the back of growing demand from existing and new operations, having a combined mall space of 3.5-4.5 million sq ft. retailers. Few developers had, back then, realised the right ingredients for constructing a successful mall. Post the slowdown in Indian economy in 2010, realisation seeped in that quality is required for enduring results. Robust supply of malls during mid to late 2000s; Slump in retail real estate supply in the current decade In the near future, we expect more malls to withdraw from the retail realty business as a result of which, the business of average and good performing malls will improve.
Unlike commercial buildings, whose tenants are stable and share common facilities, management of retail malls is complex. Apart from catering to various brand categories, mall management also involves planning the right tenant mix, space optimisation and zoning, and Source: JLL-REIS constantly studying shopper behaviour. Malls need to collect feedback from visitors to be relevant in all seasons. Otherwise, they will be out of the competition. Some malls perform poorly as they are unable Rising number of mall closures or to define the mall type, lack research on catchment and selection of conversions across major Indian cities expected to rise in near future wrong partners. By turn of the current decade, it was evident that mall management was not in the genes of every developer.
The haphazard manner of constructing malls without due-diligence left quite a few malls sick. The overall vacancy rate today stands high at ~20% in retail malls across major Indian cities. On the contrary, malls that run successfully have vacancies of not more than 10%, 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. Source: JLL-REIS 20 Is Indian real estate heading towards a tectonic shift?
4.3 New breed of retailers to drive demand for quality retail supply The presence of foreign retailers Foreign retailers tap rising consumer appetite in India is only going to rise in India, given that many brands have yet The Indian retail real estate sector is currently witnessing rising to enter India but have already demand for space coming from foreign retailers. This segment of expressed their intention to start retailers previously (in 2005) occupied not more than 15% of the total operations here retail space in organised malls, which increased to 18% as of 2010, and they currently occupy close to 22% of space. Entry of big foreign brands such as Marks & Spencer and Zara has led to a jostle for space within the good performing malls. It is the entry of these players that has resulted in a divide between successful and unsuccessful malls, as The presence of foreign retailers is only going to rise in India, they heavily favour the former even at a higher cost. given that many brands have already expressed their intention to start operations here. The following table enlists the names of foreign brands that have recently forayed into the Indian market and have started occupying space in malls across the leading seven cities –
Foreign retailers expanding reach within leading Indian cities Latest entrant - foreign (Store count in nos.) retailers in India (2013-2015)
First store Existing Store Brands opening (year) count (nos.)
ASICS shoes 2015 5
G-Star Raw 2015 1
GAP 2015 1
H&M 2015 1
Uniqlo 2015 1
Burger King 2014 20
Harry’s Bar 2013 7
Pizza Express 2013 8 Source: JLL Research Kidzania 2013 2
Source: JLL Research Is Indian real estate heading towards a tectonic shift? 21
Online retailers – in quest for a hybrid model
Increasingly, online retailers are beginning to foray into offline/physical store stores format of retailing. While this may be surprising for many, it is a way for these brands to differentiate themselves amongst the clutter of wannabe online brands. Lenskart, a well-known Indian eyewear brand that started online, has lately opened up stores in retail malls to directly connect with customers. Another brand called Freecultr, which is a fashion apparel brand created online, has been swiftly moving onto the offline space in order to give their customers a chance to touch and feel their merchandise. The brand is using its offline space to better understand the needs of their customers by collecting feedback, providing alternate payment options, using the store as a pick-up point, etc. Interestingly, Freecultr has a question posted on their website asking patrons to vote for a preferable city for their next installation, indicating that the company is planning to roll out more stores.
According to market sources, in 2014, over 70% of traffic on eCommerce websites came from the top-10 cities of India. This means that a vast majority of transactions, particularly in cities within tier-II and beyond, happens in physical stores. The Indian Railway Catering and Tourism Corporation‘s (IRCTC) growth in rural India, through ticketing kiosks is a proof that rural India is offline savvy. For online brands to exploit the rising spending power that exists in India’s rural market, it is important to make their presence felt in such places. Paytm, an online payment solutions company, has already moved offline with over 50,000 kiosks for loading its e-wallet. By being offline, the company has built trust with customers who would otherwise feel lost in the already significant online presence of other brands.
So strong is the urge to move offline globally that for the first time ever, Amazon US has opened a physical store in the US in early 2015, and it plans to open more such stores by mid-2015. The biggest nightmare for every online seller is to deal with a shopping cart abandonment rate of 70-80%. The sweet spot is to be in a middle zone where online sellers connect with the actual customers and also promote their products in multiple avenues. 22 Is Indian real estate heading towards a tectonic shift?
Residential5 real estate Is Indian real estate heading towards a tectonic shift? 23
Just like retail, residential real estate sector too is getting influenced Mumbai Metropolitan Region (MMR) witnessed the maximum fall in by the rapidly changing consumer preferences. Developers operating apartment sizes on annualised basis, along with Bangalore, Chennai in the residential space are ensuring they leave nothing to chance and and Kolkata. Other cities also witnessed varying degree of fall in have been toying with many ideas to keep the customer engaged. median apartment sizes. The dynamics of apartment sizes have a tale In the process, recent years have seen few transitions – falling to tell – that developers are paying conscious attention to consumers’ apartment sizes, more lifestyle amenities, entry of branded apartments, requirements. and introduction of new concepts such as senior living, serviced The fall in average apartment sizes across all top seven cities is a apartments etc. These transitions have caught the fancy of Indian clear indication that developers intend to make houses affordable homebuyers and they are likely to become a trend that will sustain the for buyers by reducing average apartment size instead of reducing test of time. the capital values. While property prices are not purely a product of developer’s discretion, the decision to alter apartment sizes as per the 5.1 Apartment Sizes are needs and spending power of buyers is definitely within their ambit. being decreased to suit It is relevant to note that buyers’ preference is changing with time. affordability of buyers Several urban buyers are increasingly looking for new homes near Builders are exploring innovative ways to make residential housing their office locations which could be small in size. They prefer a house across major cities more appealing to potential buyers at a time when it that is “sufficient” enough for his family requirements. This does not is increasingly becoming difficult to sell expensive apartments. Builders mean that they are compromising on their lifestyle, they prefer a small around the country are emulating the famous sachet marketing compact home equipped with all basic amenities. strategy adopted by FMCG companies in the late 1990s. Buyers are increasingly opting for homes that are closer to work-places Unable to sell expensive homes in a sluggish market, builders across in order to reduce commute times. As these locations are expensive India are making smaller apartments without lowering the price per compared to the suburbs, buyers may be able to afford smaller units, square feet and compromising on the quality of product. In the last five which is more than acceptable. To enjoy the luxury of bigger homes years, we have seen average apartment sizes falling across all major with good amenities, they prefer to buy homes in peripheral areas of cities of India. The following chart shows the varying degree of fall in the cities, from where the concept of second homes is emerging at apartment sizes: outskirts of the cities.
Decreasing apartment sizes across Indian cities
Source: JLL-REIS 24 Is Indian real estate heading towards a tectonic shift?
5.2 Branded residences have City Year slowly caught the attention Mumbai 2011 of richer Indians; trend Delhi NCR 2012 appears lasting Pune 2010 Bangalore 2013 Source: JLL-REIS The increase in India’s economic prosperity has increased the number of “super-rich” people in the country, a number that has grown by houses such as Armani and Swarovski, which lend their names while more than 200% in the past ten years, and now accounts for 3% of designing the interiors. the world’s multi-millionaires [1]. As a result, luxury consumerism has continued to increase. Very often, exclusivity is expressed through From the above table, it can be seen that Indian developers have luxury spending, which is shown through the wearing of premium started to tie-up with international brand names from early 2010 and apparel, fine dining at expensive restaurants, buying of expensive cars the trend of partnership with such brand names is increasing by the and also owning a luxurious home. year. Typically, projects in this category, to maintain exclusivity, resort to less number of units. Also, developers prefer to choose prime Currently, as consumers seek fashionable amenities in their residential locations, preferably in tier-I cities. Also, such projects have residences, “branded homes” are quickly gaining prominence in India. a tendency to command 25-30% higher prices than the average for the Typically, these are luxurious apartments combined with hospitality sub-market, depending upon the branding and facilities. services provided by the likes of Hyatt, Four Seasons, Le Meridien and JW Marriott, renowned globally for their superior hospitality services. The table below shows the year in which first branded projects were Some other apartments are joint-ventures with well-known fashion launched in different cities.
Indian developers and their international brand partners
Indian Developer International Brand Name Location Status and demonstration of success are the decisive factors for the rich, especially the Lodha Group Armani / Casa, Jade Jagger, Philippe Starck, Mumbai nouveau riche, when buying these properties, Donald Trump, Kelly Hoppen for investment-driven purchases are very few. A & O Realty F.TV Mumbai Luxury space with commensurate amenities Suntech Realty Disney Mumbai in top locations and targeted at the right class Homestead Michael Schumacher, Maria Sharapova Delhi NCR of people ensures that demand in this niche Brys Tonino Lamborghini CASA Delhi NCR segment market is met with the right product. Supertech Disney, JW Marriott, Armani, Swarovski Delhi NCR More and more developers are now working on Prestige Group Disney Bangalore this segment and we should see more launches Equinox Realty Jade Jagger Bangalore in the next few months. While the top developers are roping in international designers to build Bramha Corp F.TV Pune luxury residences in Tier I cities, lesser known Panchshil Donald Trump, Kelly Hoppen, Philippe Starck Pune developers are employing well-known domestic City Corp Swarovski Pune designers to do the same in Tier II cities.
Source: JLL-REIS
[1] Wealth Index by New World Wealth, June 2014 – has ranked India eighth and home to 14,800 multi-millionaires (an individual with net assets of at least USD 10 million), below countries such as the US, China, Germany and the UK, but above Singapore and Canada. Is Indian real estate heading towards a tectonic shift? 25
5.3 Definition of basic amenities has expanded even for mid-segment housing On the back of changing demographics (a population that is becoming younger) and rising income, Indians have expressed their desire to alter their lifestyles as we have witnessed over the last few years. Be it shopping for premium brands, demanding quality office spaces, and preference for quality amenities at residences, real estate sector has been witness to this stellar transition in consumer preference through these years.
Earlier, apartments with amenities such as swimming pool, gymnasium, club house, open green lawns, jogging tracks, etc. were limited to high-end apartments only. However, lately we have observed that consumers of mid and upper-mid category homes have also shown strong preference for such amenities in a bid to improve their quality of life. This is despite having to pay slightly more for such amenities. Realising the demand for such apartments, developers have offered projects that meet both ends – affordability for the city homebuyers as well as quality of life experience. 26 Is Indian real estate heading towards a tectonic shift?
Following are examples of mid & upper-mid segment projects with lifestyle amenities
Clubhouses, gymnasium, swimming / toddlers’ pool, luxurious spa / steam / Kalpataru Aura Mumbai 90 - 95 33 massage rooms / jacuzzi, multi-functional lounge, Indoor games / yoga room, squash / tennis / half-basketball court, mini-theatre / amphitheatre, landscaped garden / children’s play area
Lodha Splendora Thane 95 - 100 26 Landscaped garden, clubhouse, swimming pool, sport courts, football field, cricket pitch, jogging track, auditorium, amphitheatre, café, party hall, library
Navi Club-house, swimming and toddlers pool, gymnasium, health club with steam Indiabulls Greens 95 - 100 23 /sauna room, jacuzzi, badminton court, indoor games, landscaped pathways Mumbai around jogging circuits, cycling tracks and children’s play area
Multi-purpose hall, fitness centre, amphitheatre, meditation / yoga arena, Godrej Summit Gurgaon 95 - 100 14 skating rink, swimming pool, indoor / outdoor games, kids play area L aunch
Swimming pool, amphitheatre, party lawn, jogging track, indoor / outdoor 3C Lotus Boulevard Noida 95 - 100 24 games, cricket academy, club house, gymnasium CIT Y Prestige Tranquility Whitefield 95 - 100 16 Gymnasium, party hall, indoor / outdoor games, swimming pool, kid‘s play % U nits S old
PROJECT NAME PROJECT area, yoga terrace, health club, amphitheatre, jogging Track
Tata Housing New Tumkur Childrens play area, indor / outdoor games, skating rink, green landscaped 65 - 70 9 Haven Road area, walking pathways, swimming pool, gymnasium, multipurpose hall sinch P roject N o . of Quarter
PRA Realty Lake Pune 85 - 90 19 Large central park with botanical garden, clubhouse with swimming pool, District gymnasium, retail mall, hospital, jogging track, cafeteria
Kolte Patil Life Clubhouse, sports facility, kids play area, swimming pool, gymnasium, Hinjewadi 85 - 90 14 Republic landscape garden / park,meditation center, multipurpose hall
Akshaya Homes Clubhouse, swimming pool, gymnasium, aerobics zone, indoor / outdoor OMR 60 - 65 10 Today games, mini theatre, party lawns, jogging track, childrens play area
Source: JLL-REIS As a result, the amenities offered by residential complexes, both on a and upper-mid segments will continue to witness increasing allocation unit and project level, now represent one of the pillars of success for of space for such lifestyle amenities, now that the trend has set in. any residential project – the other three being location, construction However, whether this trend will percolate further into affordable quality and pricing. This holds true for all segments of housing, housing category as well is debatable. While it is a no-brainer that from mid-segment to upper-mid and high-end apartments. The only incomes are rising faster and people occupying affordable homes exception here would .be housing for low income group (LIG) and in future would also prefer to have few of those basic amenities. affordable homes where price overrides all other requirements or However, given that pricing becomes an overriding factor, many criteria. affordable projects will have to depend on external facilities such as private sports complexes, private gymnasiums, etc. The phenomenon Definition of basic amenities has evolved to include all those facilities, may be largely restricted to mid-segment housing only. which are essentially non-luxurious. In the foreseeable future, mid Is Indian real estate heading towards a tectonic shift? 27
5.4 Emerging concepts: Senior living, serviced apartments, studio apartments
1. Senior Living:
Senior living is a new category of residential real estate that is Having witnessed higher acceptance rate for senior living projects in emerging in India. Currently, there are approximately 30-35 senior the western and southern cities of India, developers in the northern living projects at various stages of construction in the country. Since and eastern cities of India are also jumping onto the bandwagon. the concept is new, its contribution relative to the global senior Following are some examples of Senior Living projects across India: living sector is minimal. As opposed to that, senior living homes accommodate 10% of the senior citizens in the United States and 4% Year of in Australia. There is a huge demand-supply gap within the sector, Project Name Developer Name Launch Location which suggests the growth potential is immense. Ashiana Utsav Ashiana Housing 2011 Pune Senior living concept took hold in India in the early 2000s, but the Paranjape Schemes sector started gaining any kind of serious momentum only after 2010. Athashri 2010 Pune Construction Ltd Also, growth in this sector has been happening in pockets rather than holistically. Most of the country’s senior living projects have cropped Clover Renaissance Clover Builders 2014 Pune up in the western and southern regions. This is because these regions Ashiana Nirmay Ashiana Housing 2014 Bhiwadi have: The Nest Aakriti Group 2014 Bhopal • Greater prevalence of nuclear families Mantri Primus Primus Eden 2014 Bangalore • Higher literacy levels Lifespaces Pvt. Ltd • A more pronounced desire among young professionals to migrate to Riva Tata Housing 2013 Bangalore other countries Antara Senior Living Antara 2013 Dehradun • Higher purchasing power, resulting in reduced dependency of seniors Limited on family members Antara Senior Living 2nd Innings 2013 Surat Limited Ashiana Shubham Ashiana Housing 2015 Chennai
Source: JLL-REIS 28 Is Indian real estate heading towards a tectonic shift?
2. Serviced Apartments
A growing number of expat professionals are looking to oversee business operations in India. And this is exactly the fraternity that is pushing demand for serviced apartments in India.
The concept: A serviced apartment is often a fully-furnished accommodation, which is available for short-term or long-term stays. These apartments come with basic amenities for daily use, which include a kitchen with cooking range, kettle, microwave, a washing machine etc. If you don’t want to cook or do the routine chores, you can even sign up for a complimentary breakfast, laundry etc.
The concept of serviced apartments works very well in the metros and larger tier-II cities, where starred hotels are notoriously overpriced. Often, the executive traffic of many MNCs and domestic companies is too erratic to justify a standalone company guesthouse. The best locations for serviced apartments are in and around the city’s CBD and SBD areas. Currently, India’s highest demand and rate of development in serviced apartments is in Bangalore, Pune, Mumbai, Delhi, Chennai and Hyderabad.
Examples of few Serviced Apartment Projects in India
Year of Project Name Developer Name City Opting for a serviced apartment makes Launch sense when the comparative cost of Lalco Residency Lalco Group 2011 Mumbai a quality hotel room for an extended Oberoi Oasis Oberoi Realty 2014 Mumbai stay is prohibitive. It is a good option Oh My God Baya Weaver 2014 Delhi NCR for international executives who shuttle between cities and require cost-effective Four Seasons Private 3C Company 2013 Delhi NCR short/medium/long-stay options, and for Residences domestic business travellers shuttling Ascott The Residence Ireo 2013 Delhi NCR internally between regional offices. Vice Royale Ajnara Group 2012 Delhi NCR The next wave of development within Homestead Service the hospitality sector would be in Brigade Group 2008 Bangalore Residences terms of an increased supply of such apartments. Hence, industry players Triangle Skypark Anish Projcts 2013 Bangalore including international ones such Ritz Apartment Carlton, Four Seasons, The Ascott Ltd., Oakwood Premier Panchshil Realty 2009 Pune etc. are ready with expansion plans to Naiknavare explore their potential and opportunities Seasons 2009 Pune Developers in India.
Source: JLL Research Is Indian real estate heading towards a tectonic shift? 29
3. Studio Apartments
Technically, studio apartments comprise of single large rooms that accomodate bedroom, living and dining areas, with compact kitchens and bathrooms attached. When they first made their appearance in the Indian residential landscape, studio apartments found favour largely with bachelors and DINK (Double-Income No Kids) families who spend most of their time at work. Nearly 80% of the overall demand for studio apartments in Mumbai, Delhi-NCR, Bangalore, Pune and Chennai are driven by software professionals and recently relocated manufacturing sector executives. Such professionals have generally spent over a year stationed in a metro and find that they prefer to pay equated monthly installments (EMIs) on affordable homes that require minimal maintenance rather than pay high rents for flats and serviced apartments.
Studio apartments are usually the first to be sold out in a residential project that features them. They are the most cost-effective residential options for people who prefer to own rather than rent, especially in locations close to workplace hubs. Another factor that drives demand for such units is the ease with which they can be rented out or sold at a profit on the secondary market. This also makes studio apartments a prime target for investors. Moreover, studio apartments do not attract high maintenance costs and make for hassle-free purchases as well as resale.
Following are some examples of Studio Apartment Projects in India:
Launch Project Name Developer Name City Year Callista Joy Group 2012 Mumbai Hiranandani Hiranandani Constructions 2014 Mumbai Solitaire Pvt. Ltd. Supertech Upcountry Supertech 2010 Delhi NCR (Safari Studio) Earth Studios Earth Infra 2012 Delhi NCR
Rohan Iksha Rohan Builders 2015 Bangalore Esperanza UKn Properties Pvt. Ltd. 2011 Bangalore Blue Ridge Paranjape Schemes 2010 Pune Megapolis Pegasus Properties 2009 Pune Ekanta Unitech Group 2013 Chennai Xanadu Siddha Group 2008 Kolkata
Source: JLL Research 30 Is Indian real estate heading towards a tectonic shift?
Industrial6 and Warehousing sector Is Indian real estate heading towards a tectonic shift? 31
Major changes foreseen in India’s taxation reforms and improvements Two types of warehouse exists currently – traditional storage facility in the physical infrastructure could bring about a tectonic shift in the (also called godowns) that largely operate in the unorganised way warehousing business is done in India. From merely being storage warehousing space, and modern logistics centers operated by players units, warehouses would be upgraded and positioned as a supply- in the organised sector. Market estimates suggests the organised chain partner to companies trying hard to meet the growing customer warehousing sector has a miniscule share of merely around 10-11% expectations of quick delivery and more variety. in terms of total warehouse space. However, in terms of value, they generate around 18-20% of the total warehousing revenues as they command a premium on account of superior quality and greater Traditional godowns making efficiency of operation. way for modern warehousing Existing setup Ongoing/Future development India’s growing economic prowess has been primarily fuelled by Location planning driven by Location driven by supply chain the Services sector, whereas industrial sector remain languished, tax savings efficiency contributing merely 24%to GDP in 2014. The sector’s contribution to Economies of scale acheived Economies of scale acheived with Asia’s GDP averages over 30%. As a consequence, activity in the with limited SKUs large number of SKUs industrial warehousing segment in India has remained lacklustre. Less automation, less usage Higher mechanization, use of latest Economic hurdles in the form of inadequate support infrastructure, of technology technology irregular power and water supply, poor logistical integration etc. Small sized godowns, poor Large warehouses resulted in industrial warehousing sector falling short of meeting in design occupier needs. Few high quality industrial warehouses therefore Source: JLL Research command rental premiums of about 30-40%. A renewed focus of the union government on the manufacturing sector, combined with The low share of modern warehousing as of today is because of two an improving infrastructure and impending tax structure reforms is reasons – outsourcing of warehousing and supply chain is still very expected to bring in sustained modernization of the country’s limited in India. Around 40% of warehouses are still company-owned industrial warehouse infrastructure over the next decade. and the shifts from storage godowns to modern warehouses have only Difference between traditional godowns and modern warehouses just begun.
Godowns Modern warehouse Typical area Under 50,000 sq ft 1 million sq ft or more Typical rents INR 12-15 per sq ft per INR 18-21 per sq ft per month or lower month Cost of INR 1,000 - 1,200 per sq ft INR 1,500 - 2,100 per construction sq ft Typical Companies seeking Companies seeking clients makeshift arrangement long-term partnerships Typical Plain vanilla structure Built-to-suit structure design Contract 9-12 months 5-6 years (lock-in) period / terms
Source: JLL Research 32 Is Indian real estate heading towards a tectonic shift?
Changing business environment to reshuffle location criteria for warehouses
The union government has announced April, 2016 as the deadline The changing business dynamics is largely driven by increased for the country-wide roll out of Goods and Services Tax (GST). Once customer focus and growing support from government. Customers of the reform is in place, local tax considerations will have relatively less today demand more variety, higher quality and faster shipments. This importance in deciding the location of a warehouse, whereas more has resulted in exponential rise in number of Stock Keeping Units operational efficiency parameters and customer-centric locations are (SKUs, or variety of products) that warehouses need to store. Demand going to become key parameters. for hub-and-spoke model warehouses is expected to rise over the next decade on the back of expectations of same day delivery or express The meteoric rise of e-commerce in India has boosted the demand shipment options by customers. for allied industries and services, including warehousing. Warehouses are expected to transform into multi-modal consolidation centres for Schemes such as Make in India, Smart Cities, and Digital India provide multiple sourcing locations, cross-docking centres for retail distribution, incentives for multinational companies to set-up large manufacturing sorting centres for customer door deliveries, an assembly facility for facilities in India. With low cost of labour along with government’s final fabrication, bundling and loading. push to enhance skills of rural Indians, as well as advancement of infrastructure in the form of Golden Quadrilateral roads, dedicated The importance of zero-defect, high-speed warehouses handling bulk freight corridors, the Indian industrial warehouse sector is expected to of small transactions and greater product variety, other value-added make a quantum leap over the next decade. services etc., is much higher than what it was a decade ago. There will be fewer warehouses, but each of them will be bigger, faster, and more technologically advanced than their prototypes in the past.
Current Likely shift in Location criteria for warehouses ranking rank
Presence in Major warehousing hub 1
Proximity to customer centres 2 Lorem ipsum dolor sit amet, Accessibility from main transit zones 3 consectetur adipiscing elit. Maecenas hendrerit at lectus in tempor. Nam Local taxation rules 4 dignissim, magna vitae tempus ultrices, massa velit volutpat nisi, sed finibus nibh ipsum vitae massa. Availability of power, water etc. 5
Availability of labour 6
Proximity to fire station, hospitals etc. 7 Is Indian real estate heading towards a tectonic shift? 33
Current7 innovations lay foundation for future transitions 34 Is Indian real estate heading towards a tectonic shift?
Real estate in India is still nascent compared to prominent cities in Asia Pacific (APAC), and there is a constant endeavour by USP Examples all stakeholders to make it grow faster and accomplish maturity. In the current market scenario, where existing developers or Presence across Lodha, Kalpataru suppliers have scaled up their operations significantly, new breed value-luxury spectrum of developers are finding innovative ways to grow and carve-out Omkar Realty, Neumec Group, a niche segment of their own. On the other hand, occupiers are Expertise in SRA strengthening their internal real estate teams to optimise on their Shapoorji Pallonji portfolio of realty assets. Also, there is growing realisation that Mayfair Housing, Man infra, Expertise in Redevelopment transparency, governance, and sustainability are important factors Paranjape Schemes that will help catapult Indian real estate to international standards, Jaypee, Indiabulls, Kolte Patil, attracting global recognition and more investments. Skills in land acquisition Lodha
Ability to attract massive PE 3C / Lotus Greens, ATS, Embassy, 7.1 New breed of developers funding RMZ, Panchshil
The last decade has witnessed emergence of a new breed of Innovative finance schemes Lodha, Indiabulls, Rustomjee developers in India who have made rapid inroads in the market outpacing older, more established rivals by adopting some unique Lodha, Tata Housing, Kanakia, Innovative marketing tactics selling propositions, which have fuelled their growth. Dosti Realty Lodha Group, a developer who came to fore during the last decade Tata Housing, Godrej Properties, – made its presence felt across the value spectrum – has projects Online sales Sobha, Purvankara that range from affordable homes such as Palava (near Mumbai) and Belmondo (in Pune) to luxury projects such as Fiorenza and Source: JLL-REIS World Towers (in Mumbai). This is quite unlike the conventional practices of developers such as Hiranandani and Oberoi who restrict Marketing tactics too have undergone a sea-change over the last their product categories to the premium segment only. Another decade with developers now rechristening precincts to make them developer who achieved explosive growth in the last 10 years more marketable – Upper Worli (for Lower Parel in Mumbai) and New is Omkar Realtors, having tapped into a niche segment of Slum Cuffe Parade (for Wadala in Mumbai) by Lodha and Upper Juhu (for Rehabilitation Authority (SRA) projects. Omkar rose to prominence DN Nagar, Andheri) by Rustomjee Group are some of the cases in after the launch of large-scale SRA projects such as Cresccent Bay point. (in JV with L & T Realty) (Bhoiwada, Mumbai), Altamonte (Kurar The equity IPO style marketing of apartments is increasingly being village, Malad), and Omkar 1973 (Worli). adopted by developers – Tata Housing conducted an online IPO-style Few other developers such as Jaypee Group, Indiabulls Real sale of apartments in multiple projects in 2013, and Lodha marketed Estate, and Kolte Patil have excelled in securing land parcels for its upcoming Thane (Clariant Chemicals) project codenamed “Big large townships and mixed-use projects at suburban locations. Bang” in 2015. More recently, developers are toying with the idea Others such as Mayfair Realty have a significant footprint in of selling apartments online, having tied-up with e-commerce redevelopment projects. companies –Tata Value Homes tied-up with Snapdeal.
Innovative financing schemes such as guaranteed rental income The new breed of developers are extremely nimble-footed and are for the first 2-3 years that were introduced by developers such as open to innovative practices in marketing and financing strategies, Lodha (Dombivali project) and Rustomjee at its Urbania project (in also focusing on untapped niche segments where they can specialise Thane) are examples of other innovations witnessed in the sector. and sustain. Is Indian real estate heading towards a tectonic shift? 35
its presumed space requirements, encouraging rational expectations of 7.2 Rising prominence of CRE real estate. Increasingly, CRE teams are expected to deal with a range team within office occupiers of tactical and strategic activity, thereby challenging the composition and skills of CRE teams amongst occupiers. The current geographic scope of corporate real estate (CRE) teams’ responsibilities could be largely city or country specific. The trend Expectations from CRE teams would include – improve workplace is shifting towards scaling it up to a region or global level so as to productivity, improve asset (real estate) productivity, improve business optimize workspace and capture benefits from workforce productivity productivity, and improve people productivity. A notable area in gains. which CRE teams will be realigning with broad corporate strategy is sustainability. Decisions to occupy Green Building spaces, Energy CRE teams are increasingly becoming centralised and global, being Efficiency, Portfolio-wise risk assessment, Social performance tracking more formally connected to the C-suite and better empowered to drive etc. will be anticipated from CRE teams. This will compel CRE teams change. This means, companies are beginning to view their property to hire competent people who can deliver on such high expectations footprint on a global, portfolio basis. This should enable CRE heads to that will be placed upon their shoulders. act with greater consistency across borders. Practice of outsourcing CRE management may come to fore as the A conflict of interest arises when CRE teams report into the finance area becomes increasingly specialised or niche. CRE teams will department as they promote a myopic view of cost rather than value require scientific approach, data-driven strategic vision, forward- generation from synergies. In the West, the strength of the CRE team’s looking and proactive style of delivery. mandate is currently stronger than what it was three to five years ago, and the trend appears to be gradually percolating into APAC too, as It may be difficult at this point in time to ascertain the proportion per the recent JLL‘s Global Corporate Real Estate Trends, published in of occupiers in India who have a dedicated CRE teams, although June 2015. on a global scale close to one-third occupiers have maintained a dedicated CRE team. A dedicated CRE team acts as a bridge between A centralised CRE team that has healthy interaction with various organisation structure and the strategic intent. business functions will be able to actively challenge the business about 36 Is Indian real estate heading towards a tectonic shift?
7.3 Consistent rise in real estate market transparency appears likely The JLL‘s Global Real Estate Transparency Index, which is released every two years and evaluates and ranks 102 countries worldwide for their real estate transparency quotient ranks India the 40th most transparent market. JLL‘s Real Estate Transparency Index Considering the top cities (tier-I) in India, their ranking has significantly improved from 50th position in 2008 to 40th position as of latest 2014 study. As per the report, the improvement was largely made on the back of advancement in market data availability. However, in the past, India has been subject to drop in ranking (in 2008 and 2012) owing to reasons such as lack of transparency in its transaction processes, high costs of investment transactions, and weak professional standards of local agents. Given that many APAC cities are moving fast in terms of improving their transparency quotient, thereby becoming more attractive to global investors; Indian cities must make faster progress.
It appears, however, that recent developments with regards to property market regulation and introduction of new financing instruments have JLL global research immense potential to improve India’s position. Indian government is likely to enact the Real Estate (Regulatory) Bill soon, seeking to improve regulation over real estate agents and quality of land registry records.
After several rounds of discussions on introduction of REITs in India, last year the government finally made the plunge and introduced it. REITs are highly successful and beneficial in several countries worldwide in terms of providing less risky investment options in real estate to small and big investors, regular dependable income to unit holders, drawing massive FDI in the sector, providing easier exit options and liquidity to cash-strapped developers.
More generally, India is likely to see faster improvements in real estate transparency, with the new government undoubtedly in a stronger position to push through economic reforms. Is Indian real estate heading towards a tectonic shift? 37
7.4 A green buildings movement is underway in India
Being the fastest growing nation in the world, India also faces the challenge of balancing between industrial advancement and rising levels of pollution / depleting natural resources. Needless to say, sustainable development will be increasingly sought to effectively address these concerns. Real estate, on its part, can help by Green building registrations on a designing and constructing buildings that conserve resources such steady rise in India as water and electricity, and increase usage of recycled materials.
In light of the requirement, the Indian Green Building Council (IGBC), part of the Confederation of Indian Industry (CII), was formed in the 2001 with a vision to encourage sustainable practices and make India one of the global pioneers in sustainable built environment by 2025. Over the years, the IGBC has created a reputation for driving the change amongst builders and other real estate stakeholders.
The importance of the impact that buildings have on human health, environment and the economy is dawning fast on developers. It is encouraging to see that a growing number of private developers in India plan and design their projects with a view to maximizing Source: IGBC energy conservation and environmental sustainability. As of June 2015, a total of 3,191 projects are registered with the green buildings council (the IGBC) having a combined footprint of 3.05 billion sq. ft. Projects registered with the IGBC is incrementally growing at a CAGR of over 50% in the last 10 years. India Milestones on Green buildings – by IGBC
Rajiv Gandhi Indian Green Building Police Bhavan at Launch India’s first International Council (IGBC) formed Gulbarga, Karnataka: green homes rating Airport, Hyderabad: India’s first green program for residential 2001 by CII 2003 2008 2008 First green airport building projects facilitated by IGBC
Launch of IGBC green townships rating Karnataka State Police system; MOU with India crosses 2 India crosses 3 Housing Project: first billion sq. ft. of green billion sq. ft. of green CREDAI (a builders’ pre-fabricated building 2011 2012 2014 building footprint 2015 building footprint association) to promote IGBC certified green buildings
Source: IGBC 38 Is Indian real estate heading towards a tectonic shift?
Conclusion The on-going transition in the Indian real estate sector is interesting and acts as a reflection of what lies ahead. As India narrows its gap with real estate trends and practices of more advanced nations in the West and APAC, everyone from local developers, government, institutional investors and occupiers / homebuyers have got things to look up to. The relationship between developers and investors is poised to become more synchronised, enabling transition from family-driven real estate business towards a more institutionalised set-up. This will be a big positive for market transparency, as domestic real estate sectors will criss-cross to new heights. On the other hand, occupiers and consumers will have a variety of options of choose from, given the market segregation and growth of niche segments, which will enable choice on the basis of corporate/individual profile. The government’s role as an enabler for smooth sailing through this new course of transition will be keenly watched by domestic and international stakeholders. Is Indian real estate heading towards a tectonic shift? 39
Authors
Suvishesh Valsan Assistant Vice President, Research [email protected] +91 22 3985 1309
Suvishesh joined JLL in 2013 and is responsible for driving thought leadership and research publications, been part of the Research & Real Estate Intelligence Service (REIS) team. Based in Mumbai, he also contributes to bespoke research publications for all sectors of the real estate. In his over six years career prior to joining Jones Lang LaSalle, he has served in financial institutions and research consultancy firms, specialising in macroeconomics, asset allocation strategy and business research. Suvishesh holds a Master’s degree in Economics from the Gokhale Institute of Politics & Economics, Pune.
Vinay Upponi Assistant Manager, Research [email protected] +91 99302 05302
Vinay is responsible for Real Estate Intelligence Service (REIS) analytics, bespoke assignments, and research whitepapers. He has extensive background, spanning over 6 years, in business research having worked at Shoppers Stop, CRISIL, and Emirates Group. He has worked on consumer demographics and real estate research with particular focus on commercial real estate. He has passed 2 Levels of the CFA (AIMR US) programme and is a Bachelor of Commerce from University of Mumbai.
Ketan Bhingarde Analyst, Research & REIS [email protected] t: +91 22 39851310
Ketan Bhingarde joined JLL Research team in 2013. Based out of Mumbai; he leads the Mumbai residential market towards research and REIS and contributes to the quarterly reports on Mumbai residential market along with the monthly newsletters and bespoke research assignments. Ketan is a MBA in Urban Infrastructure & Real Estate Management from Amity University and Bachelor in Mechanical Engineering from Mumbai University having more than 2 years of experience in Research & REIS within JLL.
For research enquiries, please contact:
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