The evolution of India's real estate in the last ten years.
Commercial Real Estate
A key trend is emerging that companies, driven by cheaper rents and reduced commute times for workers, are migrating to offices in the suburbs and peripheral areas of major Indian cities. The migration is driven by occupier demand for large IT parks and office projects in secondary business districts (SBD) and periphery business districts (PBD) precincts.
The most spectacular emergence of alternate business districts is in Delhi (NCR), like Gurgaon, which has witnessed a meteoric rise in almost all demographic and economic indicators, an unprecedented urban transformation with its urban population having clocked the fastest growth in the country over the last decade - 17% compound annual growth rate (CAGR) from 2001 to 2011.
Gurgaon and Noida chalked up over 80% of the lease volumes in 2015 which is amongst the highest proportion of lease volumes by peripheral destinations in any city.
"Mumbai however has been an exception to the trend of office migration to Peripheral Business District (PBD) due to lack of supporting infrastructure and connectivity. The city witnessed a steady shift in office stock from prime Commercial Business District (CBD) areas like Nariman Point to Secondary Business District (SBD) precincts such as Lower Parel and Andheri-Kurla road. An exodus of offices out of CBD was sparked by lack of quality office stock and the complicated ownership structure," said Anuj Puri, chairman and country head at JLL India.
"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 1H 2015. The share of SBDs in office stock has remained stable over the last several years at around 43% of the total office stock," it said.
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.
Across major Indian cities, the overall vacancy rate in retail malls stands at ~20%.
Successful malls generally have vacancies below 10%, with a select few operating near full capacity.
In recent years, some poorly performing malls have succumbed to the business viability stress. These malls are either converting into Grade-B office spaces or being demolished to make way for a new asset class in real estate.
Churn rates average around 15-18% when business is good. Well-managed malls in India have a churn rate of 4-8% during the initial years while under performing retailers exit malls midway through their leases.
Contract periods have shortened to 2-5 years today from 9-20 years seen in the mid-2000s.
A few more malls are expected to quit the retail sector in the near future which will help improve the business of average and good performing malls. JLL research estimates around 14 malls to withdraw from retail operations, having a combined mall space of 3.5–4.5 million sq ft.
India Residential Property Market
Across India, unable to sell expensive homes in a sluggish market, developers are building smaller apartments without lowering the psf price or cutting corners on the quality of the development. The last five years have seen average sizes of apartment dwindling across all seven major cities of India. Developers are intent on making houses affordable for buyers by reducing apartment size instead of reducing capital values.
But this just isn’t a trend in India. It’s also true of established markets like Singapore and Hong Kong where land are scarce and demand, high. By building smaller apartment units, the overall price quantum is significantly reduced. It becomes naturally more “affordable” and sells better and faster.
Mumbai Metropolitan Region has witnessed the maximum reduction in apartment sizes on annualized basis, along with Bangalore, Chennai and Kolkata.
About 80% of buyers of residential properties in top cities like Mumbai, Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata take a home loan. These are salaried workers who can’t afford cash payments.
There is also a growing trend to modernize Indian cities by outsourcing its architectural projects and designs to internationally-renowned agencies.
Starting from early 2000, various advanced construction techniques and innovative designs to improve the quality of projects have enabled developers to attract more IT and MNC occupants.
Incremental space is getting limited in cities like Bangalore and Pune. For about a decade, the Indian IT sector, which has dominated office space occupancy is now exploring new cities for expansion or the creation of new bases. To stay cost efficient, IT firms are scouting alternate destinations with an abundance of skilled labour.
A wave of infrastructure improvements is happening in tier-II and tier-III cities. They are quickly getting connected with today’s major metros. Cities like Chandigarh, Visakhapatnam, Vijayawada, Mysore, Kochi, Coimbatore, Tiruchi, Bhubaneswar, Ahmedabad and Gandhinagar and Jaipur have become the new centres of choice for setting up large-scale IT office infrastructure.
A “tectonic shift” in the real estate sector is coming to India.
India’s real estate developers and corporate real estate teams will have to be more adept, more agile and more innovative in their modus operandi, JLL latest report at the CII Annual Real Estate Conclave 2015 envisaged.
Source: JLL India