Indian property sees fragmented performance in 2015

Today, the world sees India as a land of opportunity for business and investment. Reserve Bank of India (RBI) head Raghuram Rajan said in mid September that while fellow Brics have deep problems, India appears to be an island of relative calm in an ocean of turmoil. As per recent government data, economic growth reached 7.4 per cent in the second quarter of the current financial year, riding on a spike in manufacturing and a pick-up in investment demand.
It is time to retrospect on how 2015 was for the real estate sector and to crystal-gaze into 2016.
Commercial real estate
India's office space absorption during 2015 stood at 35 million sq ft - the second-highest figure in the country's history after 2011. The demand for office space in 2011 came from occupiers taking advantage of low rents after the global financial crisis. This time, however, it was the result of corporates implementing growth plans.
While pan-India vacancy still stands at 16 per cent, realistic vacancy stands around eight to nine per cent - the total vacant supply is not always relevant for corporate occupiers. This is because most of them do not consider Grade A buildings that are strata-sold or located in areas with inherent disadvantages and connectivity issues, or have been vacated from recent occupier exits and no longer match Grade A requirements.
Cities such as Pune, Bengaluru, Hyderabad and Chennai have a vacancy rate of just five to 10 per cent, prompting the need for fresh supply to meet growing demand. Developers have been shying away from commercial projects because, though land and construction costs have been rising, rents have not reached a point where developers can get about 20 per cent IRR.
Rents rose across Indian cities in 2015. The pace was faster in the secondary business districts and certain peripheral business districts of tier I cities than in the established central business districts.
In 2015, office space demand was mainly driven by IT/ITeS, e-commerce, start-ups and large consulting firms. Players in many other sectors like FMCG, BFSI (front office), manufacturing, telecom and pharma did not come into the market - however, this should happen in 2016 and 2017.
Residential real estate
2015 did not bring the hoped-for growth in residential real estate. However, the silver lining is that the bad days seem to have bottomed out and sales have picked up in a few cities like Mumbai, Hyderabad and Bengaluru. Launches have reduced in cities like Mumbai, slightly lowering the inventory. Developers' initiatives like offering attractive schemes and deal terms, coupled with lowering of interest rates by the RBI, have activated fence-sitters.
The challenges of demand-supply mismatch and high unsold inventory across the country remain, but the signs are encouraging. 2016 may bring an end to the long and painful journey this sector has had.
Retail industry
2015 saw hardly any quality retail space come in. The two big trends observed were:
1. Consolidation of retail real estate by brands and retailers who focused on their profit-making stores and closed down loss-making ones.
2. The entry of institutional investors. Thanks to relaxation of sourcing norms, single-brand retail companies will find more reason to explore the Indian market.
In 2016, more mature investors will come in and buy built-up retail spaces. Once they have the relevant experience and foothold in India, they will start investing in 'greenfield' assets. Retailers are maturing as competition heats with the entry of bigger brands into the country.
Quality mall space is coming up with strong pre-commitments, indicating that retailers remain bullish about India's long-term consumption story. Retailers will start experimenting with formats and sizes for the same brands, adapting to markets as they start moving up the value chain.
2015 saw food and beverage emerge as a strong category. Entertainment options will also improve, and technology-led retail will start entering in the single-brand retail store category.
However, 2016 will see a continued dearth of quality retail spaces. Retailers will have to revisit their real estate strategy and have a flexible approach, customised to different micro-markets. Investments by both home-grown and international brands will strengthen in tier II and tier III markets as they expand beyond tier I cities.
Hospitality
India's hotel sector landscape is evolving from being largely development-driven to becoming more transaction-driven. Early signs of improvement in hotel operating performances seen in 2015 have rendered the hotel market ripe for acquisition and consolidation.
2015 saw nine hotel transactions - equal to the combined number seen in the last two years. Most of these were in the luxury and upscale hotel segments. Another highlight was the transaction of eight operational hotels, nearly twice the number of 2012.
- The writer is chairman and country head at JLL India. Views expressed are his own and do not reflect the newspaper's policy.

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