The effects of slowdown were noticeable in real estate sector across the country till the first quarter of 2009. However, towards the middle of the year, residential rates in some of the larger cities began showing an upward curve. The cities most affected were Mumbai and Delhi, according to Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj a global real estate services firm.
In Mumbai, many developers began raising rates by as much as 12-15 per cent under the assumption that the renewed demand was assuredly sustainable under all circumstances.
This assumption started backfiring towards the end of the third quarter, when demand began slowing down again in the financial capital. Delhi showed a more rational graph, thanks largely to a better volumes profile, with price escalations not going beyond 5-10 per cent even in high-demand regions. Bangalore continued to display a sombre profile, since demand from the IT / ITES employee segment has not yet ramped up sufficiently.
Chennai’s residential market continued to showcase its usual conservatism.
Mr. Puri says residential demand in 2010 would be the highest and most promising. It would continue to lead the revival phase, led by a lowering of mortgage rates and price rationalisation in newly launched projects. “It also looks the most positive in terms of funding. There is liquidity available for certain typologies and formats, most especially in the affordable housing segment. This segment does not depend overly on international funding”, he says.
According to Mr. Puri, there are two cost-to-developer components in question for such projects.
One of these is cost of land, but such projects are located in areas where land costs are low to begin with. The second is cost of construction, which is adequately covered by the down-payments taken on such units. Moreover, such housing formats invariably employ de-frilled mass-construction parameters, which also imply lowered construction costs. Mr. Puri sees an increase in private equity funding for affordable housing projects in 2010, since the demand for such projects is inflexible and assured. The emphasis will be on projects by established brand names that show sufficient potential for fast completion and absorption.
Office real estate
For the better part of 2009, the commercial segment uptake remained at about the same level as it was last year, when the slowdown was beginning to show its claws in earnest. It is an immutable fact that Indian office space depends to a significant extent on multinationals seeking to establish or expand their bases here.
The health of Indian commercial real estate is closely connected to the global economy, meaning that Grade A office spaces have largely been about MNC occupiers and the IT/ITES industry. When the financial crunch deepened in the West, many intending international occupiers put their Indian entry/expansion plans on hold.
There are signs of revival in commercial real estate now, but the process is pretty gradual. For investors, this is the best time to invest in well-researched commercial real estate opportunities.
There is, in fact, an increase in investors looking for such opportunities, since the prices are now near the bottom. Long term investment, which is the kind that truly works, will ensure that investors can reap the benefits when the office market shapes up for real in 2-3 years.
Indian retail had gone through a decisive learning phase in 2009. Like the commercial segment, Indian retail growth depends significantly on the aspirations and spending power of cash-rich IT professionals. When the downturn hit the IT sector, there was a noticeable setback in Indian retail real estate.
There had been corrections in rentals and consolidation both at the retailer and market levels. Many unsustainable market models were edged off the map.
While 2009 was the year that separated the boys from the men, 2010 will be the year of the survivors to make a serious bid at the recovery process. Many players will consolidate their operations and rationalise their business models to dovetail with the newly emerged consumer dynamics. Value retail will be the winning ticket, and we will see the stronger value retail players make calculated plays in key Tier II cities. High end retail will show a stronger hand in 2010, as well.
There will be also a wider acceptance of big brands as returning economic stability infuses buyer confidence into the market. The revenue sharing / minimum guarantee model will gain wider acceptance and become the norm rather than the exception, bringing this model’s prevalence in India closer to international trends.