This is the fourth time when BJP has come into power and this time around with Narendra Modi, for the most part BJP era hasn’t been all that great for Indian real estate. First time when it assumed power in 1996, markets crashed in early 1997 and it took around 7-8 years before economy started showing signs of improvement. Even this time around things are not very different except the fact that world has just started to emerge out of what transpired as a result of a mini crisis in Europe. While the circumstances may be quite similar to the previous BJP regimes, things look quite bright for commercial real estate this time around.
If you are looking for short term to medium term investment profits, both capital as well as rental, commercial real estate is your bet. At least for the next 5-8 years. A rock solid government at the center with able leadership and clear cut agenda of development gives more than just hope. Here a few pragmatic reasons why we feel that commercial real estate will foster in Modi’s regime.
Demand and supply: While huge inventory has piled up in residential sector, that too in the wrong segment (premium), where there are only a few takers and the overall sentiment is looking fairly grim for residential real estate. Having said that, the sector will present potential buying options however, only to fetch capital gains in the long term. Unlike residential real estate, there is an acute shortage of “quality” commercial space in Delhi. Despite thousands of companies there’s only about 175 million sq ft grade A commercial space available for consumption. Note the key word here is “quality”. There is no denying the fact that many commercial properties across the Delhi NCR are languishing for years now with no tenants however, a deeper look at these assets will speak for itself. All dead assets were built between 2005 and 2012 when a lot of foreign money came in to Indian real estate markets after India opened its doors for PE investment in 2005. Lot of this money was spent on low quality projects with the hope that real estate never fails in India. On the other hand, be it any location across NCR, if it’s a “quality” asset, it has very high occupancy levels with rental yields as high as 10-12%. Projects of builders like Hines, Bharti, and Ambience and to certain extent DLF are good examples.
Curb on Black Money: They say “black money” drives Indian real estate and I could not agree more. On the face, it seems black money is one of the top priorities of Modi government, apparently many good practices and systems are being put in place to reduce cash transactions. We belief, this would mean more people will want to dispose of extra cash to buy properties in the absence of any other investment vehicle which allows cash investment to give you returns in the range of 6-12%.
Lease restructuring: There is significant number of leases that are about to mature in 2014-2015. All these cases are the first wave of multinational companies that had set up shops in Delhi NCR, especially Gurgaon in 2005 -2006 after series of FDI easing policy initiatives by the govt. Most of these companies were sitting at extremely low rentals compared to what market commands today. They now have the option of either staying at the same location by re negotiating the terms and most likely pay higher rentals or move to another location to find more suitable terms whether from a financial point of view or space management. This churning over the next couple of years is going to keep the commercial real estate market on its toes and ultimately fetch better returns to investors.
Infrastructure push: One of the main planks of Modi’s politics is development, better roads, high speed trains, better sanitation etc has been some of the key initiatives of the current government, and all of this ultimately means a better investment climate which means more jobs and more jobs will create demand for commercial space. Two smart cities are planned within Delhi along with unlocking of huge land mass in the peripheral zones of Delhi under land pooling policy.
REITS: Approving REITS was one of the first things endorsed by the finance minister Arun Jaitely. For an average earning person to be able to use real estate as in investment vehicle is unheard of in India, simply because of the size and complexity/transparency. While a lot of them do have residential properties on a mortgage at a significantly higher interest rate however, that’s in most cases an emotional/social pressure investment rather than a source of income. REIT’s are going to change this forever and this to our mind will be a game changer. The REITS will not only give opportunity to retail investor but also address the transparency by coming under a trusted body like SEBI. While all commercial properties may not qualify or generate good returns, most grade A properties will and in turn provide much needed liquidity in the market. Current grade A stock in Delhi NCR is over 175 million sq ft which at least valued at around 35 billion USD, some more will be added to the current stock in the coming years. Nationally the number would be close to around 80 billion USD. Average returns from a good REIT will be anywhere between 8-12% coupled with around 5-8% capital appreciation. Recent huge investments in Indian commercial real estate from LP’s and PE firms like Blackstone, Xanders are a prelude to this disruption and ultimately their exit strategy.
FDI Relaxation: Again, a good measure in the direction to bring liquidity in the cash starved market. While the real reason to allow 100% FDI in construction is perhaps to be able to address the problem of affordable housing, a term which seem to have lost meaning in tier 1 cities, I doubt that the foreign money will really go in to address this issue, simply because it may not be viable, secondly, most foreign investor who had put in their money in the last bull run back in 2005, when PE regulations were eased, have burned their fingers with most residential projects, barring only a few, while on the other hand some of the most successful projects were commercial in nature. The new FDI policy is expected to be announced later this year around Diwali.
Clear direction and sound policies are a must for any successful economy, so far so good, things look like moving in the right direction.
