Today, the world sees India as a land of opportunity for business and investment. We look at how 2015 was for the real estate sector, and crystal-gaze into 2016.
Commercial/Office: India’s office space absorption during 2015 stood at 35 million sq ft – the second-highest figure in the country’s history after 2011. While pan-India vacancy still stands at 16%, realistic vacancy actually stands around 8-9% – the total vacant supply is not always relevant for corporate occupiers. Rents rose across Indian cities in 2015.
Demand will remain consistent over most of 2016, with occupiers showing a positive bias. While 2016 will bring in continued demand for leased spaces, quality supply will be lower. This means that unmet demand will reflect in higher occupancy of Grade-B office spaces.
Capital Markets: 2015 has been an interesting year for capital market activities in real estate. While the PE focus continued to remain high on residential and office projects, entity-level investments and platform-level deals also came into the limelight, indicating increase in investor confidence. In terms of asset focus, residential projects attracted a considerable share of funding; however, equity investment in this space is still insignificant.
Income-yielding office projects attracted a majority of equity investments. In terms of the geographical spread, focus was restricted to tier-I cities with NCR, Mumbai and Bangalore attracting a majority of investments (73%); reflecting learning from past experience.
Overall, the stage is set for a superlative show next year. In fact, 2016 may well bring the kind of investment activities that were seen in 2007 – the previous peak year which saw investments of more than USD 8 billion into Indian real estate.
Residential: 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; sales have picked up in a few cities like Mumbai, Hyderabad and Bangalore. 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 Reserve Bank of India (RBI), have activated fence-sitters.
2016 may well bring an end to the long and painful journey this sector has had, and signal an upward growth trajectory. It will definitely mature further into an organized industry in which some lesser organized players become casualties.
Retail: The year 2015 saw hardly any quality retail space come in. Apart from that, the two big trends observed were:
• Consolidation of retail real estate by brands and retailers who focused on their profit-making stores and closed down loss-making ones, and
• The entry of institutional investors. Thanks to relaxation of sourcing norms, single-brand retail companies will find more reason to explore the Indian market and also be able to undertake e-commerce business independently.
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. 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, customized to different micro-markets.