India is an under served economy in terms of real estate requirements, followed by a huge gap between demand and supply of units both in commercial and residential space. Government has brought in strong policy reforms that will bring in more transparency to the investors and end users. We believe that 2016 will be another active year for the global real estate investment market. We have witnessed huge demand for the commercial real estate in 2015 with absorption stood at 35 million sq ft the second highest figure in the country’s history after 2011.
The vacancy level pan-India are still around 10-14% but cities such as Pune, Bangalore, Hyderabad and Chennai have a vacancy rate of just 5-10%, prompting the need for fresh supply to meet growing demand. Developers have been shying away from commercial projects because rents have not reached a point where developers can get about 18-20% IRR. However, as rents climb faster, developers will start constructing – at least in the good markets. Recent policy reforms by the government, will help to improve the sentiments in the real estate sector.
Foreign nationals and non-resident Indians (NRIs) can now directly invest into domestic AIF (Alternate Investment Funds) in India. Real Estate Regulatory Bill has been long awaited and now finally passed will lead to a huge amount of transparency in real estate dealings. Apart from tax pass-through status awarded to investors into Indian real estate PE, the government has also allowed treaty benefits on withholding tax for investors who can provide the requisite tax residency status.
Investors are finding the real estate sector appealing mainly due to the relatively higher returns and stability on offer. The demand from commercial real estate has increased with improved occupancy and increased rentals. With increased penetration of e-commerce, demand for quality workplaces and warehouses will be on the rise. There is an estimated US$ 180 billion being earmarked for infrastructural development in the logistics sector in 2016-17, which will also play a huge role in the availability of high quality commercial spaces for the manufacturing & retail industries. Also, the automobile sector is seeing boom with many global brands looking at India as a hub for their Asian markets.
This too will lead to higher demand for commercial spaces. We feel this is the right time to invest in commercial real estate as the assets are available at attractive valuations on the background of falling interest rate environment, which increases the appreciation potential for the investors. Commercial assets provide regular dividend payouts and healthy returns of around 17-18% p.a. In year 2016 & 2017, we expect office space demand to come from number of sectors such as IT/ ITeS, e-commerce, start-ups, BFSI, FMCG, Manufacturing, and Pharma. Real estate industry is maturing and next few years will see huge upside the real estate sector with the regulation and government policies in place. Growth in the Indian economy will definitely see favourable reflection in the real estate sector, as well.
Credits Money Control