11 June 2018

1. Infrastructure sector sees growing foreign investor interest

For global pension funds, large private equity (PE) players and patient capital investors with buckets of cash and a willingness to stay for the long haul, the Indian infrastructure sector is beginning to look like a smart option.

(Source: Mint, 31 May, 2018)

Research View

Amid rising concerns on inadequate infrastructure to accommodate the rapid urbanisation of Indian cities, the growing foreign investor interests on infrastructure projects is a positive sign for the real estate sector in the country. As per media sources, the infrastructure sector has witnessed 25 deals worth INR 21,457 crore (USD 3.2 billion) YTD in 2018 against 42 contracts worth over INR 30,845 crore (USD 4.6 billion) in 2017. Investors such as Macquarie, Canada Pension Plan Investment Board (CPPIB), Alliance Capital Partners, Fairfax Holdings and Global Infrastructure Partners are showing a keen interest in infrastructure projects in India. We witnessed maximum investment in road, airports, and renewable energy projects. Besides this, the central government is also giving infrastructure development as a top priority. In the union budget 2018-19, the government has allocated a total expenditure of about INR 5.97 lakh crore (USD 89 billion) for the FY 2018.  According to Ministry of Urban Development (MoUD), the urban population in India, which is nearly 377 million is poised to grow up to 600 million by 2030. This rapid urbanisation coupled with increasing residential and commercial developments has put severe pressure on existing infrastructure that had led to various problems such as traffic congestion and increased pollution, diluting the habitable quotient in the fast urbanising metro cities. This, in turn, is adversely impacting the overall productivity of the country. In our opinion, the increasing infrastructure spending by the government and rising foreign investments into the sector should help to reduce the infrastructure gaps in major Indian cities and create room for future population growth as well.

2. Goldman, Warburg eye $200 million stake in WeWork India

The Indian arm of co-working space giant WeWork, controlled by billionaire developer Jitu Virwani of Embassy Group, is talking to Goldman Sachs and Warburg Pincus, among others, to raise up to $200 million.

(Source: Economic Times, 31 May, 2018)

Research View

The office demand from flexible workspace operators is increasing across Indian cities over the past 2-3 years. The space take up by these operators in India has increased from 0.5 million sq ft in 2015 to 3.5 million sq ft in 2017. In Q1 2018, the market recorded about 1.4 million sq ft of space take up for flexible workspace operations, contributing to a 13% of the total pan-India gross absorption. Leveraging this traction, many investors are showing a keen interest in these companies. Recently, Goldman Sachs and private equity firm Warburg Pincus, is planning to invest USD 200 million (INR 1,300 crore) while Softbank had also invested USD 4 billion (INR 26,016 lakhs) in WeWork. Recently, the company leased a 0.2 million sq ft (0.018 million sqm) commercial building, Raheja Platinum in Andheri (Mumbai). It has six operational facilities in Mumbai in micromarkets such as Bandra Kurla Complex (BKC), Worli, Vikhroli, Goregaon, and two in Andheri, with areas of over 0.1 million sq ft (0.009 million sqm). High rentals and low availability of ready-to-occupy space in preferred locations are driving the demand for flexible workspaces. In our opinion, the emergence of the millennial workforce and the rise in the number of startups will fuel the demand for flexible workspaces in all the key commercial markets of  Mumbai, Bengaluru, and Hyderabad in the coming years. With the popularity of flexible workspaces increasing amongst the millennial workforce, developers should lead the way in adopting new strategies to build such collaborative workspaces in their upcoming projects and provide premium amenities to guard against the competition in future.

3. RBI Monetary policy: Repo rate hiked by 25 bps after 4 years

The Reserve Bank of India, announced a 25-basis-point hike in the repo rate to 6.25 per cent, in line with market expectations. The six-member Monetary Policy Committee (MPC) kept its stance neutral, despite a repo rate increase.

(Source: Business Standard, 06 June, 2018)

Research View

The Reserve Bank of India (RBI) increased the repo rate by 25 basis points in its bi-monthly monetary policy. With the hike, the repo rate now stands at 6.25% and reverse repo rate has also been hiked to 6%. In our opinion, with the increase in repo rate, banks are likely to start raising their marginal cost-based lending rates (MCLR) soon. Many banks have already begun to increase interest rates over the past week. India's three major banks SBI, PNB and ICICI Bank increased their benchmark lending rates by up to 0.1 percent, making loans costlier for consumers, while housing finance company HDFC Ltd has revised the prime lending rate by 10 bps. The hike in repo rate and the impact of an increase in lending rates for home loans is likely to have a minimal influence on the residential sector as the market sentiments and the employment scenario plays a much more prominent role in residential sales as compared to minimal interest rates changes. Home sales have been experiencing a downward trend, and high unsold inventory has become the real estate industry norm since the past few years. The market is still end-user driven and buyers prefer to buy ready-to-move-in properties.  However, in the past few months, the momentum has picked up, especially in the affordable segment. RERA has also started playing its role in improving buyers’ confidence. With the home loan rates at all-time low and interest rate subsidies are available under Pradhan Mantri Awas Yojna (PMAY), the real estate sector is poised to grow in the medium-to-long term. We advise buyers looking for a home loan to avoid waiting any more as banks may increase the rates further, post the hike in the repo rate. However, for existing borrowers, the EMI burden will only increase as banks have already started increasing interest rates.

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