17 April 2018

1. Real estate sector saw more downturns than upswings in the last decade

The real estate sector went through a couple of downward cycles in the past 10 years but hardly saw any upswing. The collapse of Lehman Brothers and the global financial slowdown made private equity (PE) funds cut investments in the real estate sector, impacting property sales. While PE funds such as Wachovia and Lehman Brothers exited the sector, developers halted their hotel and special economic zone projects that needed large investments.

(Source: Business Standard, 24 March, 2018)

Research View

Despite the fact that the real estate market witnessed a slowdown in the past few years, the sector is becoming more organized with policy changes, strict regimes and better corporate governance. Post demonetization in 2016, the Indian real estate sector has changed significantly with the introduction of several new policies such as Real Estate Regulatory Authority (RERA) Act, Goods and Services Tax (GST) and infrastructure status to affordable housing. Traditionally, the real estate market in India was dominated by residential, commercial and hospitality sector, but in the past couple of years, the market is witnessing the emergence of new subsectors such as affordable housing, coworking, warehousing and logistic hubs. Being watchful in the changing market trends, a large number of developers and institutional players are adopting a cautious approach on the execution of their investment and expansion plans in 2017. Regardless of these macro-economic disruptions, the office market in India remained positive in 2017 with pan-Indian leasing volume of about 42.8 million sq ft, which was marginally up from 2016. The improving economic status of the country coupled with the recent paradigm shift in the level of transparency and accountability should drive investor and end-user confidence across all asset classes in medium-to-long term. 

2. A pragmatic RBI monetary policy in the midst of several uncertainties

While the decision of the central bank’s monetary policy committee (MPC) in the first bi-monthly monetary policy statement for fiscal 2019 has been along expected lines, there is a clear admission in the policy statement that inflation no longer poses a serious macro risk.

Hence, the MPC has revised downwards its projections for inflation based on the Consumer Price Index (CPI) to 4.7-5.1% for the first half of the fiscal year from the 5.1-5.6% forecast in its February policy statement, and to 4.4% from 4.5-4.6% for the second half.

(Source: Mint, 06 April, 2017)

Research View

While many analysts had been expecting a rate increase by at least 25 basis points, the Reserve Bank of India (RBI) kept the repository rate unchanged at 6%. Despite the risk of increasing inflation due to surging oil prices and likely increase in US Fed rates, RBI kept the policy rate unchanged which primarily indicates that inflation no longer poses a severe macro risk for the economy. While we do not expect banks to increase lending rates, we cannot rule out the possibility of a marginal increase in overall EMIs on home loan as lending rates are now linked to marginal cost based lending rates (MCLR). A few banks have already increased their MCLR over the past months due to rising cost of funds. Nevertheless, the market sentiments and the employment scenario plays a much more prominent role in residential sales in comparison to minor interest rates changes. Home sales have been experiencing a downward trend, and high unsold inventory has become the real estate industry norm since the last 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 is also started playing its role in improving buyers confidence. With the home loan rates are all-time low and interest rate subsidies available under Pradhan Mantri Awas Yojna (PMAY), the real estate sector is poised to grow in medium-to-long term.

3.  Logistics companies plan to build and own warehouses

Logistics companies are now planning to build and own warehouses and not just lease them, encouraged by the recently conferred ‘infrastructure status’ that makes easier loan access for funding these assets. An estimated $7 billion is likely to be spent on warehouses, fulfilment centres and logistics parks in the next three to four years.

(Source: ETRealty, 11 April, 2017)

Research View

Recently, many real estate players have shown a keen interest in logistics and warehousing sector. Canada Pension Plan Investment Board (CPPIB) acquired a majority stake in IndoSpace earlier in 2017, with a focus on developing logistics facilities in India. Indospace and US-based Realterm launched a third USD550 million fund, IndoSpace III to further build warehouse facilities. Also, companies like Standard Chartered Private Equity and Home-grown Milestone Capital are also in plans to invest in the industrial & warehousing facilities in the country. The proactive government initiatives and over pouring investment in the sector is likely to promote the emergence of promising warehousing corridors across India towards a well-organized future for the sector. The recent declaration of infrastructure status to logistics sector will also provide a huge lift to private investments in the sector. The government has granted infrastructure status to the logistics sector that includes industrial parks, cold chains and warehousing facilities with the intent of building an integrated logistics framework in the country. In spite of rapid expansions, finding affordable land at the right locations, standardization of warehouse specifications, adequate infrastructure support and integration of various modes of logistics, skilled resources and technology intervention will be the key for the warehousing sector to rise ahead of challenges.

Contact for more information

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