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Indian Real Estate: The need for an Institutional Market


18 Aug 2009

Ambar MaheshwariAmbar Maheshwari, Director & Head Investment Advisory, DTZ International Property Advisers, discusses the impact of the global financial downturn and the need for a more robust framework for an institutional market in the Indian real estate sector

Indian real estate has been affected by the global downturn but indirectly so. The global downturn has obviously reduced some foreign investments and the type of funds which have been affected most by the downturn in India were those from the global funds which had allocations towards Indian real estate. The other indirect issue is from the point of view of end users. The demand for Indian real estate was primarily from the IT/services sector, be it commercial or residential demand. This demand came from people working for IT/ ITES/ services companies. Now with the slowdown, many of these companies are cutting down on IT expense and the people working for them have become more uncertain and cautious and are therefore not really going out and consuming the things they were consuming before.  Real estate has been affected because there is a lack of financing available from banks and financial institutions as the lenders themselves have also been affected by the global slowdown.  Real estate assets are closely correlated to the stock markets, which have been affected badly with the global slowdown and that is why real estate markets have again been quite slow.

To what extent is financing available?

It has improved a little bit but over the past six months we have seen very low financing available from banks. The central bank, the Reserve Bank of India, has increased available loans for real estate financing; previously the banks had to curtail the funding for real estate but things are starting to look up again. Players like LIC Finance have started lending for real estate again, for projects that look more feasible in terms of demand, supply and pricing.

Which asset classes do you think offer the best investment opportunities?

I think more than asset classes, each opportunity has to have a merit of its own. It is a very nascent market in real estate here, which is why most of the funds that have been raised to invest into real estate have not really been asset specific or geography specific, they have all been opportunistic funds. This means basically wherever you find the right opportunity, you want to make an investment. Real estate investments in India are quite like private equity investments because they are development-based assets, they are not really income producing assets. So whenever you make an investment into a development asset, you’ve got to focus on the promoters, developers,  and capability, and the demand-supply situation in that location. So there are a variety of things to evaluate in order to figure out whether it is a good opportunity or not. And therefore it is not really possible to say that this is the asset class which offers the best investment opportunity or that this is the asset class that is not going to offer an investment opportunity. The markets are very nascent, there is demand for different types of product dependent on geography and different types of market. Things that you may want to exclude are really based on micro markets. For instance, micro markets in Chennai have seen a lot of built up office inventory and therefore in that micro market, investing in office does not really make sense. Or in Bangalore some micro markets would have excess supply of residential units, so it would not make sense to invest in residential out there or in an area such as Gurgaon where there is an oversupply of retail malls. So it is very specific to each micro market - it is not even city-specific, it is about micro markets within that city.

What lessons have you learned from the global financial downturn?

So many of them! I think in India there has been a supply constraint for a very long time and you could say we are a capital starved country. Therefore you need foreign capital for it to be able to grow at the level that it has been growing - I think that is something that we need to be careful about. One of the lessons of the global downturn is your reliance on foreign capital which then becomes very hard to come by and the global economy may be in worse shape than the domestic economy. The other thing is, and one of the things we need to do now, is put together a domestic institutional market for real estate. In India, domestic institutional capital is just not available for real estate; it was not even available previously so the only domestic capital that was available for real estate in India was unorganised, individual HNI, non-resident capital. It is not available in any institutional format or framework and I think one of the biggest lessons is that we need to develop an institutional market or institutional capital to be made available for this sector.

What do you think needs to be done to enable an institutional market?

 We have got to have a framework around real estate investment trusts, and mutual funds and the government needs to be forthcoming in terms of producing clear guidelines on how you could go out and form funds. Whatever capital is available, if it is an individual, an HNI, or whether it is a non-resident pool of capital, give them more information and a more organised look and feel so that they can go out and make investments in a way which is much more clear and robust.

What do you think the opportunities and challenges are over the next 12 months?

We have got to look at demand, supply and pricing and then make an investment; so there are still opportunities and there always have been in a slowdown. Challenges are obviously going to be the availability of capital and the larger economy. From where we are at now, the market has started to firm up again and stabilise more in terms of pricing. I think the reasons why we found ourselves in the scenario in the first place have not changed. The stock markets are maybe a little more positive about the new government that has come into power. We had a new budget within the last few weeks and that is an indication that things have changed. Although the market is not strong, due to the positive sentiment because of the new Government, pricing has started to stabilise. However, things on the ground have not changed much and the new Union Budget has not brought in many ‘goodies’ that would change things at ground level.

How have tier I and tier II cities been affected?

Tier I cities are really what we have been talking about. Tier II and tier III cities are places where things have really become much worse because of a lack of liquidity and because not too many transactions have happened. As a result of the number of transactions being so low, people are finding it extremely difficult. Opportunities and prices had gone up to a level where they were unsustainable

Do you think the logistics sector still offers good opportunities?

Yes, absolutely. That is a very underserved area as far as real estate is concerned in India. Logistics is probably where office markets used to be five years ago. The quality of office then is of the same quality of warehouse we are looking at today as there were not really particularly large office facilities available. There are a lot of technical implications and strategic aspects that are required for logistics to come up to a higher level. Logistics is a sector that is marred by low quality/ small/ unorganised warehouses in India currently.  For it to develop into international quality, there is a lot of strategic input required from international players that will help set up benchmarks and these international players will draw upon the best practices that they follow internationally. But it is only a matter of time and today it is a sector which offers significant opportunities.



Source: Cityscape Intelligence