Over a 3 day tour over Mumbai / Delhi / Bangalore we explored the fundamentals of investment property assets (Office /Malls/ Hotels) along with longer term prospects of REITs in India. In summary we think Investment Property assets are entering a new bull market driven by positive rental reversions / peaking of new supply growth / market share consolidation and likely lower interest rates one year out. Cap rates then in our view will likely trend 100-150bps below current 9%-9.5% levels as market starts discounting positive rent reversions over the next 3 years
Office /Retail Real Estate markets are getting more consolidated, with the top 2-3 developers in each market increasingly controlling a higher share of new supply. This is because smaller developers are increasingly shying away from a capital intensive model and tenants too are now increasingly discerning across landlords.
Across our meetings with companies/ consultants/ funds in 3 cities, the clear trend that emerged was that office /retail real estate now is entering a new bull market. Rental revisions post lock in are rising 50-70% across portfolios for many companies. This is essentially driven by rentals catching up to market pricing and reflective of likely tight demand supply fundamentals in the space over next 3-4 years
Hotels are one of the worst affected asset class of the current slowdown but now seems poised to come back as peak supply is now starting to get over. Hotels in areas such as Gurgaon / Bangalore suburbs are witnessing near sell out levels as new industry is now moving towards city suburbs rather than conventional city centers. We think as peak supply gets over in the market, RevPAR reflation in the market will revert to double digit growth levels over the next 2-3 years
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