Indian REITs - USD 18 bn Opportunity

With the Budget 2016-17 clearing the key hurdle of Dividend Distribution Tax (DDT), it has paved the way for REITs/ InvITs to see the light of day. We expect the 1st REIT/ InvIT listing in CY17.

As per Jones Lang LaSalle, REIT-able Grade A office space totals ~229 msf in India across 727 assets. Conservatively assuming that ~50% of this is REIT-able and an average sub-dollar rent of Rs 70/ psf, it would translate into a USD 18 bn of REIT value creation potential (based on a cap rate of 8% and an exchange rate of Rs 65/ $) Mumbai, NCR and Bangalore collectively account for 2/3rd of REIT-able assets

A number of Joint Venture (JV) platforms have been created recently between PE investors and established developers to invest in Indian commercial real estate.

• Standard Chartered and Tata Realty & Infrastructure to create a Rs 30 bn investment platform, to buy commercial assets across the country. Standard Chartered’s share in this JV to be Rs 20 bn.
• Goldman Sachs and Nitesh Estates announced a 74:26 JV with a commitment of Rs 18.5 bn from the former
• Warburg Pincus and Embassy Group announced to invest USD 175 mn and USD 75 mn respectively in a JV that would focus on building warehouses across the country

With new absorptions expected to surpass new completions over the next 2 years, rentals are expected to inch upwards from current levels. Expected improvement on portfolio yields makes this an opportune time  for investors to invest in REITs

Incentives for REITs and affordable housing

The budget was positive for commercial property and affordable housing markets, key highlights being – 1) Dividend Distribution Tax (DDT) exempt in respect of distributions made by the Special Purpose Vehicle (SPV) to the Real Estate Investment Trust (REITs)/Business trust and in the hands of investors; subject to 100% ownership of the SPV; 2) 100% deduction on the profits for developing affordable housing projects for houses up to 30sq mtr (in metros) and upto 60sq mtrs (in other cities) approved during Jun'16 – Mar19 and completed within three years; with minimum alternate tax being applicable; and 3) first-time home buyers to benefit from additional interest deduction of up to Rs50,000 on loan not exceeding Rs3.5mn for a house valuing less than Rs5mn.

We believe the budget has provided the requisite bold tax concessions to promote establishment of Indian REITs, as per our expectations. We think DDT exemption has reduced tax leakage to near 20% (from 35% earlier) largely addressing industry concerns making Indian REITs a relatively tax efficient structure; and comparable with other REIT markets. Tax incentives for construction of affordable housing should resolve
execution/profitability concerns for developers. Further we believe interest concessions for first home buyers could help step-up housing demand

Lodha Developers Sales to Touch Billion Dollar

Lodha Developers remains the largest developer in India on pre-sales done per year. Management expects to cross Rs65 bn of sales in FY2016, maximum of which is from the MMR. Focus remains high on deliveries. Lodha has nearly 3,900 employees with 50% of these being technical (engineers, construction management experts). Construction spend has increased from Rs19 bn in FY2013 to nearly Rs24 bn in FY2015. As per the management, Lodha has over 700 engineers, the highest for any developer in India and has the largest Customer Relationship Management (CRM) team of over 300 people. Focus on pre-sales is high, both through in-house and broker channel (over 4,000 brokers empaneled in India).

Lodha Developers & Builders Land Bank
Although total land bank is around 6,000 acres (most of it part of the Palava City development); Lodha wants to remain asset light in land strategy in Mumbai. Most land parcels in Mumbai are acquired in the past five years and already under development.

Business is divided into (a) Development of 4,500 acre Palava City in MMR (Phase-2 of 660 acres under development with Phase-1 of 270 acres delivered), (b) Development of marquee residential projects in upmarket locations (The World Place, The Park in Lower Parel, Mumbai and The Altamount, Altamount Road, Mumbai), (c) Development of premium residential projects across Mumbai suburbs (six projects under-development).

Lodha is also developing select projects in Pune, Hyderabad and London. They also intend to increase focus on commercial (Build-and-lease model) and are planning nearly 6 mn sq. ft of commercial space in Palava City. 0.5mn sq. ft of mall will be operational this year.

Organized / Branded Builders MarketShare Improve

Realty Launches are slowing down across metros on slower sales, but organized developers have been gaining on sales and launches given little price differentiation now. It also offers the comfort on timely delivery.

The market share of Mumbai, Pune and Gurgaon have increased for large organized / branded developers while in Bangalore, though the top 10 are ahead in performance, market share has only marginally increased over the past few years.

In addition to the land owners / corporates selling land, small and large developers have also started to tie up with select large developers. Such a route is usually adopted to realize higher selling rates, get faster volumes and even upfront cash flows for those in stress. Mumbai has seen the most number of deals while in CY2016, there were more deals than in FY2004-15 put together.

Access to capital and cost of borrowing remain low for larger developers, and they are getting equity funding. Four large developers have seen equity commitments / investments of over `75 bn in CY2015, in addition to multiple small deals in the market.

Traditional developers have shifted from land banking to quick monetization approach since FY2010. Prestige Estates has out-performed all on land acquisitions. It has acquired the most land in the past five years, mostly through the asset light JDA route and monetized them within four-five quarters.

Among corporates, Godrej Properties (GPL) has gained the most, we believe. It has capitalized the most on its brand equity and strong construction focus. Although older acquisitions were capital intensive, most projects after FY2013 have better structures. GPL has also been adding (i) projects in Development Management (DM) model earning annuity-type income on project management and brand equity and (ii) refundable deposits in Joint Ventures, thus protecting against cost inflations.

Chennai Property Price have gone too high too quickly

Chennai Real estate market is marred with government inactions and lot of dampening in interest due to Nokia and Foxcon. Commercial real estate had been very weak. However, commercial properties market are doing reasonably well now. First, due to government inactions, power cuts and less regulatory approvals in last 2-3 years, not many developers showed any interest in launching new projects in this segment. Second, post 2007-08 slowdown, commercial properties capital value has been mostly flat which is yielding very good lease rentals.

After clarity on state bifurcation, Hyderabad has emerged as a formidable competitor to Chennai to attract businesses. State government has renewed its focus in bringing up the commercial demand by recently organized Tamilnadu investor summit where about USD 20 bn of MoU’s are signed. This will be big positive for the sector.

Residential real estate sales are down by almost 70% YoY in Chennai. Land cost used be only 20-30% of whole project cost, now it is almost 50-70%. So overrunning cost due to delays, interest and regulatory hurdles can make a project unviable. Lots of townships (designed on the lines of mini smart cities) in and around Chennai have been flop because there is no transport infrastructure in place and no social ambience around townships. Government spend in transport infra is utmost important to propel the townships/smart cities/affordable housing in suburbs.

The problem is that even in suburbs, price have gone too high too quickly and matching the areas with adequate transportation infrastructure. This anomaly will be corrected by both price and time correction.
Developers are shying away from doing lot of advertisements because they know that with so weak sentiments, A&P cost won’t change anything. Lot of issues like regulations, plan approvals, NOC, environmental clearance, taxation (stamp duty etc) and arbitrary guidance value (Government rate which is higher in some areas than prevalent market rates) are taking toll on the whole commercial and residential space. PE players are taking advantage of this residential slowdown by doing value bulk buying at 20-40% discounts right now.

BANGALORE: Mushrooming E-comm and start-ups are driving commercial real estate

Commercial properties in the city are doing very well with less than 5% occupancy rate, which is one of the least in the country. Expert are expecting less than 3% in coming years. Lease rentals have appreciated by more than 20% in last 2-3 years.

Transport infra and power cuts have been major issue affecting occupancy level in Whitefield. Ecomm and start-ups have played a major role in absorption of small offices. Flipkart took 2-3 mn sqft office space in one go which is unheard before.

REITS are showing lot of interest in city so lot of developers are cleaning their portfolio in terms of cross ownerships, clearances etc as law requires lot of transparency to enable trusts to invest. Bangalore commercial market is the best placed among major Tier 1 cities to place the bets on. Retail is doing poorly in Bangalore due to subdued interest and Bangalore being epicentre of ecommerce.

Bangalore Residential Market Segment
Bangalore market is always known to be market with less speculative activities as compared to other markets because still 70% of demand comes from end-users segment. Developers were inching up prices by 5-7% or more in all areas historically but doing this in future seems impossible.

Luxury segment is taking a big hit because luxury homes are mostly 2nd-3rd home buying for mid management IT professionals. Issues such as low salary hikes, mid management level crisis and fewer onshore opportunities are bringing down this aspiration buying. So this segment is the most hit with prices are already down by 15-20% pan India.

Emerging trend in Bangalore is lot of compact apartments launches in the size of 500-700 sqft and costing around 25-30 lacks to cater to new entered professionals.

Govt Gifts Realty Sector on Diwali

Large developers have always been better capitalized than others with more access to money and at cheap cost (relatively). 100% FDI in townships and development of housing and commercial complexes is already permissible through the automatic route. DIPP has been advised to consolidate all FDI-related instructions such as notifications, press notes and others and prepare a single booklet so that investors wouldn’t have to refer to several documents from multiple time frames.

Investments by companies /trusts/partnerships owned by NRIs to be treated as domestic investments: NRI investments in real estate are estimated to be 10-15% (or more in select markets). Larger entities owned/controlled by NRIs will lead to more investments in housing units/projects, we believe.

Amending the FDI policy on LLPs: This will also be beneficial to the sector as an LLP structure saves tax leakages on distribution.

Transfer of investments to another non-resident investor has no lock-in and can be done through the automatic route. Earlier, such a transfer also required FIPB approval. Bringing this under automatic route will bring ease and speed to such transactions, which earlier had to face procedural delays.

Restrictions on minimum area (20,000 sq. m.) and capitalization (US$5 mn) removed. This was brought down from 50,000 sq. m. and US$10 mn last year. Condition of no lock-in already existed for investment in hotels and resorts, hospitals, SEZs, educations institutions and old-age homes.

100% FDI now permitted in completed projects for operations and management of townships, malls/shopping complexes and business centers. This will improve the service in Indian real estate with more players likely to enter the market. It could also mean cheaper services on this account.

DELHI NCR: Worst Hit Residential Real Estate Market in India

Delhi NCR Realty Market once upon a time flooded with Speculators Money from the Corrupt Congress Government Politicians and their Coterie of IAS Officers is the Worst hit Real Estate market in India as the present Government has Zero Tolerance for Corruption. 80% of apartments in NCR is 3BHK and the average size of unit is almost 1400 sq ft+, so getting a sub 1Core property is impossible.

Worst hit market in India with prices are down by 30 to 50% in select cases. Secondary market is comparatively doing fine with some deals happening. This market is known to have lot of speculative investments from investors and NRI’s in last couple of years. The average time to complete a project here is 7 years and market is so illiquid that it takes around 1.5 to 2 years to sell the property.


Noida market is even worse as compared to Gurgaon with lot of inventories building up .The same is the case in tier 2 and tier 3 cities such as Kanpur, Patiala, Lucknow, Amritsar etc with no deals happening despite price cuts of 20-30%.

All small time developers are just trying to get hold on some funds so that they can restart the halted projects and liquidate the inventory. It is the only market where there is an explicit price cut due to loss of trust factor in developers because of developers like DLF diverting funds to build land banks than developing a project. This has lead to over delaying of project, denting consumers’ confidence.

In primary residential market, the situation is so bad that no deals have happened in last 1.5 years. Lot of small time developers are in such cash crunch condition that they were not paying contractor for last 1-2 years resulting into contractors have stopped working and abandoned sites. So lots of uncompleted projects can be seen in this region.