India’s Real Estate Stock to reach 3.7 Trillion Sq.Ft. in 2019 : CBRE

CBRE South Asia released its ‘Real Estate Market Outlook 2019 — India’ in Bangalore today. Nearly USD 4.7 billion of investments were witnessed in 2018, primarily across office, development sites and the retail sector. 2018 saw 47 million sq. ft. of office space uptake, dominated by Bangalore, Delhi-NCR and Hyderabad.

CBRE expects an addition of almost 200 million sq. ft. of new real estate space in 2019 across categories, taking India’s total Real Estate stock to 3.7 Trillion sq. ft.

Asia Pacific Real Estate Market Outlook 2019 | Source: CBRE

“The growth of the Indian Real Estate market in 2019 will be driven by numerous factors including technology, demand-supply dynamics, improved ease of doing business rankings and the dust settling post the implementation of reforms such as GST, RERA among others. We expect to see significant growth across segments, which will lead to the addition of almost 200 million sq. ft. of new real estate space in 2019 across categories including office, retail, residential and logistics,” said Anshuman Magazine, Chairman & CEO — India, South East Asia, Middle East & Africa. “The current government’s pro-reform policies have yielded positive news for the equity market and investment inflows, thereby positioning India as an attractive business destination.”

According to the report India’s real estate industry has witnessed a paradigm shift from traditional finance to an era of structured finance, private equity and future public offerings. During 2018, the commercial real estate investment market witnessed few large-scale deals which has led to about USD 4.7 billion of investments. Transaction activity was led by private equity investors focusing on the office and retail sectors, while local investors focused on investing in land parcels for RE developments. The inflow of long term, patient capital from private equity and other institutional players — especially in office and retail has provided these sectors with stability that will ensure a steady growth curve.

The logistics sector picked up tremendously after the implementation of Goods and Service Tax (GST) and granting of ‘infrastructure status’. Absorption reached an all-time high of nearly 24 million sq. ft. in 2018. Cities such as Mumbai, NCR and Bangalore were the primary demand drivers, closely followed by Chennai and Hyderabad. Although quality supply has remained a prime concern across this segment, the situation is expected to improve in 2019 as prominent developers continue to acquire land assets and partner with international players to develop world-class warehousing facilities. The government’s push to bolster growth in this sector through the implementation of favourable policies has garnered tremendous attention from international players and foreign investors. This trend is likely to continue in 2019 with sizeable private equity investments expected across major cities.

2018 saw a significant spurt in flexible space operators and their footprint across the country. Flexible space operators leased more than 6 million sq. ft. of investment grade office space in the country, more than double the quantum leased in 2017. Occupiers are likely to increase agility in their real estate portfolios — finding the right mix of flexibility and collaborative / incubation spaces within their core workplaces along with adding external flexible options. RE portfolio agility combined with rising practices of remote working are also likely to result in lower space per employee.

In Q1 2019, Embassy Group and Blackstone Group LP launched the country’s first REIT, which was oversubscribed on listing. This is a critical step towards formalising the funding mechanisms prevalent in the sector.

CBRE plans to employ 3000 people in 2019, in addition to the 8000 people it employs currently in India.

Office Market Outlook for 2019

In 2018 office space absorption crossed an all-time high of 47 million sq. ft. (up 5% y-o-y) across the nine leading cities, boosted by a supply influx of 35 million sq. ft. (up 17% y-o-y). Bangalore and Delhi-NCR continued to dominate take-up; Hyderabad emerged as the third most preferred office destination, overtaking Mumbai.

• Absorption trends: Leasing activity in the sector will be driven by evolved sources of demand rising interest of global occupiers, workplace changes due to digitization of jobs, evolving need for flexibility, increased demand for domestic needs, rise in net absorption and Core + Flexi workplace strategies. The combination of these sources of demand, coupled with the supply influx of quality space is likely to result in the share of net absorption to rise from the current 60–65% to about 70–75% during 2019–20. The share of tech in overall space take-up in the country will remain in the range of 30–35% by the end of 2019.
• Supply trends: We expect development patterns to be more tech-tailored and anticipate a stronger pipeline in 2019. CBRE expects nearly 40 million sq. ft. of new office space to be released over the next twelve months. Almost 30% of this pipeline is expected to be in the SEZ space. There is also expected to be an impetus on “smarter” buildings — driven by the augmented use of tech for optimising space and costs.
• Rental trends: We expect rents to continue to grow across the key markets in Bangalore, Chennai and Pune, however, this growth is expected to taper across most cities. ‘Gateway’ cities of Delhi-NCR and Mumbai would also see rental growth, however only in select locations. Also, a convergence between SEZ and non-SEZ rentals is expected in 2019.

Retail Outlook for 2019

The Indian retail sector has been evolving at a fast pace in the past couple of years. Increasing urbanisation, evolving brand preferences, availability of technology and social media have been the driving factors behind this evolution. In 2018, nearly 5.1 million sq. ft. of new retail developments became operational across the seven major cities in the country. Supply was led by the Southern cities, with Hyderabad at the forefront; followed by Chennai and Bangalore. Smaller retail developments also became operational in Delhi-NCR and Kolkata during 2018.

Demand on the other hand has also been strong and the past couple of years have witnessed a divergence in the demand and consumption pattern of consumers in India. While fashion and apparel is expected to continue as key demand stream (value fashion, along with mid-range fashion is expected to drive retail sales), but it has also given way to categories such as F&B, multiplexes and entertainment centres, along with accessories amongst others.

• Although nearly 10–12 million sq. ft. of supply is expected to come on-stream in 2019; demand is expected to outstrip supply. While changes in FDI norms for e-commerce may impact online sales in the short-term, it may also impact investor sentiment in the segment.
• However, despite uncertainty across the e-commerce segment, omni-channel retailing is here to stay.
• Diversification in demand to continue with expansion by various domestic and international brands across newer categories.
• Experiential retail and placemaking will be the key, landlords and retailers likely to use tech for studying consumer patterns and enhance customer experience.

Logistics Outlook for 2019

2018 was a remarkable year for the warehousing market as overall absorption during the year touched 24 million sq. ft., a growth of about 44% compared to the previous year. Majority of the demand was concentrated in Mumbai (23%), Delhi-NCR (19%) and Bangalore (19%), closely followed by Chennai and Hyderabad accounting for about 15% and 12% respectively. Following the expected trend, 3PL players, e-commerce and engineering & manufacturing firms drove demand during the year contributing about 35%, 23% and 15% respectively. Markets which led rental appreciation during the year were Bhiwandi in Mumbai (23%), Western corridor in Hyderabad (20%), NH-6 in Kolkata (16%) and Northern belt in Chennai (11%).

• Significant supply addition expected; the share of Grade A supply expected to increase in overall supply. While the overall supply (grade A and inferior grade) for the sector is expected to be almost 60 million sq. ft. till 2020, at least 22 million sq. ft. of this supply is estimated to be in the grade A category.
• Demand from e-commerce players may slow down in the short-term due to policy disruptions. However, in the long run, BTS properties to become more commonplace for such players.
• Favourable policy framework and government focus on infrastructure initiatives likely to spur further growth in the sector in 2019.
• Focus on building in-city logistics, grocery delivery and cold chain facilities to see more activity in the coming year.

Capital Markets and Land outlook for 2019

During 2018, the commercial real estate investment market witnessed few large-scale deals which led to about USD 4.7 billion of investments. Transaction activity was led by private equity investors focusing on office and retail sectors, while local investors focused on investing in land parcels for RE developments. The inflow of long term, patient capital from private equity and other institutional players — especially in office and retail has provided the sector with stability that will ensure a steady growth curve.

• The liquidity squeeze in the NBFC sector, besides government policies and focus on due diligence, will lead to consolidation in the sector.
• PE investments are likely to focus on completed and under-construction quality assets across the office, warehousing and retail segments; residential sector will continue to be dominated by debt funding.
• As the due diligence process tightens, the quality of loans is also anticipated to improve, however, as a result funding costs may rise.

Residential Market Outlook for 2019

Post the policy reforms of 2017 such as demonetisation, RERA and GST, the residential market is absorbing the impact of these changes and is on the path to recovery. This led to a growth of about 15% y-o-y in new supply and 13% y-o-y in sales. As developers align themselves with structural policy reforms implemented in the past few years and with changing characteristics of demand, we can expect residential supply to improve in 2019. The residential market is better placed this year as speculation-led investment activity has reduced significantly and financial checks are in place to prevent over-gearing. In terms of segments, mid-end projects will still garner the major chunk of supply, followed by the affordable segment (owing to government incentives and increase in end-user demand). The uptick in launches is expected to be witnessed in Bangalore, Mumbai, Hyderabad and Chennai, whereas launches in Kolkata and Pune are expected to be stable.

• Supply- demand scenario is expected to improve, unsold inventory levels to further decline.
• Alternate assets such as co-living, student and senior housing will continue to garner greater interest from end-users and developers.
• Affordable housing will drive supply and demand, backed by several government reforms
• Alternate assets such as co-living, student and senior housing will continue to garner greater interest from end users and developers.
• In the affordable segment, developers are likely to draw up appropriate marketing strategies, phase-out launches and defend their margins by managing construction costs. Greater use of tech and tech-enabled construction techniques can assist in better execution of projects.