Year 2012 was one of the worst years for the real estate sector. Squeeze on cash flows, scaling down residential projects, higher vacancy in retail, lower absorption of office space, and liquidity crunch described the past year for the sector.
However, the next year promises to be much better. The reasons for this optimism are many: The opportunities for the realty sector from the opening of foreign direct investment (FDI) in retail, the likelihood of key policy rates being cut in early 2013, and the expected recovery in the economy next year, which will improve the overall sentiment.
Home truths
While the prime focus of real estate companies in 2013 will be residential, they will keenly watch the retail space for opportunities arising out of FDI being allowed in the sector.
A total of 160,622 residential units were launched in 2012, a modest 3.83 cent growth from the previous year’s 154,701 units. The National Capital Region (NCR), comprising about 60 per cent of the new launches was 22 per cent lower than the previous year. If 2012 was more about execution and consolidation, a spree of launches are likely in 2013, according to industry observers.
Take DLF, India’s largest real estate company. The realty major’s target is to launch projects measuring 8.5 million sq ft in Gurgaon by March 2013. DLF had recently launched a 1.2-million sq ft project ‘the Skycourt’ in New Gurgaon.
More announcements could be expected from the company, as it is in the process of selling non-core assets to focus on its core business. In line with this strategy, DLF had sold its luxury hotel chain, Aman Resorts, in the third week of December.
Other developers, too, have launches up their sleeve. They are waiting for the liquidity situation to improve and interest rates to reduce.
Companies in the sector are pinning their hope on the Reserve Bank of India (RBI), which has hinted it would start cutting rates from January.
The cost factor
One factor that affected the growth of the sector in 2012 is likely to follow in the new year, too. Despite Finance Minister P Chidambaram’s nudge to developers to cut prices for the unsold inventory so that they could be cleared, property prices are likely to remain high. During calendar 2012, NCR saw a 15 per cent appreciation in property prices.
However, realtors such as Mumbai’s Mantri Realty claim they have already cut prices. “We have reduced prices as the finance minister requested,” Sunil Mantri, chairman and managing director of Mantri Realty, told Business Standard.
However, according to Delhi-based CHD Developers, home prices will undergo a wave of high appreciation after six months.
Retail push
Buoyed by the new policy to permit up to 51 per cent FDI in multi-brand retailing and 100 per cent in single brand, retail space take-up and rentals are expected to revive in the new year. This will be a huge relief for the sector, which witnessed rentals fall by up to 30 per cent in malls in key cities in 2012. According to international consultancy Jones Lang LaSalle (JLL), major cities such as Mumbai, Delhi (including NCR), Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million sq. ft of mall space in 2013.
Real estate players are already scratching their left palms in anticipation of deals with foreign retailers. Some of them have already held discussions with foreign brands to develop property on the outskirts of cities. The entry of foreign retailers could infuse fresh enthusiasm into the sector. Renewed demand for retail property could improve investors’ confidence in the sector.
“Anticipated growth in demand is expected to bring some upward movement in retail rentals, particularly along established hubs,” says Anshul Jain, CEO of DTZ India.
In 2012, the retail sector saw a drop of 65 per cent in the total supply in NCR, Mumbai and Bangalore, according to a report by the Royal Institute of Chartered Surveyors.
By the end of this financial year, vacancy levels in Mumbai and Delhi are expected to be about 20 per cent and 15 per cent across other cities, due to demand-supply gap, according to Balbirsingh Khalsa, national director, Office Industrial Agency, Knight Frank, another real estate consultant.
Among the major retail launches announced for 2013 are DLF’s Mall of India and Unitech’s Gardens Galleria, both slated for the second half of the year. However, analysts say the launches could slip into 2014.
In Mumbai, mall rentals are likely to see a nominal increase, says Ramesh Nair, managing director (west), JLL. With high-street rentals already very high, malls have become unaffordable and unviable for many retailers. Unless rentals become realistic, 2013 will see subdued demand, he adds.
CHD Developers is of the view that superior malls will have lower vacancy than the inferior ones, while rentals will get a push.
Office space
With foreign retailers expected to open stores in India, demand for office space is also likely to go up. However, a lot will depend on how the economy behaves.
In 2012, the office space take-up stood at 27 million sq ft, a sharp 24 per cent drop from last year’s 35.6 million sq ft, according to DTZ. Consultants see a slight uptick in the office space offtake in 2013. “We expect the office space take-up in 2013 to be higher than 2012, but lower than 2011 — at 32 million sq ft,” says an analyst.
According to Anshuman Magazine, chairman and managing director of CB Richard Ellis South Asia, big deals in 2013 would be lower than last year as economic woes would continue to loom. “The global economy is uncertain, and India’s GDP has fallen to 5.5-6 per cent this fiscal, which will affect big office space transactions,” he notes.
Affordable housing
Budget 2013-14 is expected to make a few announcements for the affordable housing segment, as recently indicated by Ajay Maken, minister of housing and urban poverty alleviation.
Also, long-pending Bills such as those on land acquisition and real estate regulation & development are expected to be passed during 2013, to bring transparency in the sector and improve overall sentiment.
