 "Colin Dyer")
Colin Dyer, president & CEO Jones Lang LaSalle (JLL), believes Indian commercial real estate is in good shape with rising rentals and low vacancy. Dyer and Anuj Puri, chairman and country head, JLL India, talk to Shivani Shinde Nadhe on supply side challenges in India and the Brexit impact on global realty. Edited excerpts:
Recently announced Q2 numbers show JLL has grown well despite the difficult macro environment. How do you see the growth for real estate and do you see any impact of Brexit?
Colin Dyer: Real estate markets depend on the health of the world and national economies. While some countries have issues, overall global economic growth is expected to be in four-five per cent range. We are seeing healthy economic conditions, firms are expanding, people are buying real estate and we see good demand for all the services we offer.
Having said that, I call the current environment biennial — though there are crises in some areas, the overwhelming trend is that the world is moving forward. Brexit was one of the biggest problems during the quarter. This was a problem for us, as 15 per cent of our revenues come from UK.
What happens from here? We think it will take a couple of quarters for price discovery. We will get some clarity by November-December. The unknown is what will happen in the leasing markets as companies will have to wait and see what happens to the regulatory issues between Britain and Europe, especially around visa regulations for European people and companies in UK.
Has there been any impact of Brexit on the global markets and India? Are investors moving away from the UK?
Colin Dyer: The only impact of Brexit has happened in Britain. We have not seen it contaminating other geographies. However, there is as much demand interest in Britain because you saw prices drop by almost 10 per cent and the currency, too, has depreciated. But the issue is there are no sellers.
Anuj Puri: European corporate is less than 10 per cent of the total Indian commercial market in terms of leasing of space every year. So exposure to Europe and UK is limited. Even if it happens, it is contained. We have started to see interest among Indian HNIs in UK residential properties go up post Brexit because the currency has devalued and there is 10-15 per cent correction in price. We feel that as time passes we will see interest from some of the Indian institutional investors to buy leased properties.
How is the Indian real estate market compared to global markets?
Colin Dyer: Indian city rental rates are growing. We are not seeing a crazy amount of development because development lending is difficult to raise. Indian market of commercial real estate is in good shape. It is not a bubble. Moreover, India has changed over the last 4-5 years. Private equity and institutional capital want to come here.
There is much more confidence in India, especially since the Narendra Modi government took over. People feel there is a push towards good governance, economic growth, etc.
Anuj Puri: The rental growth over the past 18 months has been 1-3 per cent every quarter and this year we are looking at net absorption of 35 million sq ft for CY2016. Pune, Bengaluru, Chennai and Hyderabad have vacancy in single-digit percentage. Pune is at five per cent from earlier vacancy levels of 9-10 per cent. On the commercial segment, rentals are rising and demand is high. The problem is lack of good quality supply, as there is no availability of debt to construct new commercial office space. On FDI, in 2015, we had $2 billion of investment come in. In the first six months of 2016, we have seen $2 billion FDI come in. That shows the increased momentum.
With a lot of international brands coming in, do you see retail commercial space looking up?
Colin Dyer: The fact that India is allowing retailers to come into India and not just take a minority role is a huge positive. We have seen the positive impact on retail real estate. The challenge on retail RE is good quality supply not coming up.
Anuj Puri: On demand side, you have Zara, Forever 21 and now M&M also coming in. However, the issue is on supply side. We are still seeing poor grade malls being built up. Of the 7 mn sq ft that will be delivered this year, there are only 10 superior grade malls that are coming up. Many of the malls have not really understood that there is a science behind circulation, design, tenant mix, etc. They are still looking at selling each shop.
When do you think the residential market will bounce back?
Anuj Puri: The past two quarters have been better than the six quarters prior to that. The unsold inventory in the last two quarters has gone down. That doesn’t mean that the sales have improved, what has gone down in new launches. New inventory coming on ground is reduced. But then this is the first sign of life coming back. The market was suffering due to wrong products being offered. A lot of products were in the premium to luxury segment, whereas the demand was at mid level. The other reason was inability to complete these residential projects due to overleveraged position. As these issues get corrected, we will see markets turning around.
However, I will add a caveat here that the turnaround will not happen in a rush. It will be segment by segment, city by city and developer by developer, it will not be across India. Some developers and projects may still find it difficult.
What trend do you see in the commercial real estate pricing?
Anuj Puri: Across all the cities, you have had similar phenomenon where rentals are growing and vacancy has come down. But new supply has been a challenge. We wonder till what level is this rental growth sustainable as a country, as many outsourcing companies are coming into India for cost arbitrage. One of the benchmark we have set is that the rent in many cities should not cost $1 per sq ft per month. So, the rentals have risen but not breached the $1 per sqft per month.
