BackIn real estate, sentiment is low and liquidity is tight
Realty funds small against what market requires, says Anshuman Magazine of CBRE South Asia
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The real estate sector is stagnant, if various reports and price trends are to be believed. Yet it is one asset class that attracts almost everyone when it comes to investments. Of late, real estate has come into focus—regulations that promise to bring in transparency are being introduced, and indices that measure prices and supply are coming up. In an interview, Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt. Ltd, talks about how the changes taking place will shape the future. Edited excerpts:
How is the real estate market faring in terms of price?
Currently, the real estate market is slow. The main reason is that growth in our gross domestic product has reduced. The sentiment is low and there is liquidity problem from both sides. For developers, the cost of debt is high; banks are not eagerly lending to the industry and private equity money has slowed down considerably. For consumers, the interest rates are high, prices have gone up and sentiment is low.
The good part is that overall, there is still movement in the market. In commercial real estate, though space take-up has reduced over the years, we still see 28-30 million sq. ft getting absorbed. There is consolidation but we are seeing activity in the market. Rentals have remained flat, thanks to the supply.
In the residential market, since prices went up really high—especially in Delhi and Mumbai—sales are coming down. Residential sales have come down across the country. But in the mid-price segment, where there are developers with even half decent reputations, we are seeing sales.
Why are real estate funds coming up even in this slow market?
These funds are very small compared with what the real estate market requires. Obviously, there are opportunities and that is why funds are happening. First, there is private equity coming from outside, though limited. Second, domestic money is also coming in because there are limited investment opportunities in India. So, on one hand liquidity is tight and on the other people are sitting on cash because of the economic slowdown.
If you hear about 200-500 crore funds, these are really opportunistic funds because the market is slow. In the commercial space, private equity funds are taking big positions in commercial rental yield-based properties. They feel it is a good time because prices are competitive and they are bullish for the long term. They are also reducing risk by investing in income-producing assets. So, less money is going into greenfield development projects.
Will real estate investment trusts (Reits) change the way people are investing in real estate now?
A Reit structure will make a big difference and I hope it comes soon. First, it will mop up retail investment. So, people who want to participate in commercial or residential real estate but are unable to do so since it is expensive, can buy Reit units. It will allow them exposure in various large estate companies. For example, if it is a 1 million sq. ft-office development or a 300,000 sq. ft-retail development, a normal retail investor will not be able to buy there; but through a Reit structure, she can diversify into real estate.
The other big thing will be that it will provide an exit route. It will encourage more people and institutions, both foreign and domestic, to put money into real estate. Today, if a private equity fund wants to invest in real estate and they develop a commercial space, how do they sell? They either sell to other private equity funds or in small pieces. But if a Reit structure comes in, they will be able to sell to them. So a lot of people who want to invest in India actually don’t because they do not have a way to exit, Reits will provide that exit and bring liquidity.
Will that drive up the prices even higher?
Price is a function of supply and demand. It may drive up prices of trophy assets. Say, there are a few grade-A office developments fully owned by a developer who sells it to a Reit which is looking for such a property. This may compress yields in the market. All this is very theoretical right now. We will have to wait and see how much corpus Reits can raise and where the market is at that time.
Will a stable government change the price dynamics?
It will improve the sentiment, give comfort to the market and confidence to investors. Demand has to be stimulated, which will stimulate supply. For example, if infrastructure projects are implemented faster, it will bring in more activity. More than stability, it is important that the government takes key decisions on economic reforms.
How will the Real Estate (Regulation and Development) Bill benefit consumers?
The Bill is definitely good for the consumer and I believe the consumer needs protection. It will also give confidence to consumers as they will be assured that if something goes wrong, they will be safeguarded. But the Bill also has to take into account developers’ issues. You can penalize a developer for late delivery of a project, but what if the developer does not get approvals on time from the authorities? The Bill needs to be more balanced.
There is a lot of focus on this sector, be it through Bills or indices. What will this change?
The industry has moved quite a bit from having hardly any information available and low transparency to some level of transparency and availability of information. This makes the industry more competitive, which improves quality and pricing. It also encourages more people to invest.
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