Asset class

Residential projects, as an asset class, seem to have turned the tables on commercial projects after a gap of three years. In 2014, investments in the office asset class had gone past the corresponding figure for residential. But now—between 2016 and the end of first quarter of calendar year 2017—residential projects (including townships) across India attracted an investment of more than Rs 26,000 crore.

In contrast, commercial projects (including IT) got almost half of this amount at slightly more than Rs 13,600 crore.

Land attracted 2.5 per cent of the overall investment at Rs 1,065 crore, while retail could attract only 2 per cent or Rs 870 crore because of the lack of quality mall supply.

These figures, which appear in a recent JLL India study, say that these investment figures are a combination of debt and equity. Clearly, residential has been the preferred asset class for both institutional and private equity (PE) investors.

Interestingly, equity flows have reduced in the residential sector in the last four-five years, making way largely for debt and structured instruments.

Quite significantly, and notwithstanding the JLL India findings, Cushman & Wakefield believes that commercial office real estate sector is entering a new phase of growth, as several global and local factors are expected to bring about discernible changes in the sector.

“The Indian real estate is on the cusp of change as the commercial office segment moves closer towards corporatisation,” says a recent report by RICS and Cushman & Wakefield titled “Commercial Office real Estate: Positive Disruptions-Beacons of Change”.

According to the report, three major forces are likely to disrupt the way commercial office market functions, albeit positively - changes in economic policies of major economies in the world, changing ownership pattern and the shift towards new commercial tenancy models such as co-working.

“Overall, while there will be certain short-term headwinds emanating from global policies, India is relatively well-insulated. India is firmly on track to become an economic powerhouse with strengthening GDP, better business environment and investor-friendly policies by the government,” predicts Anshul Jain, managing director, India, Cushman & Wakefield.

Sachin Sandhir, global managing director – emerging business, RICS echoes similar sentiments. “The biggest change in the sector will be brought about by its institutionalisation. As institutional investors gain ownership in commercial office assets, better corporate governance and best professional practices are slowly being adopted by the commercial real estate sector. With Reits coming in, we will see increased demand for professional valuers of Reit assets. Also, professional management and valuation of properties as per international standards will become the norm, steering the sector towards institutionalisation, especially once Reits are listed and the Real Estate Regulation Act (Rera) is fully enforced,” says Sandhir.

While admitting that some strategic investors, still realise the growth potential that the office asset class has in the long-term in India, and that the lull was all but a temporary one, Shobhit Agarwal, managing director - capital markets & international director, JLL India, points out, “Just before the global financial crisis (GFC) in 2007-08, the office market was blazing with healthy leasing transactions and bustling construction activity. However, all this traction came to a virtual standstill as the GFC erupted, leading to a host of unfinished buildings and a perceptible lack of space demand. Consequently, there was a sharp decline in office market rents and capital values over the subsequent periods. Even before the office sector began to come out of the woods and display some green shoots of recovery in 2011, the residential sector had already picked up the slack and was driving the industry forward.”

He adds: “Residential projects as an asset class became the darling of both institutional and private equity investors who were looking to make good their losses from the office asset class.”

The general perception among realty players and sector analysts is that commercial office real estate is expected to see greater participation of foreign institutional investors (FII), as they continue to pick up leased and under-construction assets in India.

The investment scenario is now marked by a combination of sovereign/pension funds with a long-term investment focus, along with private equity funds that have a typical 7-8 years investment horizon. This is leading to a marked shift in ownership pattern with institutional investors now being amongst some of the largest owners of office assets.

The long-term vision of foreign pension and sovereign funds, greater investment platforms and JVs has helped establish stringent corporate standards and management.

Adhering to international project standards during construction is likely to be a game-changer with increased focus on quality of developmental assets and professionally managed developers.

Cushman & Wakefield points out to another significant trend and says that to tap into the growing demand for office, several global and Indian players are creating stock in the top cities.

Global and local companies are competing with each other by offering best practices in the real estate sector.

Co-working spaces are evolving, driven by the changing needs of their occupiers to increase collaboration and productivity. Although, Bengaluru, Delhi-NCR and Mumbai see the highest concentration of co-working centres, Hyderabad, Chennai and Pune too are witness to some activity.

There is no doubt that the increasing share of equity financing, is a key indicator that investors are looking to become project partners and points towards their strong positive sentiments for commercial assets.

A major consideration in recent times for commercial assets has also been the impending launch of real estate investment trusts or Reits, as pointed out by both JLL and Cushman & Wakefield. It remains to be seen, however, if Reits will eventually change sectoral inflows in the years to come.

ritwikmukherjee@mydigitalfc.com