indian real estate market overview - shobhit agarwal
DESCRIPTION
Real Surat Development Seminar 2011 (RSDS-11); Shobhit Agarwal, JMD, Jones Lang LaSalleTRANSCRIPT
Cash-In to
India Real Estate Investment Scenario
Presented by: Shobhit Agarwal, Jt. Managing Director, Capital Markets, India Date: 26th November , 2011
Cash-Out
Investment Grade Real Estate Under Construction (2Q11)
COMMERCIAL 40.3 USD Billion
Office 30.1 USD Billion
Retail 10.2 USD Billion
RESIDENTIAL 119.8 USD Billion
TOTAL 160.1 USD Billion
Source: Real Estate Intelligence Service (JLL), 2Q11
Value of investment grade real estate under construction crossed
USD 160 Billion at the end of Q2, 2011
The Growing Prowess of Indian Real Estate
Commercial25%
Residential75%
Retail25%
Office75%
Office Market Trends INDIA
•3
0
100
200
300
400
500
600
4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15
(mill
ion
sq ft
)
100 msf in 4Q06
200 msf in 2Q09
300 msf in 3Q11
400 msf in 2Q13
500 msf in 2Q15
10 quarters 9 quarters 7 quarters 8 quarters
Growth of Office Space
Source: Real Estate Intelligence Service (JLL), 3Q11
Among the fastest growing office market in the world, constructing 100 million sq ft every 7-10 quarters. Office stock to become 500 million sq ft by 2015.
Note: Figures are representative of the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India
(http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
Source: Real Estate Intelligence Service (JLL), 3Q11
28.2 million sq ft of office space has been absorbed in the first three quarters of 2011.
Net Absorption to grow from 30.5 mn sq ft in 2010 to 39.1 mn sq ft in 2013.
Supply and Demand of Office Space
22.8
28.8 32
.9
42.5
41.6
40.5
46.4
56.7
22.3
28.8 32
.0
33.1
19.6
30.5 35
.7
37.0 39
.149
.8
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Com
plet
ions
/ A
bsor
ptio
n (m
illio
n sq
ft)
0%
4%
8%
12%
16%
20%
24%
28%
32%
Vaca
ncy
(%)
New Completions Net Absorption Vacancy
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
Source: Real Estate Intelligence Service (JLL), 3Q11
Pune, Kolkata, Chennai and Hyderabad have higher supply of IT SEZ Projects, when compared to IT Projects. NCR-Delhi and Bangalore is skewed towards IT and Mumbai is
skewed towards Non IT. Nearly 30% of the future supply till 2013 is IT SEZ.
IT-Non IT Supply
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
14.8
10.2
3.5 3.8 5.
0
4.4
6.8
6.7
8.2
7.4
6.0 6.
7
3.1
10.2
15.4
3.2
2.5
1.8
1.4 1.91.
1
0
2
4
6
8
10
12
14
16
18
NCR-Delhi Mumbai Hyderabad Pune Kolkata Chennai Bangalore
Fore
cast
ed S
uppl
y in
mn
sqft
durin
g 4Q
11-2
013 IT IT SEZ Non IT
Commercial TrendsConstruction Status of Future Supply
Source: Real Estate Intelligence Service (JLL), 2Q11
Huge amount of supply expected in 2011, is under advanced stages of construction, in either ‘Ready for Fit-Outs’ or ‘50-100% Structure Ready’ stages. Developers focusing on execution of smaller near term
projects than longer term ones.
Note: Figures are representative of the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
43%
33%
23%
59%
26%
46%
9%
39%
5% 5%
1%10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F
Stag
es o
f Con
stru
ctio
n fo
r Exp
ecte
d Su
pply
Proposed
Excavation / Upto Plinth
Less than 50% StructureReady
50-100% Structure Ready
Ready for Fit-Outs
Completed
NCR-Delhi
MumbaiBangalore
Chennai
Pune
Hyderabad
Kolkata
0
10
20
30
40
50
60
70
80
90
100
0% 5% 10% 15% 20% 25% 30% 35% 40%
Vacancy (%)
Stoc
k (m
illio
n sq
ft)
3Q11 4Q12F
Mumbai has surpassed Bangalore in terms of operational office stock. Bangalore continues to attract high demand from IT/ITES companies.
Source: Real Estate Intelligence Service (JLL), 3Q11
With more completions, Mumbai has replaced Bangalore as the leader in
office stock
Rapidly rising vacancy in Chennai due to large
demand-supply mismatchHealthy demand witnessed in
2010-2011 has kept a low vacancy of 7.6% in Hyderabad
Office Stock and Vacancy Across Cities (3Q11)
4Q12F values for stock and vacancy rate are REIS forecasted values
Oversupply is expected to increase vacancies across cities in 2012. Bangalore expected to outperform due to good pre-leasing and affordable rentals in
2012.
3Q11 4Q12F
Source: Real Estate Intelligence Service (JLL), 3Q11
Office Stock and Vacancy Across Cities (4Q12F)
NCR-Delhi
Mumbai
Bangalore
Chennai
Pune
Hyderabad
Kolkata
0
10
20
30
40
50
60
70
80
90
100
0% 5% 10% 15% 20% 25% 30% 35% 40%
Vacancy (%)
Stoc
k (m
illio
n sq
ft)
NCR-Delhi and Mumbai to witness the maximum
movement due to huge supply
Bangalore and Hyderabad to have low vacancy among cities
56%
49% 60
%
39% 43
% 48%
29%
35% 27
%
32% 30
% 30%
9% 11% 9%
19% 17
% 16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010
Others
Australia
Switzerland
EuropeanUnion
India
USA
Source: Real Estate Intelligence Service (JLL)
Firms headquartered in USA and Europe contribute a lion’s share of lease transactions for office space across Indian cities.
Leasing of Office Space on the Basis of Countries of Origin
For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India(http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
68%
60% 64%
49%
34% 47
%
9%
10% 9%
14%
24%
16%
11%
13% 10%
19%
21%
13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010
Others
Consulting
Manufacturing/ Industrial
BFSI
IT/ITES
Source: Real Estate Intelligence Service (JLL)
IT/ITES, BFSI and Manufacturing sectors continue to dominate the share of lease transactions of office space, contributing over 75-80% of the pie.
Leasing of Office Space by Various Sectors
For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India(http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
Office Initial Effective Yields
Source: Real Estate Intelligence Service (JLL), 2Q11
Note: Initial Effective Rental Yield is the initial effective rental income (after deducting outgoings such as property tax and considering incentives such as rent free period) at the time of sale or transaction, expressed as a percentage of the sale price or valuation.
The recorded spread of 80-90 bps between the yields of CBDs and those of Suburbs exists due to the risks of a huge supply overhang expected in the
suburban locations. Institutional investors are concluding transactions at yields of 9.75%-10.75%.
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
F
2Q12
F
4Q12
F
2Q13
F
4Q13
F
Aver
age
Initi
al R
enta
l Yie
ld =
Ren
tal I
ncom
e /
Capi
tal V
alue
Overall CBDs SBDs Suburbs
YIELD COMPRESSION
YIELD FORECAST
PEAK
YI
ELD
S
CBD
SBD
SuburbsSpread 80-90 bps
Retail Market Trends INDIA
Source: Real Estate Intelligence Service (JLL), 3Q11
Of 9.9 mn sq ft forecasted for absorption in 2011, 7.1 mn sq ft has already been absorbed till 3Q11 and another 1.3 mn sq ft is pre-committed.
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
Supply and Demand of Retail Space
3.8 4.1
9.4
8.5
6.3 6.
9
13.7
17.9
2.8 3.
7
9.6
6.6
4.0
4.0
9.9
10.5 12
.010
.5
0
4
8
12
16
20
24
2005 2006 2007 2008 2009 2010 2011 2012 2013
Com
plet
ions
/ A
bsor
ptio
n (m
illio
n sq
ft)
0%
6%
12%
18%
24%
30%
36%
Vaca
ncy
(%)
New Completions Net Absorption Vacancy
NCR-Delhi
Mumbai
Pune
Bangalore
Chennai
Hyderabad Kolkata
0
5
10
15
20
25
30
0% 5% 10% 15% 20% 25% 30% 35% 40%
Vacancy (%)
Stoc
k (m
illio
n sq
ft)
NCR-Delhi and Mumbai lead others by a huge margin in terms of operational retail
stock; have high vacancies in secondary districts
Kolkata, Hyderabad, Bangalore and Chennai have relatively low stock and low vacancy; These
cities have considerable activity on high streets
NCR-Delhi and Mumbai constitute two-thirds of pan India retail mall space.Considerable retail activity remains on the traditional high streets of India.
2Q11 4Q12F
Source: Real Estate Intelligence Service (JLL), 3Q11
Pune has high vacancies due to select retail properties having low
occupancy levels. Other properties enjoy good occupancy
Retail Stock and Vacancy Across Cities (3Q11)
NCR-Delhi
Mumbai
Bangalore Pune
Chennai
HyderabadKolkata
0
5
10
15
20
25
30
0% 5% 10% 15% 20% 25% 30% 35% 40%
Vacancy (%)
Stoc
k (m
illio
n sq
ft)
Note: 4Q11F values for stock and vacancy rate are REIS forecasted valuesSource: Real Estate Intelligence Service (JLL), 3Q11
NCR-Delhi expected to remain dominant with over 25.9 million sq ft of operational mall space by end-2012. Vacancies are expected to increase in the short term due
to supply-absorption mismatch.
3Q11 4Q12F
Malls expected to become operational in 2012 will move NCR-
Delhi and Mumbai towards 34% and 28% vacancy respectively
3.9 mn sq ft of expected supply
during 4Q11-4Q12 in Pune
Bangalore to witness rapid rise in stock with a total 8.8 mn sq ft of operational retail stock expected
by end-2012
Retail Stock and Vacancy Across Cities (4Q12F)
Source: Real Estate Intelligence Service (JLL), 3Q11
All of the expected future supply in 2011 is under advanced stages of construction. 51% of supply expected in 2013 at risk of completion being at initial
stages of construction.
Retail Supply during 2011-2013
74%
48%
46%
41%
10%
19%
23%
3%
3%
24%
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F
Stag
es o
f Con
stru
ctio
n fo
r Exp
ecte
d Su
pply
Proposed
Excavation / Upto Plinth
Less than 50% StructureReady
50-100% Structure Ready
Ready for Fit-Outs
Completed
Residential Market Trends INDIA
Source: Real Estate Intelligence Service (JLL), 3Q11
Low sales volumes led to sharp decline in absorption rate from 21.4% in 1Q10 to 11.5% in 3Q11. New Launches have declined since 4Q10, due to slowing demand.
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.Absorption Rate is the ratio of sales over inventory of residential units, where inventory is the number of units launched yet unsold in the market.
Residential Supply and Absorption
With the country’s urban population growing up to 3.8 percent annually due
to higher birth rate ascompared to death rate and migration from rural
areas, urban areas will be short of an estimated
26.53 million dwelling units by 2012.
Ministry of Housing and Urban Poverty Alleviation
Government of India
“
”
24.4%
21.3%
17.5%
11.5%
9.3%9.6%
13.3%
18.9%
15.7%
17.6%
19.7%20.7%
21.4%
14.3%15.2%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
Num
ber o
f Res
iden
tial U
nits
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%
Abso
rptio
n Ra
te(N
et A
bsor
ptio
n as
Per
cent
age
of A
vaila
ble
Stoc
k)
New Launches Net Absorption Absorption Rate
Source: Real Estate Intelligence Service (JLL), 3Q11
NCR-Delhi accounted for 35% of the residential launches in 3Q11. Bangalore is the only market to have registered a rise in absolute number of launches in 3Q11 compared to
2Q11.
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
Residential Supply and Absorption
46% 53
%
36%
55% 58%
59%
38% 50
%
46%
35%
12%
20%
25%
21% 17%
6%
27% 12
%
15%
21%
8%
9% 14%
13%
24%
11%
9%
9%
7%
7% 14%
8%
9% 16% 10
%9%
5%
12% 9%
15% 8%
8% 7%5%15
% 10%
13%
11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
% N
ew L
aunc
hes
in R
esid
entia
l Mar
kets
Kolkata
Hyderabad
Pune
Chennai
Bangalore
Mumbai
NCR-Delhi
Source: Real Estate Intelligence Service (JLL), 3Q11
Average residential capital values appreciated by nearly 2-3% in 3Q11. With subdued residential activity, capital values in Hyderabad remained stable during 3Q11.
Movement of Capital Values (3Q10 – 3Q11)
Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
Chennai
Mumbai
Hyderabad
Kolkata
NCR-Delhi
Pune
Bangalore
Simple Average of % Q-o-Q Change in Capital Values of Constituent Micro-markets
3Q10 3.4%3.6%0.0%5.1%2.6%2.2%5.6%4Q10 3.7%6.0%0.0%1.5%2.0%1.4%1.7%1Q11 0.3%0.8%1.0%1.7%2.3%3.8%5.2%2Q11 1.8%1.5%0.0%2.2%2.4%2.7%2.8%3Q11 2.2%1.3%0.0%2.1%2.6%1.5%2.5%
ChennaiMumbaiHyderabadKolkataNCR-DelhiPuneBangalore
22
While Sensex touched 2008 peak levels, Realty Index further dipped
BSE Sensex Vs BSE Realty Index
Slowing Residential
Sales
Indian Real Estate – The Challenges
Slow Pace of Infrastructural
Growth
High Inflation and Fiscal
Deficit
Land acquisition at
high valuations
Procedural Delay in
Approvals
Building Teams
Relatively Low Transparency
Expensive Liquidity for Real Estate
Private Equity in Real Estate in Tier II cities
Introduction
• Faced with the difficulty of raising funds from traditional sources such as banks, Private Equity and NBFC’s have become a big source of funding for Real Estate Developers
• Since 2006, Private Equity Funds have infused USD 10.2 bn into real estate companies and projects in India (according to a recent report by Nomura)
• In 2011, Private Equity investment in commercial office space was the highest followed by investment in residential space
Investment Characteristics of Private Equity players
• Investment horizon of 4-5 years
• Invest at the project/ SPV level
• Invest in metropolitan cities due to greater comfort with developers and the depth of the market
• Focus on SEZs and Industrial IT parks due to clarity on exits
• Seek IRR north of 20% on their investment
26
Our Clients
27
•Proprietory funds
•Funds not actively investing
•Sovereign wealth funds
•Active foreign funds
•Active domestic funds
Significant investments by PE funds in Tier II cities
Fund Investee Company
Location Stake Amount
(USD/mn)
Fire Capital Arcor Group Nagpur 75% 14
Urban Infrastructure Venture Capital
Raheja Universal Chandigarh 50% NA
Oman Fund Motisham Complexes
Mangalore 50% 129
Monsoon Capital Anant Raj Industries
Panchkurla, Haryana
50% 43
Warburg Pincus Unique Affordable Homes
Jaipur - 75
Key factors leading to PE growth in Tier II cities
• Favorable demographic
• Rising cost of land and lack of adequate opportunity in tier II
• Lack of adequate land
• Affordable cost of living following office occupiers and IT demand
• Increasing rate of urbanization and demand for flatted community
Concern faced by developers vis-à-vis PE Funds
Developers towards PE Private Equity Funds towards Developer
• Focus only on deal making and hence add no value to the firm
• Funds are bankers who are just concerned about their returns on investment
• Do not want to be accountable for the business they conduct
• Funds are only in the business to exit
• Margins made in metros is much higher than those made in Tier II cities
• Political risk and regulatory risk could derail projects
• Land acquisition issues could lead to cancellation of projects
• Tier II cities have high financial risk as they mostly rely on one sector
• Find Tier II cities less mature than metros• Find execution of projects by large
builders difficult as they lack local knowledge
• Find lack of transparency and inefficient management setup
Key Learning's for the Developer
Private equity firms require local developers to generate the following abilities:• Efficient management team
•Transparent in his dealings
•Proper expertise in real estate development
•Execution of the project should be in order with the project being completed in stipulated timelines
•The books of accounts should be in order
•Strong liasoning team
•Good marketing team.
•Should be having all approvals in place for the project
31
Thank you
Copyright © Jones Lang LaSalle 2011