Indian realty market is well poised as country regains favour of foreign investors; ULI-PwC report ‘Emerging Trends in Real Estate® Asia Pacific 2016

Mumbai, 16 December 2015 - The progressive evolution of Indian foreign investment policy for the real estate sector through introduction of various liberalisation measures has reinforced the confidence of foreign investors and has helped India regain favour to be one of the preferred investment destinations in the Asia Pacific region, says the Emerging Trends in Real Estate® Asia Pacific 2016 report, jointly published by the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC).

Survey respondents ranked Bangalore, Mumbai and New Delhi at 12th, 13th and 16th positions for investment prospects and at 15th, 13th and 11th positions for development prospects respectively, in the list of the 22 markets covered in the report. While there has been a marginal drop in rankings of Mumbai and New Delhi from an investment prospects perspective (they were ranked 11th and 14th, respectively in Emerging Trends in Real Estate® Asia Pacific 2015 report), Bangalore has shown a remarkable improvement as it has moved up 5 positions over its last year’s ranking (17th). The report attributes the surge in Bangalore’s rankings to its technology industry and the availability of a large pool of skilled labor necessary to ramp up the venture capital backed startups.

The report highlights that the Mumbai is on a recovery path on the commercial real estate side and, down-town is on stable ground. Delhi and nearby industrial zones have one the biggest pipelines of new supply in Asia and on the ground, occupancy problems are focused on B-grade or secondary assets rather than the higher-quality buildings, for which the demand remains high. The story in Bangalore is however different than that in Mumbai and Delhi, where even the huge amount of upcoming supply of commercial office inventory is not perceived to be a cause of concern, as it is expected to be matched by an equally high absorption rate.

Overall, the outlook seems to be positive; this is evidenced by the fact that the 80 percent of the foreign capital inflows have been all-equity buyouts by big institutional players. Even those investors who had burnt their fingers in the first round of investments in 2006-07, are not wary of Indian markets anymore, and are willing to bet their money once again on the Indian real estate story.

In the city specific observations, the survey results suggest that Mumbai is on a recovery path as far as the commercial real estate side is concerned. Further, on the residential end, there is currently a reasonable amount of oversupply in the suburbs; however, with the recent slowdown of approvals for new projects, the oversupply situation could get addressed to a certain extent.

New Delhi, on the other hand, is expected to see the biggest pipeline primarily on account of Delhi-Mumbai Industrial Corridor, a cornerstone project of the current government supported by Japanese capital that aims to develop eight international-standard industrial clusters between the two cities. Further, cash crunched developers in the residential space are being targeted by foreign investors to provide rescue capital.

Per the respondents to the survey, Bangalore is emerging as the real estate capital of India as it overtook Mumbai in this year’s rankings to become the most preferred real estate investment destination in India.

It is also important to bear in mind that this survey was undertaken through the months of September and October 2015, i.e. prior to the further liberalisation in regulations for foreign direct investment in construction development sector and foreign investment in Alternative Investment Funds and therefore, it does not take into account the changes in sentiment, if any, on account of these developments. However, in our view, the mood across industry has only become more vibrant and exhilarating in the last few weeks.

The Emerging Trends report provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is based on the opinions of more than 400 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.

The top five investment markets for 2016:

  • Tokyo (ranked first for investment and development) – Tokyo “ticks all the boxes” for investors given its status as Asia’s top gateway city, and the market with the greatest depth and liquidity. Still, despite the continuous heavy activity fueled by easy credit and low interest rates, some are wary that the market is slowing. While the short-term outlook is favourable, a slowdown, accompanied by price stagnation or declines, could prove problematic for those needing to refinance high loan-to-value loans in the future, the report cautions.
  • Sydney (second for investment and development) – Sydney is a draw for institutional investors seeking core office properties. The shortage of those assets and an influx of new investors competing for the properties, coupled with a depreciated local currency, are resulting in strong property yields. Real estate in Sydney is also benefiting from the transformation of Australia’s economy from a commodities-driven to a service sector-driven model. In addition, a significant number of office-to-residential conversions and redevelopment projects have drawn investor interest.
  • Melbourne (third for investment and development) – Melbourne is perceived as offering a similar environment to Sydney. However, even with double-digit price increases in 2015, properties in the city remain more affordable than those in Sydney, mainly because more land is available for an expansion of the central business district (CBD). Absorption remains strong, both from newly arrived businesses and those moving from the suburbs to the core of the city.
  • Osaka (fourth for investment, fifth for development) – Osaka continues to benefit Tokyo’s “spillover demand,” as investors migrate to the smaller city where competition is not as stiff. Yields for residential properties are particularly strong, although commercial assets are also performing well. The market’s impressive growth “marks the end of a long period of oversupply that plagued the city for years,” notes the report.
  • Ho Chi Minh City (fifth for investment, fourth for development) – Ho Chi Minh City’s rating has soared over the past two years, jumping from 19th place in 2014 to one of the top five for 2016.The report attributes its surge in popularity to successful efforts by the government to stabilise the local currency and keep inflation in check, coupled with a revival of real estate lending by banks. In addition, improved market access for foreigners is drawing outside investors, who could significantly boost purchases of both residential and commercial properties.

Across the Asia-Pacific region, the industrial/logistics sector continues to be the most popular property type for investment prospects. “Shortages of modern distribution facilities across almost all markets ensures that demand will continue to grow, especially in China,” says the report. It notes that demand is being driven by the need for rapid delivery resulting from the e-commerce boom, buildout in the cold-food chain, and structural changes in regional manufacturing as operations move to emerging markets such as Vietnam.

Overall findings from the report include the following:

  • Weaker land sales in the first half of the year were attributed mainly to slower sales in China. While some international investors remain cautious about the mainland, transactions across the region picked up strongly in the second half and are now expected to match or exceed last year’s record levels.
  • Yields are now also pushing record heights in most markets, but buying momentum seems unlikely to slow in 2016. As a result, although a few investors see current pricing as a high-water mark, the majority believe the growing weight of capital will continue to push prices up and yields down, albeit at a slowing pace.
  • With yields in Asia now at levels often deemed uncompetitive compared with deals on offer in the United States and Europe, some investors continue to move up the risk curve, investing in asset classes and geographies that provide better returns. At the same time, this trend has probably slowed since last year.
  • Although yields may have further to run in markets such as Australia and Japan, many investors now see rental growth (rather than cap-rate compression) as a source of future profits. This is a controversial notion, however. While the cycles in both countries are at a point where rent increases are plausible, other investors see such expectations as rationalisations.
  • Opportunistic returns are tough to find in the current environment, but plenty of funds operate—apparently profitably—in the space. The best venues for opportunistic returns currently are Japan and China. Opportunities for distress, meanwhile, remain elusive, with the possible exceptions of China and India.
  • Emerging markets such as the Philippines, Vietnam, and Indonesia have enduring appeal given the higher yields and growth they offer. But most investors are steering clear in practice given the heightened levels of risk in the current environment, with high exchange rate and capital flow volatility as the United States heads toward an impending hike in the base rate.
  • More institutional investors are crowding into Asian markets. A proliferation of mergers and acquisitions and portfolio-type deals are resulting from the search for ways to invest large sums of capital from institutions.
  • There is plenty of risk out there. However, the most commonly mentioned scenarios involved fasterthan- expected increases in interest rates, and—a perennial favourite—a hard landing in China with a knockon effect across the rest of Asia.

About the Urban Land Institute

The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has nearly 35,000 members worldwide representing all aspects of land use and development disciplines, including more than 1,850 in Asia.

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