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India’s Stock of Commercial
Real Estate
Research Report
2014
On Point
The new preference for international and domestic funds
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India’s Stock of Commercial Real Estate2
Nevertheless, India continues to lead in terms of GDP growth over comparable emerging and developed nations, largely on the
back of its socioeconomic fundamentals that remain intact. With a population younger than other comparable emerging nations,
India’s favourable demographics and ensuing rise in consumption are sure to last longer than those in other countries, promisinga prolonged period of higher GDP and income growth. The median age of India’s population is only 26, while that of other leading
emerging nations ranges from 30 to 40. In leading developed nations, the median age falls in the range of 37-46, signalling a
relatively lower propensity to spend and a much lower GDP growth rate compared to emerging countries.
Fundamentals remain strong despite frustration over
current slow economic growth
Not so long ago, the Indian economy showed consistent upward growth trajectory, which made it the second fastest-growing
economy in the world. Its high growth rate, backed by a favourable demographic transition and the strong global economy, fostered
rising consumption in virtually every sector. However, since the start of the global nancial crisis (GFC), India’s economic growth has
been affected by reduced foreign inows and lower exports. The country’s GDP growth witnessed a falling trajectory for the rst time
in a decade, and it currently stands at 4.5% y-o-y (revised from the 5% estimated by CSO previously) as of the full scal year (FY)
2012-2013.
Figure 1: India: Erstwhile Rising Growth Trajectory Temporarily Gets Hiccups
(% YoY growth in India’s Real GDP)
Source: RBI, CSO
10.0%
1970-79
4.1%4.5%
5.7%
7.2%
8.6%8.9%
6.7%
4.5%
1980-89 1990-99 2000-09 2009-10 2010-11 2011-12 2012-13
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
00%
Decadal data Yearly data
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India’s Stock of Commercial Real Estate 3
Table 1 Real GDP Income Growth Median Age
Annualised average growth 2006-2013 (% 2013 est.
Leading emerging nations
Brazil 3.6% 11% 30.3
Russia 3.7% 12% 38.8
India 7.4% 10% 26.7
China 10.2% 18% 36.3
Leading developed nations
US 1.2% 2% 37.2
UK 0.6% -1% 40.3
Germany 1.5% 3% 45.7
Japan 0.6% 2% 45.8
Source: IMF, CIA World Factbook
Source: SIAM, DGCA; *data for FY13-14 up to Dec-2013
Source: World Bank Entrepreneurship Indicators, 2013
Table 2: Rising consumerism in India
FY05-FY14 Passenger Car Sales Two-wheeler Sales Domestic Air Passengers
CAGR % 14.9% 10.1% 10.5%
Figure 2: Wages Are Lowest in India Among Comparable Nations
India’s per capita income continues to rise and fuel consumption.
Table 2, ‘Rising Consumerism in India’, shows that rising income
has resulted in increased consumption of several durable goods
and services that were of little signicance to ordinary Indians
around a decade ago. Therefore, despite the challenging operating
environment that currently exists in India in terms of policy inertia,
corruption and bureaucracy, among others, the country continues
to witness high growth rates in the registration of new rms. The
World Bank’s Entrepreneurship Indicators for 2013 show that during
the 2004-11 period, the number of new rms registered in India has
grown by 26% y-o-y on average. This was the second highest growth
observed across all comparable emerging economies of the world
(see Table 3).
At present, the global risk perception of emerging economies
(including that of India) is relatively higher, owing to weak worldwide
investor sentiment. India, in particular, has had to face the dilemma
of twin decits-current account and scal-owing to a fall in foreign
inows and domestic tax collections, along with high imports
(particularly gold, oil and durables). However, the economy’s inherent
advantages highlighted above have not gone fully unnoticed. The
World Investment Report 2013, released by the United Nations
Conference on Trade and Development (UNCTAD), has repeatedlyidentied India as the third most attractive destination in the world
for investment during the 2013–2015 period, as revealed through a
survey of 159 top multinational companies. Some of the main reasons
identied by these companies included India’s vast and untapped
market, along with labour cost, which is lower than in many other
emerging markets.
Table 3: Number of new rms incorporated
Emerging Economies Annual avg growth 2004-11 (%)
Russia 35.4%
India 26.0%
Indonesia 13.3%
Hong Kong, China 12.7%
Singapore 9.7%
Brazil 6.3%
Korea 5.7%
Malaysia 2.5%
Australia 0.9%
2000
1600
1200
1000
800
600
400
200
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Actual Forecast
0
Brazil
Taiwan
ChinaIndia
1800
1400
Source: International Labour Organization and JLL research
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India’s Stock of Commercial Real Estate4
Real estate in India: Gradually gaining the interest of
mainstream investors
Figure-3(c)
Figure-3(a): Commercial Real Estate Borrowing Figure-3(b): Individual Housing Loans
0
N o v - 0
7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
J u l - 0 8
J u l - 0 9
J u l - 1 0
J u l - 1 1
J u l - 1 2
J u l - 1 3
N o v - 0
8
N o v - 0
9
N o v - 1
0
N o v - 1
1
N o v - 1
2
N o v - 1
3
1,600
1,400
1,200
1,000
800
600
400
200
I N R
b n
Source: BSE, RBI, Real
Estate Intelligence Service,
JLL
140
120
100
80
60
40
20
I n d e x
2007 2008 2009 2010 2011 2012 20130
Commercial CapitalValue Index
Residential CapitalValue Index
BSE Realty Index
BSE Sensex Index
N o v - 0
7
F e b - 0
8
F e b - 0
9
F e b - 1
0
F e b - 1
1
F e b - 1
2
F e b - 1
3
M a y - 0
8
M a y - 0
9
M a y - 1
0
M a y - 1
1
M a y - 1
2
M a y - 1
3
N o v - 0
8
N o v - 0
9
N o v - 1
0
N o v - 1
1
N o v - 1
2
N o v - 1
3
A u g - 0
8
A u g - 0
9
A u g - 1
0
A u g - 1
1
A u g - 1
2
A u g - 1
3
6,000
5,000
4,000
3,000
2,000
1,000
0
I N R
b n
As the growth rate of new enterprises being registered is rising every
year, commercial real estate is bound to benet, and the ReserveBank of India’s (RBI) data on borrowing reects this trend. Cumulativeloans to commercial real estate have been rising fast with every
passing year, and in the last six years, the gure has nearly tripled.More jobs are created with every new rm getting registered, therebyputting more income in the hands of Indian households. This also has
had a benign effect on residential real estate. Loans to individuals
for house purchase have nearly doubled during the same six-yearperiod. Developers operating in the residential market in India
have also benetted from the mismatch in demand and supply, ashousing shortage has been a perennial problem in India. Cumulative
commercial real estate loans has tripled to reach INR 1.428 billion in
the last six years up to November 2013, whereas individual housingloans doubled to reach INR 5.185 billion during the same period.
Physical real estate outperforms real estate equities
In spite of the effects of the GFC and a general slowdown in theIndian economy, physical real estate has been performing well. Apart
from the underlying demand-supply mismatch, the advantages of
investing in physical real estate over equities were signicant. TheBSE Realty index witnessed a signicant decline of 89% in absoluteterms from 2007 to end-2013 (see Figure 3C). In comparison,commercial property prices declined only by 14% during the same
period. This gives us enough condence to believe that with therevival of the world economy in the near to medium term, investors
will become more condent in investing in physical real estate inIndia as opposed to investing in equities, given the healthy returns
expectation as well as downside protection the former offers.
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IT-ITES sector-the largest occupier of real estate space in
India-continues to strengthen
The IT-ITES sector, which is the dominant sector in India in terms of
real estate occupancy, has seen a spectacular growth rate over thelast decade. As of FY2004-2005, the sector employed around 1.1
million people, and this gure rose by almost three times to just under
3 million people by FY2012-2013. Further, the growth in employment
generated by this sector is expected to remain strong in the coming
years (see Figure 5). The National Association of Software and
Services Companies (NASSCOM), the primary trade association
of IT companies in India, has projected that this sector will likely
employ around 10 million people by 2020, thereby growing at a rate of
approximately 20% annually for the next seven years.
The Indian IT-ITES sector is poised to gain strength from the currentlevel, considering that economies of the United States and Europe,
which together account for a dominant share of the industry’s
revenues, have started to witness a recovery from the after-effects
of the nancial crisis. The depreciated value of the Indian currency
at the moment has also helped the sector to boost its margins, and
the growth of this sector will generate considerable demand for
ofce property. It also strengthens our belief that while the immediate
economic and business outlooks may not be too encouraging,
Source: NASSCOM
Source: Real Estate Intelligence Service, JLL
Figure 4: Share of leasing activity by occupier type across India
2009 2010 2011 2012 2013
100%
80%
60%
40%
20%
0%
Professional Services
Consultancy Business
Telecom, Healthcare-Biotech, Real Estate &
Construction and otherindustries
BFSI
Miscellaneous
IT & ITES
Manufacturing /Industrial
23%
22%
23%
25%
5%
34%
26%
11%
18%
8%
39%
29%
8%
18%
4%
46%
18%
16%
13%
5%
34%
14%
13%
10%
4%
24%
opportunistic buying and, thus, demand for commercial real estate
will remain intact in the near to medium term.
Figure 5: IT-ITeS Employment
8.0
9.0
10.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2020P
1.1
2.9
10
0.0
E m p l y e e d P e r s o n ( i n m i l l i o n s )
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India’s Stock of Commercial Real Estate6
Slowing down of FDI evokes some support from
policymakers
Foreign direct investment (FDI) has been one of the most important
factors that helped several sectors in India to sustain high growthrates in the recent past. The opening up of FDI in 2005 virtually
coincided with the period when the rising growth potential of the
Indian economy became apparent globally. What followed thereafter
was a more than 50% y-o-y rise in FDI inows into the real estate and
infrastructure space in India each year until FY2009-2010. Thereafter,
as the GFC started to affect emerging economies (including India),
FDI inows started to moderate. For the latest eight-month period
for FY2013-2014 (up to November 2013), FDI in real estate and
infrastructure stood at USD 889 million, which is far below the USD
Source: Department of Industrial Policy and Promotion (DIPP), GOI *For FY2013-2014, data available up to November 2013 month
Figure 6: Sharp fall in FDI in Real Estate & Infrastructure in India
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY07 FY08 FY09 FY10 FY11 FY12 FY14*FY13
1,652
3,922
4,829
5,787
1,663
3,141
8891,332
FDI in Retail Estate & Infra ($mn)
0
U S D
m n
5.8 billion peak inows into this sector witnessed in FY2009-2010.
Before 2005, only Non-resident Indians (NRIs) and Persons of Indian
Origin (PIOs) were allowed to invest in Indian real estate, but with
various restrictions in place. In 2005, the government opened up FDI
in real estate (with limited restrictions) with the intention of bridging
the wide gap between demand and supply. From then onward, FDI
in real estate witnessed remarkable growth until the past three years
when it moderated signicantly, reecting a global risk-off sentiment
and domestic macroeconomic issues-high ination, weak currency,
twin decits and moderating economy, among others.
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Real estate investments in India: FDI conditions highlighted
in the Press Note 3 guidelines
FDI in India is permitted either via the automatic route or through
the approval route. Investments in integrated townships, housing,built-up infrastructure and construction development (including hotels
and resorts, commercial, hospitals and so forth) are automatically
approved.
While the slowing growth of the Indian economy has signicantly
affected FDI inows into the real estate sector, the government
has recently shown a commitment toward reviving FDI investors’
sentiment, particularly for real estate.
Recent efforts of the government to revive FDI are moves in the right
direction
• There is a proposal to introduce the Real Estate Regulatory Bill,which could help allay concerns over the transparency issues that
currently plague the Indian real estate sector.
• In June 2013, the RBI eased norms for external commercial
borrowings in the affordable housing sector. The minimum
experience for developers was reduced from ve to three years.
• Several initiatives were taken to allay concerns of international
retailers, who were hitherto unconvinced about entering India
despite the further opening up of the sector last year.
• In the retail sector, the government is mulling over the idea of further
raising FDI limit to 74% in multibrand retailing from the present limitof 51%.
• Foreign retailers are now allowed to open stores in cities with less
than 1 million population in those states where not a single city has
a population of 1 million or more.
• The criteria of 30% sourcing from small and medium enterprises
(SMEs) that have an investment cap of USD 1 million has been
relaxed to some extent. The cap has now been raised to USD 2
million, considering the future growth prospects for the SME unit.
The Indian government is also toying with the idea of relaxing norms
on minimum built-up areas, investment horizons (time frame) andminimum capitalisation conditions to encourage FDI capital inows.
These initiatives, we believe, would help in reviving sentiment among
foreign investors.
Conditions for FDI in Real Estate in India
Minimum Area
• Development of serviced housing plots - 10 ha• Construction development projects - built-up area of 50,000 sqm
• Combination projects - either of the above two conditions
Minimum Capitalisation
• For wholly-owned subsidiary - USD 10 million
• For joint ventures (JV) with Indian partners - USD 5 million
Time Frame
• FDI cannot be repatriated within three years from completion of
capitalisation• At least 50% of projects to be developed within ve years from
date of obtaining statutary clearances
Prohibitions
• FDI in real estate business and construction of farm house notpermitted
• Investor cannot sell undeveloped plots• Payment cannot be made through traveller’s cheques or foreign
currencies
• Purchase of agriculture land/plantation property/farm houses by
NRIs/PIOs requires RBI permission
Exceptions
• Hotels and tourism, hospitals and SEZ projects have thebenets of not attracting conditions of minimum area, minimumcapital and time frame
• Investments made by NRIs in townships, built-up infrastructureand construction development projects also do not attract
conditions under the above three heads
Industrial Parks
• FDI in industrial parks would not be subject to the aboveconditionalities, provided it meets the following criteria:
• It would comprise a minimum of ten units, and no single unitshall occupy more than 50% of the total allocatable area
• Minimum percentage of the area to be allocated for industrialactivity shall not be less than 66% of the total allocable area
Source: DIPP
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Indian REITs - A keenly awaited source of funding for cash-
strapped developers
Real Estate Investment Trust (REIT) is a listed entity that owns and
actively manages a portfolio of income-producing real estate assets.REITs are listed on stock exchanges, and their shares are publicly
traded like equities. This is a key feature that helps REITs to generate
liquidity. REITs can have sector-specic portfolios (e.g., ofce, retail,
industrial or residential) or a diversied real estate portfolio across
several real estate sectors. They also use geographic diversication in
managing the risk of their commercial real estate portfolios.
REITs are yet to take off in India, while globally, many developed and
developing countries have already introduced them.
Table 4: Introduction of REITs - in Developed Markets
United States 1960s
Australia 1971
Japan 2001
Singapore 2002
United Kingdom 2007
- In emerging markets
Brazil 1993
Russia 2003Thailand 2003
Hong Kong 2005
Philippines 2009
Globally, the combined market cap of REITs stood at around USD
850 billion, as per estimates provided by Asia Pacic Real Estate
Association (APREA) as of end-2012. North America has been the
most developed REIT market and has the largest share of over 50% in
the total market cap of REITs globally. The concept of REITs in Asia is
relatively new, although it currently accounts for a 12% global marketshare, thereby becoming a fast-growing REIT market. The APREA
claims that while the region has a relatively higher share in total
investible real estate market (physical) globally, penetration of REITs
in Asia is proportionately lower. With REITs yet to establish in the two
large economies of India and China, the Asian REIT market’s potentialfor growth is immense.
REITs in India - Gearing up for a take-off
The Securities and Exchange Board of India (SEBI) had framed draft
regulation for REITs in 2008, although it did not gain momentum
after that, possibly resulting from the policy inertia exhibited by
the Indian government until last year. As of end-2013, the SEBI
attempted to revive discussions on establishing REITs in India, having
acknowledged the instruments success globally in attracting relatively
cheaper funds. Some of the binding regulations for Indian REITs
(I-REITs), as derived from the draft of SEBI regulations of 2008, are
mentioned below:
• I-REITs should have a net worth of INR 50 million
• At least half of the trustees of I-REITs should be independent
• Schemes to be launched by I-REITs must be ‘closed-ended’, and
units of every scheme must be listed on a stock exchange
• I-REITs are allowed to invest only in real estate; investing in vacant
land is prohibited
• I-REITs cannot engage in property development activity
• I-REITs cannot take more than 15% exposure to a single real estate
project
• I-REITs cannot take more than 25% exposure to a real estate project
of a single developer (or any other transacting party)
These regulations are still at the drafting stage and are yet to be
formalised or enacted. Concerns for authorities or REITs going forward
could be India’s partial readiness for institutional participation in the
realty sector. For instance, there has to be a clear demarcation of
real estate assets, which must be graded by institutions and valued
correctly. The legal structure surrounding the real estate sector inIndia is currently rather weak. The lack of professionals may also act
as a drag for India, as there are few real estate specic education
modules. Until REITs become a reality in India, existing developers
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Source: IPIT website
Source: A-iTrust website
and investors will look to FDI as the only possible alternative for exiting
an investment.
However, in the absence of I-REITs, certain Indian developers have
resorted to listing their properties abroad, particularly on the Singapore
Stock Exchange. A few examples of I-REITs listed in Singapore are
given below, along with their performances:
1) Ascendas India Investment Trust (A -iTrust):
Assets of Ascendas India Trust include:
• International Tech Park - Bangalore
• International Tech Park - Chennai
• Cyber Pearl - Hyderabad
• The V - Hyderabad
• aVance Business Hub - Hyderabad
• International Tech Park - Pune
Performance of A iTrust:
• Listed at SGD 1.55 in August 2007
• During the GFC, along with other assets, A -iTrust shares fell from
a peak of SGD 1.66 (November 2007) to a trough of SGD 0.45
(October 2008)
• It recovered to SGD 1.05 (January 2010) by 133% from the trough
• Over the last two years until August 2013, share prices have
remained largely range-bound, compared with a 33% fall in the BSE
Realty Index
2) Indiabulls Property Investment Trust (IPIT):
Assets in the Indiabulls Property Investment Trust include:
• One Indiabulls Centre (One IBC) - Elphinstone Road, Mumbai
• Indiabulls Financial Centre - Elphinstone Road, Mumbai
Performance of Indiabulls Property Investment Trust:
• Listed at SGD 0.72 in June 2008
• During the GFC, share prices fell from a peak of SGD 0.74 (June
2008) to a trough of SGD 0.13 (October 2008)
• It recovered to SGD 0.30 (April 2010), up by 131% from the trough
• Over the last two years up until August 2013, share prices have fallen
by 29% as against a 33% fall in BSE Realty index
Figure 7 (a): A iTrust1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
Sep07
Sep08
Sep09
Sep10
Sep11
Sep12
Jan14
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
May08
May09
May10
May11
May12
Sep13
May13
0
i n S G D
Figure 7 (b): IPIT
0.8
0.7
0.3
0.1
0.6
0.5
0.4
0.2
Jul08
Apr09
Jan10
Jan14
Oct 13
Jul13
Apr13
Jan13
Jan12
Jan11
Oct 12
Oct 11
Oct 10
Jul12
Jul11
Jul10
Apr12
Apr11
Apr10
Oct 08
Jul09
Jan09
Oct 09
0
i n S G D
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Value of ‘under-construction’ real estate in India: Analysing
ofce sector value dynamics
As at 4Q13, the total value of under-construction real estate in
India stood at USD 234 billion. This value has been growing at acompounded annualised growth rate (CAGR) of 32% over the last
three years since end-2010. The value of real estate then stood at
USD 101 billion. Indian real estate market had witnessed its worst
phase during mid-2010 owing to weakness in business sentiment.
This signicant growth in the value of under-construction real estate
in India was primarily led by the residential sector, which grew at
42% CAGR during the last three years. The residential sector’s value
as of 4Q13 stood at USD 191 billion, and it accounts for more than
80% of the total value of under-construction real estate in India. Thissector accounts for similar proportions in almost all leading cities of
India (except Hyderabad and Kolkata; refer gure 9B). Three years
back, the residential sector accounted for only a 66% share of the
Figure 8: Sector share (%) in value of under-
construction real estate
(as of 4Q13 data)
14.4%
3.8%
81.8%
Ofce Retail Residential
Source: JLL, Real Estate Intelligence Service
total value. This clearly reects the shift in focus of developers over
the last three years toward the housing market as business sentimentweakened. A widespread slowdown in economic activity on one hand
and an inherent demand-supply gap in housing on the other forced
developers to focus their activity on the residential sector in the last
few years.
The top seven cities in India-NCR-Delhi, Mumbai, Bangalore,
Chennai, Pune, Hyderabad and Kolkata-account for more than 80%
of the total value of pan-India under-construction real estate. Delhi
has the highest concentration of under-construction real estate value
of 33% of the total pan-India. The relatively large residential and retailsectors makes Delhi the leading contributor in value proposition.
Mumbai has the second largest share in total real estate value,
although it has a dominant share of the ofce market.
Figure 9 (a): City share in total value of Indian real estate
Source: JLL, Real Estate Intelligence Service
33.1%
15.4%
1.6%
8.0%
3.7%
3.7%
29.7%
4.8%
NCR-Delhi
Mumbai
Bangalore
Chennai
Pune
Hyderabad
Kolkata
Others
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India’s Stock of Commercial Real Estate 11
Source: JLL, Real Estate Intelligence Service
Figure 9(b): Sector-wise share (%) in value of real estate under-construction across top cities
(data as of 4Q13)
100%
80%
60%
40%
20%
NCR-Delhi Bangalore Chennai Kolkata Other CitiesPune HyderabadMumbai0%
3.8%10.9%
85.5%
1.1%
14.7%
84.2%
3.7%
17.1%
79.1%
2.2%
11.1%
86.7%
4.8%
12.7%
82.5%
23.7%
23.9%
52.4%
8.1%
29.6%
62.3%
4.1%
17.3%
78.6%Ofce
Retail
Residential
Figure 10: City-wise share (%) of ofce by area in 4Q13
Source: JLL, Real Estate Intelligence Service
Other Cities
Bangalore
NCR-Delhi
Chennai
Kolkata
3.8%
4.6%
4.9%
9.1%
13.1%
16.7%
17.8%
30.0%
Pune
Hyderabad
Mumbai
0.0% 10.0% 20.0% 30.0% 40.0%
Figure 11: City-wise share (%) of ofce by value as of 4Q13
Source: JLL, Real Estate Intelligence Service
NCR-Delhi
Bangalore
Other Cities
Chennai
Kolkata
3.3%
3.4%
3.7%
6.1%
9.5%
18.6%
25.1%
30.4%
Pune
Hyderabad
Mumbai
0.0% 10.0% 20.0% 30.0% 40.0%
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India’s Stock of Commercial Real Estate12
Ofce market scenario: Value dynamics across leading cities in
India
The top-seven cities account for 80% of the total real estate value in
the ofce sector. The total value of ofce real estate pan-India stood
at USD 34 billion as of end-2013. The value of under-construction
ofce space in India currently accounts for 60% of the total value
of completed ofce space. This means that in the next ve years,
the value of completed ofce space is likely to grow to over USD
50 billion. Being the commercial capital of India, Mumbai has the
highest concentration of under-construction ofce real estate value.
The city accounts for a dominant 30% share in pan-India ofce market
value (see gure 11). NCR-Delhi (25%) and Bangalore (9.5%) are the
other two tier-I cities that follow Mumbai in that regard. .
Over the last three years, Bangalore has witnessed the highest
growth by value of under-construction ofce space. The city’s value
has grown at a CAGR of 26% during the last three years. The
availability of high-quality and large ofce space at sub-dollar price
per square feet of rentals (lower operational costs), access to a large
pool of skilled workforce and a cosmopolitan culture have worked
in Bangalore’s favour, making it a preferred destination for IT–ITES,
manufacturing and consulting companies. Bangalore’s ofce market
vacancy level is less than 10%, which is much below the national
average of 18% as of 4Q13. Among Tier I cities, NCR-Delhi follows
Bangalore, with an 11% CAGR of the value of under-construction
stock during the same period, supported by improving infrastructure
and the consequently rising acceptance of NCR as a preferred
destination for business.
Among the Tier II cities, Hyderabad has seen the value of under-
construction ofce stock grow by 13% CAGR during the last three
years. The ofce market in Hyderabad is largely driven by the
IT–ITES and pharmaceutical sectors, both of which have managed
to show resilience to the economic slowdown. These sectors have
a strong export market, particularly in the West, which is currently
recovering steadily from the GFC.
Mumbai has seen only a marginal rise in value of ofce under-
construction, owing to the slowdown witnessed in its stronghold
BFSI sector. However, over the last few years, Mumbai has gradually
witnessed the penetration of non-BFSI tenants, which has helped
the ofce market in the suburban (inexpensive) locations of the
city. The city has recently witnessed major infrastructure projects
getting completed or nearing completion, all of which will create new
opportunities for developers and investors around the upcoming
micromarkets.
While the supply of under-construction ofce space in the three
leading metropolitan cities (Mumbai, Delhi and Bangalore) is much
the same, capital values in these cities are the key differentiators
of the value dynamics. In terms of concentration of ofce supply (or
area) in the under-construction space, NCR-Delhi leads the pack of
top seven cities, with a share of 17.8% of India’s overall supply, while
Mumbai (16.7%) and Bangalore (13.1%) follow closely.
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India’s Stock of Commercial Real Estate 13
Taking stock of ‘completed’ ofce assets in India
23%
1%7%
9%
19%
23%
18%
NCR-DelhiBangalore
Chennai
Mumbai
Kolkata
PuneHyderabad
Source: JLL, Real Estate Intelligence Service
As of end-2013, stock of completed Grade A real estate ofce space
in the top seven cities stood at 376 million sq ft, which is around 70%of the total pan-India ofce stock. Tier-I cities of Mumbai, Bangalore
and NCR-Delhi hold the largest share of ofce stock (refer gure 12).
The completed stock of Grade A ofce space across leading cities of
India witnessed signicant growth of 30% CAGR during the pre-
slowdown period (2005-2009), owing to a push from policies favouring
real estate and a general growth in economic activity during that time.
However, post the economic slowdown, growth fell to merely 14%
CAGR during the four-year period 2009-2013. Kolkata, Chennai and
Pune witnessed the biggest fall in growth in stock of completed ofce
market assets between the two time periods. Mumbai, however, wasan exception to this trend (see gure 13).
In Mumbai, the growth differential in completed ofce stock market
between the two time periods reveals a different pattern. While
the growth of completed ofce stock fell quite signicantly across
all major cities in India post slowdown, Mumbai witnessed a rise
in growth during the second period compared with the previous
four-year period. We believe that the reason for this was a
change in policy, which came during the second period, when city
authorities allowed companies to house their back ofce functions
in IT-designated buildings. This allowed many non-IT rms to only
maintain a front ofce in the expensive central business districts,
while the major chunk of back ofce functions were moved to the
relatively inexpensive IT-designated buildings in the suburbs. Certain
developers who had large land parcels in the suburbs utilised this
opportunity to offer commercial space at reasonable rentals. This new
policy created a favourable situation for all stakeholders, enabling a
rise in demand as well as supply of ofce space in the suburbs.
Figure 12: Share of completed ofce space (by area)
amongst top-7 cities(as of 4Q13, %)
50%
45%
40%
35%
30%
25%
20%
15%10%
5%
0%NCR-Delhi Bangalore ChennaiMumbai Kolkata IndiaPune Hyderabad
Post-slowdown (2009-13)
Pre-slowdown (2005-09)
Figure 13: Pre-slowdown and post-slowdown phases of India real estate and the impact on Investable-grade ofce stock
(% growth in ofce stock by area)
Source: JLL, Real Estate
Intelligence Service
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India’s Stock of Commercial Real Estate14
Growth of Real Estate Ofce Stock in Different Cities over
2009 Stock
Additions to ofce stock: Substantial already, but a lot lesser going forward
Addition in ofce stock is calculated by taking 2009 stock as base. The growth % in ofce stock as of 2013 YTD is
from 4Q09. The growth % in 2014 and 2015 are incremental over Figures relate to Grade A overall market.
Source: JLL, Real Estate Intelligence Service
2009-13 2014F 2015F
DELHI
YTD Stock:70 mn sq ft
MUMBAIYTD Stock:90 mn sq ft
PUNEYTD Stock:36 mn sq ft
BANGALORE YTD Stock:73 mn sq ft
CHENNAIYTD Stock:53 mn sq ft
HYDERABAD YTD Stock:29 mn sq ft
KOLKATA YTD Stock:17 mn sq ft
16%
7%
9%
10%
9%
9%
74%
91%
52%
8% 9%46%
5% 3%50%
11% 14%54%
23% 9%77%
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India’s Stock of Commercial Real Estate 15
Pune
Figure 14: Listed players’ share in total
FDI-compliant universe
Figure 15: Building category-wise share of FDI-compliant stock (by area) of ofce space
Figure 16: City-wise share in FDI-compliant
stock (by area) of ofce space
27%
73%
Listed player’s share
Unlisted player’s share
26%
1%7%
12%
18%
20%
16%
NCR-Delhi
Bangalore
Chennai
Mumbai
Kolkata
Hyderabad
5%
48%48%
Non IT
IT SEZ
IT Buildings
The Universe of FDI-compliant ofce assets in India
*By FDI-Compliant stock, we mean that sub-set of the total Grade-A ofce stock which meets all criteria for receiving FDI investments as per PressNote 2 and 3 guidelines of the Department of Industrial Policy & Promotions (DIPP)
Source: JLL, Real Estate Intelligence Service
Source: JLL, Real Estate Intelligence ServiceSource: JLL, Real Estate Intelligence Service
FDI-compliant ofce stock* accounted for around 45% of the total
total completed Grade A investable stock of 376 million sq ft as ofend-2013. This share rose signicantly from under 30% of the total
investible universe as of 2006.
Out of the total FDI-compliant stock in India, the share of listed
developers stood at 27% as of 2Q13.
Once again, the IT–ITES sector occupied the largest share of the
FDI-compliant stock. Only 5% is occupied by the commercial (non-IT)
sector.
Needless to say, IT–ITES dominated cities of Chennai, NCR-Delhi
and Bangalore had the highest share of FDI-compliant stock.
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India’s Stock of Commercial Real Estate16
Source: JLL, Real Estate Intelligence Service
The opening of FDI to investments has been a key driver of this
transition in supply for FDI-compliant stock. On the demand front,
however, there are certain key trend changes in the Indian ofce
market that have led to a change of preference in favour of FDI-
compliant properties. Some of the reasons are listed below:
• Lease transactions have gradually increased over the last few years,
leading developers to become conscious of the quality of buildings
that they will have to manage (see gure 17).
• Secondly, in the previous decade, the Indian economy’s meteoric
growth rate was seen as a major diversication opportunity
geographically for large multinational companies, especially those
from the United States. These MNCs have strong preferences
Source: JLL, Real Estate Intelligence Service
Figure 18: Almost entire incremental demand for FDI-compliant stock has come from the IT-SEZ space
100%
80%
60%
40%
20%
1H1320060%
IT SEZ
IT Non-SEZs
94%
52%
6%
48%
Figure 17: Share of Sale and Lease Transaction in Total Recorded Transactions
100%
95%
5%
91%
9%
93%
7%
84%
17%90%
80%
70%
60%
2011 2013*2012201050%
SalesTransactions
LeaseTransactions
for quality ofce space that enhances employee productivity and
reduces cost through efcient usage of energy resources (Table
3 highlighted the strong growth in new rms incorporated in India
during recent times, as per the World Bank’s 2013 Entrepreneurship
statistics).
Of the total FDI-compliant stock as of 2008, merely 6-7% comprised
of IT-SEZs. This share grew signicantly to 45% as of mid-2013. The
sharp decline in the share of IT non-SEZ during the same period
suggests that many domestic IT companies moved from their erstwhile
standalone IT parks and buildings to IT-SEZs to take advantage of the
benets offered under the SEZ Act.
*update is as of 3Q13
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India’s Stock of Commercial Real Estate 17
After the hysteria of the last few years, tepid recovery of real
estate growth in India reects a transition of the industry
During the last eight years from 2006 to 2013, the Indian real estate
market has received cumulative private equity (PE) investments of
USD 15.4 billion. The skewed nature of investment inows into the
sector through this channel is evident from the fact that 44% of that
amount came in one year-2007. Post that, investments have been
consistently lower. During 2013, PE investments are estimated to
have been around USD 66 million, unchanged from the level seen a
year earlier.
While it is easy to blame macroeconomic factors for this steep
correction or fall, it was actually a combination of the following factors
that led to the decline
• The edging real estate industry in India lacked the depth and
maturity required to handle large inow of money. As a consequence,
easy money was managed by inexperienced developers
• Over exuberance, misguided by the overtly optimistic expectations of
PEs, brought the PE industry to this point
• What made things worse was the clash of cultures, with guts-driven
grassroot promoters on one side and sophisticated number-
crunching PE managers on the other
• With the worsening of the macroeconomic scenario in India that
followed in the later years, exits became more difcult. Of the total
USD 14.7 billion invested during 2006-2012, only 20-25% managed
to make an exit
Emerging opportunities - Rupee depreciation and yet-to-recover
capital values
The depreciated value of the rupee (13% depreciation against the
USD in 2013) has made exits difcult. However, on the ip side, it
has made entry more lucrative for foreign investors. According to a
survey done by Bain & Co, revealed in its India Private Equity Report
2013, fundraising is no longer difcult for ventures in India with sound
credibility, nancial strength and product differentiation.
Commercial real estate prices have yet to fully recover from the
bottom observed during 3Q-2009, thereby keeping the opportunity to
invest at low levels still alive. Considering that the cost of construction
has increased during this period because of rising commodity prices
globally, this is a window of opportunity that may be short-lived. Also,
with Indian authorities currently in the mood to break the jinx of policy
inertia, it will not be long before we see establishment of a real estate
regulator and the implementation of certain relevant reforms that will
radically improve the maturity and transparency of the sector.
Figure 19: PE Investment in Indian Real Estate
8
7
6
5
4
3
2
1
2006 2007 2008 2009 2010 2011 2013*2012
0.850.940.88
3.31
6.76
1.29
0.660.66
0
i n U S D
b i l l i o n
Source: Grant Thornton data *JLL preliminary estimate for CY2013
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India’s Stock of Commercial Real Estate18
It is interesting to note that India offers one of the highest yields in commercial real estate.
The average yields of global emerging cities ranged between 8% and 9% over the period
considered, whereas the average for other global developed cities ranged between 4.5% and
6%. As against that, yields recorded in Mumbai (India) have consistently moved above theaverage yield trend. This could be primarily because of the following reasons given below:
• Yields are typically benchmarked against the cost of capital in the respective countries. Since
the cost of capital in India is relatively higher, yield expectations have remained higher when
compared with other nations. This has enabled foreign investors to benet through interest
rate arbitrage using offshore leverage.
• Secondly, emerging markets (including India) are still perceived as relatively risky compared
to developed markets. Possibility of frequent changes in tax rules, policy inertia and stringent
entry and exit regulations have contributed to this perception. Macroeconomic headwinds in
India (discussed previously) added to these concerns.
• Thirdly, the regulatory environment for Indian real estate is perceived as restrictive.
Further, in the absence of REITs in India, there is not sufcient market depth
to allow for exit from the asset once invested. The government appears
to be working on it, and we have intermittently heard of
policies to relax norms for investments.
India offers an attractive real estate yield
Source: JLL, Global Real Estate Intelligence Service
11.0%
9.0%
5.0%
3.0%
2008 2009 2010 2011 1H 201320121.0%
Hong Kong SydneySingaporeNew YorkLondon Tokyo Mumbai
Figure 20 (b): Ofce Market Yields in Developed Market Cities
7.0%
Source: JLL, Global Real Estate Intelligence Service
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
2008 2009 2010 2011 1H 201320125.0%
Seol JakartaMumbaiBeijingBangkok Manila
Figure 20 (a): Ofce Market Yields in Emerging Market Cities
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India’s Stock of Commercial Real Estate 19
Indian real estate sector in transition - Ofce sector yields reect the changing trend
Image
Figure 21: Spread Between Overall City Yields and CBD Yields
Source: JLL, Real Estate Intelligence Service
Q 1 2 0
0 8
Q 1 2 0
0 9
Q 1 2 0
1 0
Q 1 2 0
1 1
Q 1 2 0
1 2
Q 2 2 0
0 8
Q 2 2 0
0 9
Q 2 2 0
1 0
Q 2 2 0
1 1
Q 2 2 0
1 2
Q 3 2 0
0 8
Q 3 2 0
0 9
Q 3 2 0
1 0
Q 3 2 0
1 1
Q 3 2 0
1 2
Q 4 2 0
0 8
Q 4 2 0
0 9
Q 4 2 0
1 0
Q 4 2 0
1 1
Q 4 2 0
1 2
Delhi Mumbai Bangalore
Chennai Hyderabad Kolkata
1.2%
0.8%
0.4%
1.0%
0.6%
0.2%
-0.8%
-0.4%
0.0%
-0.2%
-0.6%
During the pre-crisis period, most of the seven widely tracked cities
in India witnessed movements in yields within a narrow range,
irrespective of their risk-return prole. However, post-crisis, there
has been realignment in the risk proling of various cities within
India, and this has helped to better allocate funds across portfolios.
For instance, there is now a clear demarcation between high-risk
suburban districts and the CBDs. The rising spread between the
CBDs and non-CBD locations across the leading cities in India
(shown in the graph) suggests that investors are revisiting the entire
spectrum of real estate investment options more carefully than in the
past (before 2009), when movements in yields were mostly one-
directional and similar. We believe these are signs of an industry that
is on a gradual path to maturity
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India’s Stock of Commercial Real Estate20
History of Commercial
Real Estate Yields in
India since 2005
The yields took a sharp upturn with the advent of the GFC. Since most FDI investors in Indian
real estate were based out of the United States and Europe, they became extremely wary of
acquiring further exposure to real estate, especially in emerging economies such as India.
Funds faced investment freeze in the backdrop of pessimism. This resulted in reduced liquidity
in the sector for new investments as well as defaults in committed investments. Offshore
leverage also became a challenge. Average yields increased sharply (from 10.5% to 11.5%)
during this period, reecting the low-risk appetite of investors in Indian commercial real estate. R i s i n g
Y i e l d s
2008-2009
Toward the later part of 2009, yields started reversing again before comfortably nestling within
the 10-10.75% range. A large part of the credit for reviving the commercial real estate market
in India was attributed to domestic investors-mainly domestic real estate venture funds and
high net worth individuals (HNWIs) who took advantage of the stressed valuations. Between
CBDs and suburbs, a spread of 80-90 bps was recorded between the yields, primarilybecause of risks of a huge supply overhang expected in the suburban locations. This phase
witnessed the ight of investors toward quality assets in top cities. The quality Grade A assets
continued to command a premium, which helped yields to maintain steadiness during this
period.
S t e a d y
Y i e l d s
2010-2012
‘Risk normalisation’ continues to be the theme of investments. Growth expectations for 2013
were not higher than the levels observed in 2012. The key challenge faced by India today is
the political risk arising out of the policy inertia preceding the general elections in 2014.
M o d e r a t e C
o m p r e s s i o n
2013 and
beyond
Real estate, as a sector, boomed in India after the opening up of FDI in 2005. In the rst three
years (2005–2007), a large number of global nancial institutions set up third-party funds
along with allocations from their books for deployment in the real estate sector. The economy
was buoyant, and most economic indicators ashed green. Most large projects received equityfunding resulting in the sector experiencing falling yields in this phase (from 12.5% to close to
10%).
C o m p r e s s
i n g Y i e l d s
2005-2007
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India’s Stock of Commercial Real Estate 21
Market yield (%)
Figure 22: Relatively faster rise (or fall) in capital values have led to yield compression (or strengthen) in India
Source: REIS, Jones Lang LaSalle research
Yields in India to remain benign over the near to medium term
With increasing maturity seeping into the real estate business, renewed push from policymakers to revive the sector and moderate
compression of yield, we see that the ofce sector’s overall attractiveness has gone up. That possibly explains the ndings from a reference
check of some large PE rms, which indicates that close to 15 offshore funds are in the process of mobilising around USD 4.5 billion for
investments into various realty sectors, including commercial.
Historically, yield compression or rise in India has largely occurred as a consequence of faster rises or falls in capital values against those
of rental values. Our latest estimates for the near to medium term suggests that the spread between the growth of capital values and rentals
would remain marginally positive. Therefore, we foresee mild compression in yields to continue for some more time.
Gross rents Capital Values (RHS)
11000
10000
9000
8000
7000
6000
5000
4000
3000
Capital Values fallfaster than rentals
Capital Values rise marginallyfaster than rentals
110
70
0
100
80
90
60
50
40
2 Q - 2 0
0 6
2 Q - 2 0
0 7
2 Q - 2 0
0 8
2 Q - 2 0
0 9
2 Q - 2 0
1 0
2 Q - 2 0
1 1
2 Q - 2 0
1 2
4 Q - 2 0
0 6
4 Q - 2 0
0 7
4 Q - 2 0
0 8
4 Q - 2 0
0 9
4 Q - 2 0
1 0
4 Q - 2 0
1 1
4 Q - 2 0
1 2
4 Q - 2 0
1 3
4 Q - 2 0
1 3
4 Q - 2
0 1
4 F
Yields strengthen Moderate yield compression
11.0%
10.8%
10.6%
10.4%
10.2%10.0%
9.8%
9.6%
9.4%
9.2%
9.0%
2 Q - 2
0 0 6
2 Q - 2
0 0 7
2 Q - 2
0 0 8
2 Q - 2
0 0 9
2 Q - 2
0 1 0
2 Q - 2
0 1 1
2 Q - 2
0 1 2
4 Q - 2
0 0 6
4 Q - 2
0 0 7
4 Q - 2
0 0 8
4 Q - 2
0 0 9
4 Q - 2
0 1 0
4 Q - 2
0 1 1
4 Q - 2
0 1 2
4 Q - 2
0 1 3
4 Q - 2
0 1 3
4 Q - 2
0 1 4 F
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India’s Stock of Commercial Real Estate22
Conclusion
The Indian real estate sector has witnessed stark contradictions in
terms of growth over the last decade. During the pre-GFC period, it
received large capital inows, owing to India’s strengthening economic
activity and support from favourable policies. However, during the
GFC, immaturities of India’s real estate sector came out glaring at
investors as well as policymakers. A combination of factors, along with
a weakening domestic economic growth, led to demand sluggishness
in the sector. An ensuing slackness in absorption of ofce assets,
however, could not shake fundamentals of the Indian real estate sec-
tor. We believe that the economy’s high potential for growth, coupled
with a rising national income and propensity to consume will attract
many multinational businesses, thereby generating demand for ofce
space. Additionally, the sector itself is in transition over the last few
years since its immaturity got exposed during the nancial crisis. While
investors were always the smarter and professional lot, they had much
to learn about the operating dynamics of the sector in India. Develop-
ers, on the other hand, have increasingly realised the benets of inte-
grating professional practices to stay nancially sound and attractive.
Our guide to the universe of Grade A ofce assets and FDI-compliant
ofce assets is a useful tool for investors trying to ascertain various
investment options in the commercial real estate space in India. We
believe that at present, the sluggishness in the commercial real estate
sector is behind us, and the sector is poised for a recovery on the back
of attractive yields and yet-to-recover capital values.
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India’s Stock of Commercial Real Estate 23
Author
Suvishesh Valsan
Assistant Vice President, Research & REIS
+91 22 3985 1309
Special contribution & guidance
Karan Khetan Assistant Manager, Research & REIS
Akshit Shah
Manager, Capital Markets Research India
Devi Shankar
Assistant Vice President, Capital Markets
Ujwala Rao
Head - Capital Markets (West India)[email protected]
For more information about research
Ashutosh Limaye
Head of Research - India
+91 22 3985 1319
For further business with Capital Markets
Shobhit Agarwal
Managing Director - Capital Markets
+91 22 3985 1488
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www.jll..com
About JLL
Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management rm offering specialized real estate services to clients
seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 70 countries from
more than 1,000 locations worldwide. On behalf of its clients, the rm provides management and real estate outsourcing services to a property
portfolio of 3.0 billion square feet. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets
under management.
JLL has over 50 years of experience in Asia Pacic, with over 27,500 employees operating in 80 ofces in 15 countries across the region. The
rm was named ‘Best Property Consultancy’ in three Asia Pacic countries at the International Property Awards Asia Pacic 2013, and won nine
Asia Pacic Awards in the Euromoney Real Estate Awards 2013.
For further information, please visit our website, www.jll.com.
About JLL India
JLL is India’s premier and largest professional services rm specializing in real estate. With an extensive geographic footprint across 11 cities
(Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of
over 6800, the rm provides investors, developers, local corporates and multinational companies with a comprehensive range of services
including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset
management, sustainability, industrial, capital markets, residential, hotels, health care, senior living, education and retail advisory.
The rm was named the Best Property Consultancy in India (5 Star Winner) at the International Property Awards - Asia Pacic for 2012-13.
For further information, please visit www.joneslanglasalle.co.in
Ashutosh Limaye
Head, Research and REIS
+91 98211 07054
For more information about Research