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Debt availability may go up, equity capital flow into realty to be stable: Jones Lang LaSalle’s Anuj Puri 

Funds with good track record and strategy to target a narrow asset class can raise money more easily in 2013, feels JLL India’s chairman & country head.

The year 2012 was another unremarkable year for the real estate sector. Large companies continued to see slow growth while the debt overhang on their balance sheets remained. However, the impending cut in interest rate is likely to boost the demand for the residential segment while FDI in multi-brand retail is expected to help the retail property market. In fact, these are some of the key factors which have seen the realty scrips moving up. VCCircle caught up with Anuj Puri, chairman and country head of Jones Lang LaSalle India – one of the largest international property consultancy firms in the country which is also launching its domestic real estate fund of Rs 300 crore. In an exclusive interview, Puri talked about the real estate market in India, the drop in private equity transactions, multi-brand retail’s impact and the outlook for the year 2013. Here are the edited excerpts.

How do you see the Indian real estate market performing in 2013, compared to last year?

India’s GDP growth was constantly revised downward during the last three quarters of 2012. This trend will prevail in 2013 although the quantum of revision will be lower. The country’s economic environment will certainly improve, with a corresponding (but lagging) gain in momentum for real estate. The most tangible benefits of economic improvements for the Indian real estate space will be seen in the second half of 2013.

In the residential segment, most of the Indian cities will see an increase in launches this year, but the southern cities of Bangalore and Chennai will witness a decline, compared to 2012. It is important to note that these two cities recorded a historical high in terms of number of launches last year. Also, residential property prices have breached affordability limits in cities like Mumbai. So developers will have to factor in the ground realities of the business while debating the lowering of prices to catalyse sales in 2013.

We also expect the year to bring a larger-than-usual number of NRI investors into the commercial property arena. It’s because NRIs are currently enthused by the prevailing exchange rate benefits and the fact that commercial real estate capital values are still 15-25 per cent under their 2007-08 peak levels.

In 2013, new organised retail project completions will increase significantly. Chennai, Hyderabad, Kolkata and Pune will be among the major contributors to this increase, with 53 per cent share of the country’s overall mall supply for the year. The primary reason being – a sizable amount of mall property supply, expected to reach completion in 2012, has been pushed to 2013. India’s major cities like Mumbai, Delhi-NCR, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million sq. ft. of organised retail real estate in 2013. In fact, Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70 per cent of the total retail space absorption. Other cities like Pune, Hyderabad and Kolkata will account for the remaining 30 per cent.

What’s your view on commercial space absorption and the inventory pile-up?

The fact that Mumbai, Delhi-NCR, Bangalore and Chennai saw 72.5 per cent of the total commercial real estate absorption in 2012 says a lot and indicates the forward path. In 2013, these cities will grab the lion’s share of contribution in total commercial property absorption – certainly in the range of 74-76 per cent. As for commercial real estate investment potential, Mumbai, Bangalore and Delhi-NCR will continue to be of highest interest to big-ticket investors focused on real estate. We also expect investor-driven demand to remain upbeat in Chennai, Hyderabad and Pune. Mumbai will see the highest share of commercial corporate property transactions from companies focused on their own occupancy needs. And the Delhi-NCR region will be more popular with high networth and institutional investors.

With the opening of multi-brand retail, everyone expects new ventures and expansion of existing ones to take shape. How realistic are those expectations and when can we see the impact?
The government’s nod to FDI in multi-brand retail will be a major driving factor for increased activity in 2013. Since the policy opens the market to major MNC retail brands, the organised retail sector will see a major transformation in terms of overall contribution in the mid-term. This, in turn, will positively impact the absorption of retail space over the next 12-24 months. It’s expected to touch 6.8 million sq. ft. and 7.1 million sq. ft. in 2013 and 2014, respectively. However, the full benefits of FDI in retail will not become fully evident in 2013 as it will take mall developers at least two more years to incorporate the design elements and dimensions required to meet global standards.

How do you see the retail side of property move, both in terms of demand and rentals?

Mall developers are expecting a massive rise in demand for their projects in 2013. But those whose shopping centre spaces don’t meet the requirements of international brands in terms of location, overall size, design and professionally managed operations, will fail to see any action. Malls with winning formulas will be able to raise their rentals marginally.

There has been a substantial drop in private equity transactions in the real estate market in 2012. How do you see the transaction pipeline for this year?

In 2013, the availability of debt capital is likely to increase while the flow of equity capital will remain more or less stable. The bid-ask spreads will reduce, increasing overall transaction volume, even as additional cuts in CRR and repo rates will infuse more liquidity into the system. Cross-border capital will begin to make a gradual comeback in the coming year and cap rates for office and retail properties are likely to descend to 10.5 per cent and 11.5 per cent from 11 per cent and 12 per cent, respectively.

This year will also see most PE deals being structured to ensure cash flow for investors. Most real estate PE investments will be focused on tier I cities. Funds with a good track record, a strategy to target a narrow asset class within specific locations (such as last-mile funding for under-construction residential projects in tier I cities) and strong delivery teams will be able to raise money more easily.

Real estate NBFCs have become the centre for mezzanine deals besides restructuring of old loans. Will this trend continue? What are the new trends that you foresee?

Well, 2011 and 2012 were the years of debt and equity. And 2013 will be the year of investment grade assets sales and more investments in core or income-producing assets. In fact, we expect our highest capital markets business to come from such activities. Pune, Bangalore, Chennai and Hyderabad will be the cities that will see maximum action on this front as they have the highest number of quality assets. These assets are now fully developed and have reached the ‘marriageable age’ after developers acquired the land for such projects around 2004, began construction in 2007 post approvals, took another four years to deliver and one more year to lease them out. The target clients for such assets will be institutional buyers like Blackstone, Ascendas and Mapletree, among others.

(Edited by Sanghamitra Mandal)

Jones Lang Lasalle Property Consultants India Pvt. Ltd. is a consulting and an investment banking firm. It offers capital markets, consulting, corporate finance, lease administration, transaction management, facilities management, project and development and corporate solutions. The firm also provides agency leasing, property and asset management and land services. It caters to hotels and hospitality and industrial logistics sectors. The company was incorporated in 1997 and is based in Mumbai, Maharashtra. Jones Lang Lasalle Property Consultants India Pvt. Ltd. operates as a subsidiary of Jones Lang Lasalle.