THE GREAT INDIAN REAL ESTATE STORY

Indian Economy and its Impact – Turbulent Times

The Indian Economy is going through a painful phase of slowdown. All the high frequency economic indicators like auto sales, industrial credit demand, exports are also echoing the sharp decline in growth. The GDP growth for H1 FY20 decelerated to 4.8%, slowest in the last six years. RBI has lowered India's GDP growth projection to 5% for FY20. This would be the slowest expansion since the global financial crisis of FY09. Supply of credit also remains a constraint, given the NBFC credit crunch and NPA issue ailing public sector banks. Recent defaults by entities like IL&FS, Jet Airways, DHFL is making banks more risk averse and creating fear sentiments in the market.

Consumption growth, the mainstay of India's economy, reduced to 4% in H1 FY20 from an average growth of 8% in the previous three years. In this bleak scenario, the Government's infrastructure investment plan of INR 100 turn-over in the next 5 years could be a silver lining in the dark clouds that pushes up the investment cycle. In a scenario where markets are crashing due to global crisis, triggered by geo-political issues as well as possibilities of a pandemic arising out of Coronavirus some highly optimistic individuals might say that investing in Real Estate might be the safest bet in the current times.

The Changing Face of Real Estate in India

The Real Estate Industry has undergone a virtual catharsis since 2014 with the imposition of the Real Estate (Regulation and Development) Act, 2016 (RERA), Goods and Services Tax Act (GST) and demonetisation. The impact of these regulations has changed the paradigm for the Real Estate Industry forever. Adapting to this changed scenario has not been easy for the developers and coupled with the slowing down of the economy, it has been an uphill task for the Industry to sustain and hold itself against the headwinds. Measures such as the consecutive rate cuts totaling 135 base points since February 2019 by the RBI, reduction of GST rates to 1% for affordable housing and 5% for others have had little impact in supporting the already weak end-user sentiments.

Residential Spaces – India: Small is the New Big

While these measures may have helped keep home-buyer sentiment from deteriorating much further, they have completely altered the fabric of the Indian Real Estate Business for the developer. Developers have also been increasingly aligning themselves with the needs of home-buyers by reducing ticket-sizes and unit-sizes in a bid to encourage sales.

This period of right-sizing and right-pricing of new residential product and greater transparency due to increased regulation, has led to a steadying of sales numbers as seen in the modest but positive Y-o-Y growth numbers of the three trailing half-yearly periods leading up to H2 2019. This stabilisation in volumes can be attributed largely to the fact that developers have been focusing on affordable housing and on lower ticket sizes. 60% of launches during H2 2019 have occurred in ticket sizes under INR 50 Lakhs, and 82% under 1 Crore, while 48% of the sales as well were concentrated in the under INR 50 Lakhs ticket size.

In the top eight cities of India, only Mumbai and Pune saw Y-o-Y sales growth fall during H2 2019, while Bengaluru was the only city that saw double-digit Y-o-Y growth for the same period; with the other markets posting more modest growth numbers. However, Mumbai has accounted for almost 32% of the units launched during the year and along with Pune, this number adds up to 53% for these eight cities. The age of unsold inventory has decreased across the eight major cities from 16.4 quarters in H2 2018 to 15.9 quarters in H2 2019, signifying that the unwinding or unloading of older residential stock is finally taking place.

The weighted average prices have stagnated across cities with Mumbai, Pune and Chennai seeing prices fall by a further 2%, 3% and 5% Y-o-Y, respectively. Hyderabad continues to see exceptional price growth at 10% Y-o-Y due to the extremely low unsold inventory level and comparatively lower supply coming in to meet the pent-up demand.

Residential Spaces in Gujarat

With 'affordable homes' becoming the new buzzword for Gujarat's Realty, it is not a surprise that around one-third of all the Real Estate Projects registered with Gujarat Real Estate Regulatory Authority (GujRERA) are falling under affordable housing category.

Expansion of the Municipal Corporation limits, development of basic infrastructure and the growth of commercial and industrial hubs have had positive effects on the State Real Estate. The safety factor, the lifestyle amenities and the premium education & healthcare facilities available across cities have given a tremendous push to the Residential Segment in the State. Nearly 82% of the total new supply in the three cities including Ahmedabad, Vadodara and Surat since 2013 till date comprised apartments. There is also a tremendous opportunity seen for redevelopment schemes. Preference is also growing for living in gated communities; Ahmedabad, Vadodara and Surat collectively saw supply of nearly 16,800 units in the villas and row houses categories with maximum supply in Surat. Integrated townships are also emerging as a key category.

Ahmedabad Residential Spaces

In the Residential and mix-use segment, Ahmedabad being the biggest city in the State, has the highest number of such projects. Ahmedabad Real Estate is largely a consumer driven market with major residential developments coming up in West Ahmedabad, in and around the SG Highway. The City saw maximum real estate activity with the launch of approx. 71,000 units from 2013 till date. Interestingly, out of the total launches, nearly 76% constituted of apartments thereby proving that it is an apartment heavy market.

Like the other major cities of India, Ahmedabad market in 2019 witnessed increased consumers focus on affordability, as consumers galvanised towards smaller apartments configurations in peripheral locations of the City. As a consequence, some demand-supply mismatch was seen in terms of both price segments and BHK configurations; as supply failed to keep up with the changing demand. 2BHK searches and searches for properties costing under INR 3000 per sq. ft. were the most prolific and strongly dominated the Ahmedabad Market, forming almost 50% of the searches.

In H2 2019, the new residential launches surpassed the year ago period by 184%. Off the total new launches, the ticket size bracket of INR 25-50 Lakhs had a share of 62% followed by INR 25 Lakhs ticket size where 29% of the new launches were concentrated.

East and North Ahmedabad are primarily considered affordable markets in the City and these two markets witnessed close to 56% of the sales within the city in H1 2019. Some of the areas that witnessed hectic sales activity were areas like Ranip, Chandkheda, Gota, Naroda and Vastral. Besides these, SG Highway, Bopal and Chankheda-Motera remain the top three micro-markets in Ahmedabad for the last two quarters.

The pricing has more or less remained the same in the last one year and barely moved up by 2% in 2019, compared to the same period last year.

This end-user friendly movement in prices and the reduction in average unit sizes of new launches across cities are steps in the right direction and more in-line with the contemporary home-buyer's needs.

Office Spaces – India: A Developing Story

The Indian Office Space Market has been largely insulated from macro concerns that plague the economy and has only gained traction in 2019 due to the large infusion of supply that came through during the year. The ongoing slowdown in the economy has not had a noticeable impact on office space demand yet.

Transaction activity continued to stay strong through 2019 and responded in kind to the spike in supply. 2019 saw a historic high of 5.6 mn. sq. mt. (60.6 mn. sq. ft.) in terms of space transacted in a calendar year, a 27% Y-o-Y growth over 2018. The supply momentum stayed strong in 2019 as well, as close to 5.7 mn. sq. mt. (61.3 mn. sq. ft.) of office space was delivered during the year, amounting to a 56% Y-o-Y growth over 2018. This strong positive story however, did not extend to rental growth that slipped into negative territory for the first time since H2 2015. The weighted average rental level for the eight major cities, fell by 1% for H2 2019.

Who is buying?

The IT/ITeS sector accounted for 41% of transacted volume in H2 2019 as compared to 31% in the previous period. Hyderabad and Chennai accounted for 51% of the space absorbed by IT/ITeS Sector Companies during the recently concluded period. In contrast, the Banking, Financial Services and Insurance (BFSI) Sector that has been reeling under the shadow of the NBFC crisis and credibility issues with some banks, saw its share dip from 18% during H2 2018 to 16% during H2 2019.

"Co-working" is Working in India

Co-working Companies continued to take up more space in H2 2019 and constituted nearly 39% of the total area transacted by the other services sectors compared to 23% in H2 2018. The space taken up by co-working players has nearly quadrupled since 2017 to a little over 8 mn. sq. ft. or 0.75 mn. sq. mt. in 2019. Its share in transactions has steadily grown from 5% to a very significant 13% of the total area transacted in the office space markets of Mumbai, NCR, Bengaluru, Pune, Hyderabad and Chennai in 2019.

Ahmedabad Office Spaces

Quality supply has made its way into the market and the City has witnessed a decent volume of transacted space. New completions in the H1 2019 were up 192% compared to H1 2018. In H2 2019,0.21 mn. sq. mt. (2.23 mn. sq. ft.) of new office spaces became available representing only a small uptick of 3% Y-o-Y. This was largely because of a huge amount of quality supply entering the market in micro markets like Paldi, Bopal-Ambli Road, Sindhu Bhavan Road, Vijay Cross Road, Keshav Baug, Ranip, SP Ring Road and SG Highway. It goes without saying that slowly but steadily the western part of the City is becoming the nerve centre of the office market in Ahmedabad, especially areas along the SG Highway.

The numbers of transactions in H1 2019 are at the same level as witnessed in H1 2018. What is however, encouraging to note is that the average deal size has gone up by 22% compared to H1 2018. In H1 2019, the average deal size was 1,297 sq. mt. (13,963 sq. ft.) compared to 1,064 sq. mt. (11,457 sq. ft.) in H1 2018.

Of the total new completions in H2 2019, nearly 80% was in CBD West. This huge supply infusion has increased the city level vacancy to 35.85% despite a healthy increase in occupier demand. From 26.40% vacancy recorded at the end of 2018, this is a very substantial jump. However, the silver lining is that the availability of new Grade A spaces will enable healthy take-up in 2020, as quality spaces at rentals cheaper than some other commercial hubs of India, will surely make occupiers sit up and take notice in the long-term.

As a lot of quality supply came on the block in the last six months of 2019, the volume of transacted space also witnessed an upsurge with a 70% Y-o-Y growth. Unlike in the past, when BFSI accounted for the lion's share of total transaction volume, IT/ITeS emerged at the top slot with a 43% share during H2 2019 from an 11% share in total transactions in H2 2018.

Note: BFSI includes BFSI support services; Other Services Includes co-working, media, telecom, etc.
Source: Knight Frank Research

Of all the micro-markets, CBD West garnered the largest share in office space consumption in H2 2019, CBD West accounted for 51%. Further, within CBD West, SG Highway remained the most preferred location to attract occupiers. In H2 2019, the share of SG Highway was 44% of the total transaction volume of CBD West. Apart from SG Highway, Keshavbaug, Bopal-Ambli Road and Thaltej also witnessed steady occupier traction in the period under review. The Peripheral Business District (PBD) accounted for the remainder 49% share of office consumption in H2 2019. Many occupiers from the Banking, Financial Services and Insurance (BFSI) and IT/ITeS Sectors set up footprint within the Gujarat International Finance Tec-City (GIFT), which gave a fillip to the overall office space consumption within this business district during H2 2019.

Even with the substantial inventory available, the upswing visible in the office spaces sector especially in the CBD west areas does create a hopeful scenario for next couple of years in the Ahmedabad Market.