Sector Opportunities
India Real Estate Blog
Suburban offices and the residential sector are likely to offer the greatest opportunities over the short term, and over the medium term opportunities will rise in the retail sector.
Suburban Offices
Growth Drivers: With India emerging as a leading hub of IT and ITES/BPO activities, these sectors will continue to be the main drivers of suburban office demand. The IT and ITES sectors accounted for 80% of the 25 million sq ft of office space absorbed in 2005. Jones Lang LaSalle estimate a requirement for about 50-70 million sq ft from the IT and ITES sectors over the next two to three years.
The suburban fringe of the main cities has emerged as the primary growth market for offices, with 75% of office development in suburban and peripheral fringe locations. This sub-sector will continue to be fuelled by a 30% + annual growth forecast for the IT and ITES sectors.
Emerging sectors such as telecoms, financial services, pharmaceuticals and biotechnology will also boost demand for office space. Over the medium term, the further opening up of the economy is expected to lead to a broader occupier base, as Indian business services expand in response to domestic demand.
Investment Opportunities: IT Parks and SEZs: The focus of foreign investor demand is likely to be on IT Parks and Special Economic Zones: which provide attractive tax incentives for developers. With the expected termination of fiscal benefits in IT Parks by 2009, developers are likely to move towards Special Economic Zones, where developers are entitled to a 10- year corporate tax holiday.
The main IT parks are located in:
The Bangalore–Hyderabad–Chennai “Golden Triangle” in southern India, which will continue to be the main beneficiary of the IT boom, with India’s best infrastructure, labour pools and real estate formats. National Capital Region (NCR) - Delhi has become a primary hub for IT and ITES, particularly in the suburbs of Gurgeon and NOIDA. Pune, with strong education and research institutions, has emerged as a strong IT hub. A number of tertiary IT hubs, most notably Kolkata, have emerged over the past 2 years, driven in particular by expansion of domestic software companies. Sale and Leasebacks – One of the major trends is a general shift from owning to leasing real estate.While not universal, more corporates are evaluating investment structures that help get real estate off their balance sheets and redirect their capital to core business activities.
Prime Office Yields:
An active investment market has pushed prime yields in the NCR (Delhi), Bangalore and Mumbai down by as much as 300 basis points from 12.5-13% (in 2001) to 9.5-10.0% (as at Q1 2006). In Hyderabad, Chennai and Pune, prime yields are in the range of 10.5-11.5%. Many domestic investors are now looking at Tier III cities such as Kolkata in order to achieve “first mover advantage”, and following the movement of occupiers to newer locations. Prime yields in Tier III cities are currently in the region of 12% - the gap between primary and tertiary cities is expected to narrow. Residential
Growth Drivers: Rising disposable incomes, particularly among young urban professionals and easier access to finance is fuelling a residential boom in India. The key drivers are:
A growing middle class and increasing urbanization, resulting in acute shortages of housing units in urban areas. An increase in the rate of household formation, due to a structural shift from a joint family system to nuclear families. An increase in disposable income levels, due to a decrease in marginal tax rates and increase in total incomes. Changing attitudes to home ownership - the current average age of a new homeowner is now 32 years, compared with 45 years a decade ago. Increasing affordability of residential property, due to declining interest rates. Increasing availability of finance - the last few years have seen the home loans market grow at an annual rate of 30%. According to the governments 10th Five-Year Plan, which ends in 2007, the country is facing a housing shortage of over 20 million units. The plan estimates the country’s housing requirement at 4.5 million units per year. The government aims to provide housing for all its citizens by 2012, requiring an investment estimated at close to $800 billion.
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