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Indian Real Estate Market Overview - Shobhit Agarwal

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Real Surat Development Seminar 2011 (RSDS-11); Shobhit Agarwal, JMD, Jones Lang LaSalle …

Real Surat Development Seminar 2011 (RSDS-11); Shobhit Agarwal, JMD, Jones Lang LaSalle

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  • Year Date Sensex (high) Realty (high) 2008 2- Jan 21206.77 13485 2009 1- Dec 17530.94 3899 2010 5 - Nov 21108.64 3900 2011(Jan) 4 - Jan 20651 3904 2011(July) 21 – July 18567 2235
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    • 1. Cash-In to India Real Estate Investment Scenario Presented by: Shobhit Agarwal, Jt. Managing Director, Capital Markets, India Date: 26th November , 2011 Cash-Out
    • 2. Source: Real Estate Intelligence Service (JLL), 2Q11 Value of investment grade real estate under construction crossed USD 160 Billion at the end of Q2, 2011 The Growing Prowess of Indian Real Estate Commercial 25% Residential 75% Retail 25% Office 75% Investment Grade Real Estate Under Construction (2Q11) COMMERCIAL 40.3 USD Billion Office 30.1 USD Billion Retail 10.2 USD Billion RESIDENTIAL 119.8 USD Billion TOTAL 160.1 USD Billion
    • 3. Office Market Trends INDIA
    • 4. Growth of Office Space Source: Real Estate Intelligence Service (JLL), 3Q11 Among the fastest growing office market in the world, constructing 100 million sq ft every 7-10 quarters. Office stock to become 500 million sq ft by 2015. Note: Figures are representative of the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India ( http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
    • 5. Source: Real Estate Intelligence Service (JLL), 3Q11 28.2 million sq ft of office space has been absorbed in the first three quarters of 2011. Net Absorption to grow from 30.5 mn sq ft in 2010 to 39.1 mn sq ft in 2013. Supply and Demand of Office Space Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
    • 6. IT-Non IT Supply Source: Real Estate Intelligence Service (JLL), 3Q11 Pune, Kolkata, Chennai and Hyderabad have higher supply of IT SEZ Projects, when compared to IT Projects. NCR-Delhi and Bangalore is skewed towards IT and Mumbai is skewed towards Non IT. Nearly 30% of the future supply till 2013 is IT SEZ. Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
    • 7. Commercial Trends Construction Status of Future Supply Source: Real Estate Intelligence Service (JLL), 2Q11 Huge amount of supply expected in 2011, is under advanced stages of construction, in either ‘Ready for Fit-Outs’ or ‘50-100% Structure Ready’ stages. Developers focusing on execution of smaller near term projects than longer term ones. Note: Figures are representative of the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
    • 8. 3Q11 4Q12F Mumbai has surpassed Bangalore in terms of operational office stock. Bangalore continues to attract high demand from IT/ITES companies. Source: Real Estate Intelligence Service (JLL), 3Q11 With more completions, Mumbai has replaced Bangalore as the leader in office stock Rapidly rising vacancy in Chennai due to large demand-supply mismatch Healthy demand witnessed in 2010-2011 has kept a low vacancy of 7.6% in Hyderabad Office Stock and Vacancy Across Cities (3Q11)
    • 9. 4Q12F values for stock and vacancy rate are REIS forecasted values Oversupply is expected to increase vacancies across cities in 2012. Bangalore expected to outperform due to good pre-leasing and affordable rentals in 2012. 3Q11 4Q12F Source: Real Estate Intelligence Service (JLL), 3Q11 Office Stock and Vacancy Across Cities (4Q12F) NCR-Delhi and Mumbai to witness the maximum movement due to huge supply Bangalore and Hyderabad to have low vacancy among cities
    • 10. Source: Real Estate Intelligence Service (JLL) Firms headquartered in USA and Europe contribute a lion’s share of lease transactions for office space across Indian cities. Leasing of Office Space on the Basis of Countries of Origin For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India ( http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
    • 11. Source: Real Estate Intelligence Service (JLL) IT/ITES, BFSI and Manufacturing sectors continue to dominate the share of lease transactions of office space, contributing over 75-80% of the pie. Leasing of Office Space by Various Sectors For further insights, please refer to our latest whitepaper The Changing Face of Commercial Offices in India ( http://www.asiapacific.joneslanglasalle.com/india/Gurgaon/Sept2011/Commercial_Offices_in_India.pdf)
    • 12. Office Initial Effective Yields Source: Real Estate Intelligence Service (JLL), 2Q11 Note: Initial Effective Rental Yield is the initial effective rental income (after deducting outgoings such as property tax and considering incentives such as rent free period) at the time of sale or transaction, expressed as a percentage of the sale price or valuation. The recorded spread of 80-90 bps between the yields of CBDs and those of Suburbs exists due to the risks of a huge supply overhang expected in the suburban locations. Institutional investors are concluding transactions at yields of 9.75%-10.75%. YIELD COMPRESSION YIELD FORECAST PEAK YIELDS CBD SBD Suburbs Spread 80-90 bps
    • 13. Retail Market Trends INDIA
    • 14. Source: Real Estate Intelligence Service (JLL), 3Q11 Of 9.9 mn sq ft forecasted for absorption in 2011, 7.1 mn sq ft has already been absorbed till 3Q11 and another 1.3 mn sq ft is pre-committed. Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. Supply and Demand of Retail Space
    • 15. NCR-Delhi and Mumbai lead others by a huge margin in terms of operational retail stock; have high vacancies in secondary districts Kolkata, Hyderabad, Bangalore and Chennai have relatively low stock and low vacancy; These cities have considerable activity on high streets NCR-Delhi and Mumbai constitute two-thirds of pan India retail mall space. Considerable retail activity remains on the traditional high streets of India. 2Q11 4Q12F Source: Real Estate Intelligence Service (JLL), 3Q11 Pune has high vacancies due to select retail properties having low occupancy levels. Other properties enjoy good occupancy Retail Stock and Vacancy Across Cities (3Q11)
    • 16. Note: 4Q11F values for stock and vacancy rate are REIS forecasted values Source: Real Estate Intelligence Service (JLL), 3Q11 NCR-Delhi expected to remain dominant with over 25.9 million sq ft of operational mall space by end-2012. Vacancies are expected to increase in the short term due to supply-absorption mismatch. 3Q11 4Q12F Malls expected to become operational in 2012 will move NCR-Delhi and Mumbai towards 34% and 28% vacancy respectively 3.9 mn sq ft of expected supply during 4Q11-4Q12 in Pune Bangalore to witness rapid rise in stock with a total 8.8 mn sq ft of operational retail stock expected by end-2012 Retail Stock and Vacancy Across Cities (4Q12F)
    • 17. Source: Real Estate Intelligence Service (JLL), 3Q11 All of the expected future supply in 2011 is under advanced stages of construction. 51% of supply expected in 2013 at risk of completion being at initial stages of construction. Retail Supply during 2011-2013
    • 18. Residential Market Trends INDIA
    • 19. Source: Real Estate Intelligence Service (JLL), 3Q11 Low sales volumes led to sharp decline in absorption rate from 21.4% in 1Q10 to 11.5% in 3Q11. New Launches have declined since 4Q10, due to slowing demand. Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. Absorption Rate is the ratio of sales over inventory of residential units, where inventory is the number of units launched yet unsold in the market. Residential Supply and Absorption With the country’s urban population growing up to 3.8 percent annually due to higher birth rate as compared to death rate and migration from rural areas, urban areas will be short of an estimated 26.53 million dwelling units by 2012. Ministry of Housing and Urban Poverty Alleviation Government of India “ ”
    • 20. Source: Real Estate Intelligence Service (JLL), 3Q11 NCR-Delhi accounted for 35% of the residential launches in 3Q11. Bangalore is the only market to have registered a rise in absolute number of launches in 3Q11 compared to 2Q11. Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. Residential Supply and Absorption
    • 21. Movement of Capital Values (3Q10 – 3Q11) Source: Real Estate Intelligence Service (JLL), 3Q11 Average residential capital values appreciated by nearly 2-3% in 3Q11. With subdued residential activity, capital values in Hyderabad remained stable during 3Q11. Note: Figures represent the top seven cities of India – Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata.
    • 22. While Sensex touched 2008 peak levels, Realty Index further dipped BSE Sensex Vs BSE Realty Index
    • 23. Indian Real Estate – The Challenges Slowing Residential Sales Slow Pace of Infrastructural Growth High Inflation and Fiscal Deficit Land acquisition at high valuations Procedural Delay in Approvals Building Teams Relatively Low Transparency Expensive Liquidity for Real Estate
    • 24. Private Equity in Real Estate in Tier II cities
    • 25. Introduction
      • Faced with the difficulty of raising funds from traditional sources such as banks, Private Equity and NBFC’s have become a big source of funding for Real Estate Developers
      • Since 2006, Private Equity Funds have infused USD 10.2 bn into real estate companies and projects in India (according to a recent report by Nomura)
      • In 2011, Private Equity investment in commercial office space was the highest followed by investment in residential space
    • 26. Investment Characteristics of Private Equity players
      • Investment horizon of 4-5 years
      • Invest at the project/ SPV level
      • Invest in metropolitan cities due to greater comfort with developers and the depth of the market
      • Focus on SEZs and Industrial IT parks due to clarity on exits
      • Seek IRR north of 20% on their investment
    • 27. Our Clients
      • Proprietory funds
      • Funds not actively investing
      • Sovereign wealth funds
      • Active foreign funds
      • Active domestic funds
    • 28. Significant investments by PE funds in Tier II cities Fund Investee Company Location Stake Amount (USD/mn) Fire Capital Arcor Group Nagpur 75% 14 Urban Infrastructure Venture Capital Raheja Universal Chandigarh 50% NA Oman Fund Motisham Complexes Mangalore 50% 129 Monsoon Capital Anant Raj Industries Panchkurla, Haryana 50% 43 Warburg Pincus Unique Affordable Homes Jaipur - 75
    • 29. Key factors leading to PE growth in Tier II cities
      • Favorable demographic
      • Rising cost of land and lack of adequate opportunity in tier II
      • Lack of adequate land
      • Affordable cost of living following office occupiers and IT demand
      • Increasing rate of urbanization and demand for flatted community
    • 30. Concern faced by developers vis-à-vis PE Funds Developers towards PE Private Equity Funds towards Developer
      • Focus only on deal making and hence add no value to the firm
      • Funds are bankers who are just concerned about their returns on investment
      • Do not want to be accountable for the business they conduct
      • Funds are only in the business to exit
      • Margins made in metros is much higher than those made in Tier II cities
      • Political risk and regulatory risk could derail projects
      • Land acquisition issues could lead to cancellation of projects
      • Tier II cities have high financial risk as they mostly rely on one sector
      • Find Tier II cities less mature than metros
      • Find execution of projects by large builders difficult as they lack local knowledge
      • Find lack of transparency and inefficient management setup
    • 31. Key Learning's for the Developer
      • Private equity firms require local developers to generate the following abilities:
      • Efficient management team
      • Transparent in his dealings
      • Proper expertise in real estate development
      • Execution of the project should be in order with the project being completed in stipulated timelines
      • The books of accounts should be in order
      • Strong liasoning team
      • Good marketing team.
      • Should be having all approvals in place for the project
    • 32. Thank you Copyright © Jones Lang LaSalle 2011

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