2021 REIT Performance Outlook in Indian Real Estate

April 20, 2021Real Estate
Credit: Markusgann / Envato Elements

Facing an economic bubble

The commercial spaces demand is likely to be driven largely by the technology sector in India. In order to understand any economics of the commercial spaces it is essential to ask the question on how the Indian technology sector is faring? The industry participants believe that the market is projected to continue to grow with a 13% CAGR. In the post CoVID world, global organisations are much more dependent on technology and have become agnostic to geography. With the talent available in India, it is but natural that the Indian technology sector is likely to benefit.

Major players have been making large amount of investments in the technology sector. With the advent of artificial intelligence and digitisation coupled with work from home, a technology company would prefer to center in India where not only is labour cheap, but the labour possess the sufficient skill sets to do the job. Unanimously, India will continue to grow, and the growth is here to stay.

In the retail portfolio, the developers and investors have gained some confidence in the asset due to the recovery timelines recorded. What was expected to be a 1 to 1.5-year recovery horizon, turned out to be much faster with the February 2021 numbers reflecting 90% sales growth recovery. However, with the second wave coming in, the status would get pushed out again.

For the residential sector, the past 7 years has seen the asset class withering the bouts of underperformance as well as price and time correction. The recovery chart has been more of a K shaped recovery with some of the big players continuing to grow and developers with weak financials withering away or consolidating.

The previous year was more of a year of uncertainty due to CoVID, whereas this year, it is turning out to be uncertainty arising from the vaccine.

The industry participants believe that the fundamentals of India real estate demand are solid, as a result the real estate markets are likely to see more confidence leading to stability if not an immediate increase in the footprint. Whether the sector is facing an economic bubble? If the numbers of December 2019 are to be compared, then it doesn’t seem that the sector is in an economic bubble.

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Visualising the next 12-24 months

The industry participants strongly believe that the next 12 to 18 months the market is going to see a round of experimentation. Different organisations are taking different stands and these positions would be dynamically changing.

Corporates have realised that the WFH model worked well to maintain businesses, however for businesses driven by innovation and in the growth stage, physical presence in the office would be required. Since workforce is likely to be back post vaccination, corporates are aligned to coordinate vaccines to employees. For most of the corporates last year was stabilisation, with the advent of second wave, corporates are now likely to maintain a tight ship for the next couple of months and deferring the decision to take up more space.

It is unclear on whether Co-working is a reality or long-term solution? – there is lack of certainty on how it is going to work out. The other option of de-densification and spreading out from the conventional cities to other cities or locations may see only a few occupiers having workplaces in the tier 2/3 cities, and this trend seems to be more of a one – off rather than the industry perspective.

While the market is currently walking through a sticky patch – it is more of a timing issue and rather a question of ‘when’ and not ‘if’ the sector comes out of the patch.

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Commercial –the big picture

The institutional investors have become very selective in the type of asset. It is now important to understand the definition of Grade A categories and what qualifies as Grade A or not. The perception of criterias to qualify as a Grade A are now to be looked at as an occupier and not just around the building.

The prospects for Grade B assets are not that great. Older buildings will have to be converted and repurposed. Refurbishing the properties to get it to today’s environmental standard may be feasible in one or two odd assets of the portfolio. However, where the portfolio itself consists of a large proportion of assets requiring refurbishing, then that would prove to be quite challenging.

Investors are not looking for a dormant landlord but an aggressive asset manager to the Grade A assets they are ploughing the money in. No investor would want to invest in the speculative supply that Grade B provides.

Grade A workspaces are perceived to be safer than residential assets, making it no-brainer for the workforce to return back to the workspace, with 50 to 70% already returning back to office with the numbers ramping up more post vaccination.

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Greenfield construction

The standards and aspirations have increased multiple notches in terms of air quality, common areas, health considerations, etc. requiring design reconsiderations that can be sufficiently met by the large developers.

It is expected that strong developers in select locations will break ground with Grade A assets however the momentum may not be as anticipated 2 years back. In terms of greenfield Grade B and Grade C assets are not likely to start as these assets are based entirely on speculative demand.

The reduction in greenfield assets is likely to reduce supply over a medium to long- term basis.

Efforts in ESG

ESG has become a focus area globally for various investors and developers. Various activities are being undertaken with the aim to achieve ESG requirements by the market players including decreasing carbon emission, equal opportunities for women, energy efficient elements in properties, making campuses inclusive for disability, beautification drives, process of constructions with water efficient methods etc. This is just a scratch on the surface of the possibilities in ESG. Multiple developers have put forth their stand to develop sustainably and aim to get the projects LEED certified.

The industry has seen more ESG activities in the last 6 months than over the past 2 years.

The industry has always believed that ESG is going to become an integral part of development. This sentiment has just enhanced due to CoVID, where ESG activities have moved from a ‘nice to have’ to a ‘must have’ as a result of demand from the occupiers and investors making the GRESB scores a prerequisite to raise any capital.

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PoV with REITs

REITs are equity like products on a risk adjusted basis. The change in interest rate is likely to affect REITs. However, with REITs, the presence of dividend coupled with the positive element of growth from the underlying assets makes it interesting.

REIT as an investment structure is not a game of size. The US market has REITs with sizes varying from $3 to $13bn. The largest size in Asia is $16bn. There is room in the REIT market for REITs with different scales with different pricing. Once the commercial REIT stabilises there is definite scope in the market to see REIT’s with more asset classes.

This is a summary report of our GRI eMeeting: 2021 REIT Performance Outlook in Indian Real Estate, co-hosted by PwC.


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