Expected improvement in the economy is likely to spur demand in the three major real estate segments

A new dawn for real estate?

Expected improvement in the economy is likely to spur demand in the three major real estate segments

Sanjay Dutt, managing director, Cushman & Wakefield

Since the NDA government came to power, a slew of policy initiatives - housing for all by 2022, smart cities, Goods and Services Tax, and Real Estate Investment Trust - led to renewed sentiments in the real estate sector. At the same time, it also attempted to strengthen affordability by cutting interest rates and bringing down inflation.

The Centre also relaxed FDI norms by removing two major hurdles - the minimum built up area and capital requirement - to boost foreign investor participation. India's rating on "ease of doing business" is also expected to allay fears of investors wanting to invest in the India growth story.

In 2015, the positive wave in the economy resulted in the commercial office space sector witness higher levels of consolidation and expansion leading to leasing of 37 msf in the January-September 2015 period, up 15 per cent from the corresponding period of 2014. Bengaluru was the prime demand driver with the IT-ITeS and BFSI sectors expanding operations. The sectors are expected to remain strong as the US and European economies undergo economic recovery. Overall, now, the market is also witnessing a consolidation, wherein big developers are partnering with smaller ones to get projects off the ground.

The residential stock is, however, not translating into sales. The supply overhang continues to affect the sector despite a 31 per cent fall in launches between January and September 2015 year-on-year. Delhi-NCR witnessed the maximum unit launches with an increased focus on affordable segment, while Hyderabad witnessed the highest growth of 60 per cent in new launches. In the retail sector only three malls covering 1.16 msf became operational during the period, compared to 1.53 msf last year.

With an optimistic business environment expected going ahead, activity in the office sector is expected to intensify next year. The year 2016 is likely to see traction from developers, with the largest quantum of supply over the next five years expected to come in 2016 at 54 msf. This is on the back of strong demand from the occupiers that is encouraging the developers to step on the construction of new office space.

Moreover, strong pre-commitment levels are further likely to drive absorption. Pre-commitments for Grade A office space during January-September 2015 was recorded at 8.29 msf, up 21 per cent from the same period last year. During Q3 2015, Grade A pre-commitments of 4.69 msf was recorded - the highest seen in 11 quarters - on the back of positive business outlook. Mumbai contributed to more than half of total pre-commitments in the latest quarter as IT-ITeS companies consolidate their operations in large spaces in the peripherals.

The revival in the office sector is expected to trickle-down to the residential sector in the medium-to-long term. Higher consumer confidence, greater job prospects and lower interest rates would go a long way in driving residential demand.

Going forward, an expected improvement in the economy is likely to spur demand in these three major segments. On the supply side, the future of the real estate industry on a whole will depend on faster implementation of projects, adherence to project timelines, and delivery as per committed schedule. With the Union Budget slated to be announced in a few months, the real estate sector would expect a few announcements that would further set the tone for a revival in the market.

The column is written by Sanjay Dutt, Managing Director, Cushman & Wakefield, India