Emerging opportunities in commercial real estate space

Indian economy is presently one of the fastest growing economies globally recording GDP growth rates of 7.9% in 2015-16 and 7.1% (estimated) in 2016-17. Against the backdrop of a rising economy and concurrent income growth, the real estate sector has witnessed tremendous growth over the last 10-12 years, with government policies at the crux, providing the necessary stimulus. This has led to strong interest from the investment community in businesses across the spectrum with real estate being one of the prime investment targets. The investor sentiment is quite positive for both domestic and international players, all of whom are looking to grab a slice of this pie. Investors from across the globe – from North America and Europe to APAC and the Middle East, are finding the real estate sector appealing mainly due to the relatively higher returns and stability on offer. Investors prefer the secure income streams of Grade A commercial properties. Apart from financials, the other key considerations are the product quality, the specifications and features, the quality of tenants, the lease tenures, etc. Properties with these characteristics witness strong leasing activity and significantly outperform the market, commanding a substantial valuation premium. Interest rates are also softening over the recent past with the repo rate at 6.25%, which is the lowest in the past five years. Currently, the RBI has taken a cautious stance as it works to balance lower interest with the dual objective of keeping inflation rates low while still fueling economic growth. However, it is expected that the medium term interest rates will reduce further, providing a fillip to business growth. The recent policy reforms by the government will help to improve the sentiments in the real estate sector. With an objective of bringing in more transparency into the overall Indian real estate industry, Modi government has proposed a string of regulations, in the form of Real Estate Regulation Act, which is expected to result into a major paradigm shift with strong emphasis on safeguarding buyer's interest and boosting buyer's confidence. The target market in India is small when compared to developed markets, and the number of developers having a portfolio of investible properties is even smaller. This substantially limits the available investment opportunities for completed, rent-yielding properties. Consequently, it would not be surprising if the cap rates compress substantially with the market witnessing yields matching Singapore and Hong Kong. Growth area: Coworking spaces A new growth avenue is that of co-working spaces. Located in prime business areas, these spaces provide a convenient way to take up only as much space as needed – from as low as one seat to much more. This works great for freelancers and SMEs who, aided by the reasonable prices, are able to locate themselves in a Grade A office park with sophisticated infrastructure without having to lease large spaces. The rich networking environment and the prominent business address give such SMEs a cutting edge in enhancing the business opportunities that they get. Outlook: We also believe that going ahead the industry will see a lot of consolidation in the short to medium term with M&As and takeovers becoming more common. Transparency and propriety will get a further boost with the provisions of the Real Estate Regulation Act becoming operational. With a limited stock of assets available for acquisitions, investment flows will naturally get directed to development and construction activities. Coupled with the global outlook that the country is rapidly adopting, this will bring about a rise in the volume of great world-class commercial real estate being built in the country. Source:realty.economictimes.indiatimes.com