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India Property Highlights - India Outlook

Colliers Jardine Research: September 1999

Economic Environment

The last three months have seen a swing of mood towards optimism in the Indian economy. After dire predictions of a looming recession, a revival in cyclical industries such as cement, steel and automobiles has provided a sense of relief. With industrial recovery in the offing, the economic growth rate has been revised to a realistic 6 per cent. Rural incomes in FY'99 have been estimated to be substantially higher than the previous fiscal (by around 10 bn USD), mainly due to a bumper crop in April-May'99.

Inflation as measured by the wholesale price index continues to remain on a 17 year low at under 2 per cent levels on a year on year basis. This continues to give the Reserve Bank the flexibility to reduce the cash reserve ratio and also to maintain flat interest rates.

The industrial growth rate at 6.3 per cent in April-May'99 is a reflection of demand picking up. With increase in demand, investments are also expected to pick up. One of the major thrust areas is expected to be the housing construction sector. This coupled with flat interest rates as also tax incentives provided to the housing finance sector, has seen a 25 per cent to 30 per cent increase in disbursements for major housing finance companies.

Overall, with the economy looking up, the real estate market after having bottomed out is set to see heightened activity in the coming quarters and prices are unlikely to decline any further.

Supply

By the end of the year, an additional supply of 4.5 to 5 Mn sq. ft. of office space is expected to be created in the CBDs of the four major metros viz., Mumbai, Chennai, New Delhi and Bangalore. In Delhi, the vacancy rate is expected to increase from approximately 12 per cent to 15 per cent in Connaught Place and it is likely that rentals will remain under pressure for the next 18-24 months.

Demand Demand is picking up in non-CBD areas such as Bandra-Kurla in Mumbai and Gurgaon in Delhi were corporates continue to relocate in an effort to consolidate all their facilities under one roof.

Rents, Capital Values & Yields

Since 1996, rentals and capital values have both seen a decline all over the country. Investors have been predominantly out of the market and annual yields have decreased from 14-16 per cent to 11-12 per cent within a time period of three years.

For the first time since 1996 though, markets have shown signs of revival and prices are gradually gaining stability.

Mumbai

Capital values

• In Mumbai, the demand for outright purchase of commercial properties remains weak as compared to the previous quarters.

• The Worli area is gradually losing out to Bandra-Kurla and Andheri-Kurla due to a pricing advantage and superior facilities.

• Bandra-Kurla has added new state of the art buildings, to the supply, which have generated considerable demand even in the construction stage. Some notable buildings are ICICI, Citibank, ILFS Tower, Wockhardt, Fortune 2000 to name a few.

• Andheri-Kurla also continues to be popular as it provides office space both in the economy range as well as in the premium range. The new quality stock being released is being absorbed at a higher rate than before, although off-take on stock under construction is still slow.

Rental Values

• Rental values have shown a marginal decline in Cuffe Parade and Colaba, with prime buildings fetching between Rs 130 to Rs 150 sq ft per month.

• Security deposits have reduced to 12 months rent from the high values being commanded earlier.

• Andheri-Kurla rental values have declined marginally, with the increase in supply to settle in the range of Rs 50 to Rs 80 per sq ft per month.

Capital values

• In the second quarter of 1999, the residential property market has witnessed an increased purchaser interest in the mid to high-end segment.

• Significant sales of prime properties in South Mumbai were the highlight of the quarter, some of these being apartments in Maker Tower B in Cuffe Parade at Rs 23,000 per sq. ft., Breach Candy apartments in Breach Candy at Rs 19,500 per sq. ft., Urvashi on Napean Sea Road at Rs 16,000 per sq.ft., Everest Apartments in Malabar Hills for Rs 17,000 per sq.ft. and Lands End in Dongersi Road at Rs 10,800 per sq.ft.

• Whilst there continues to be interest in new properties, buyers still consider projects which have ready to move in units or those in their final/completion stages.

Rental Values

• Even though some companies have reduced budget allocations for expatriates or cut down on the number of expatriate staff, the leave and licence market continued to be active in the last quarter.

• At the upper end of the market the occupancy rates continued to be high in certain prime buildings, thus creating a price-quality equation which pushed rentals up in this segment, this quarter.

• Therefore, even though there has been an overall bottoming out of property prices, a few premium apartments either retained their values or have been leased at rentals higher than current market levels.

New Delhi

Capital Values

• Demand has slowed down in Connaught Place with a wait and watch stand being taken by most corporates. Capital values are expected to weaken further in the CBD, especially in the high-end segment and we expect a further decline of 4-5 per cent in capital values before the market bottoms out.

• Capital values are still subdued in Gurgaon, as there has been an increase in the supply available, with new projects being undertaken by various developers. Some of these are DLF's Plaza Towers, TCG's First India Place and Unitech's Global Business Park and Business Floors.

Rental Values

• There has been a drop of 5-7 per cent in rental values of prime commercial property in the last quarter. We expect a continued weakening in the remaining half of the year.

• Prime buildings at Connaught Place fetched effective rentals in the range of Rs 120 to Rs 175 per sq. ft per month. Lease rentals for prime buildings in Nehru Place were in the range of Rs 75 to Rs 175 per sq ft. per month, while those in Gurgaon were between Rs. 40 to Rs 75 per cent sq ft per month.

Capital values

• With heightened corporate activity in Gurgaon, several private developers have announced residential projects, which will create additional supply in the market.

• With more options being generated in a supply heavy market, the end user has become more discerning with value for money being sought and add-ons such as better amenities and conformity to Vaastu are catching up.

Rental Values

• Most tenants have renegotiated the security deposits and the advances charged, with there being a downward revision in the upfront money taken by the landlords, thus bringing down the effective rentals by 5-7 per cent.

• While the rental values weakened in most of the areas, values in prime areas of Malcha Marg, Chanakyapuri and Shanti niketan have remained stable in the range of Rs 50 per sq. ft per month to Rs 60 per sq. ft per month.

• Demand for farmhouses in Chattarpur and Pushpanjali areas have increased with a number of multinationals having taken up office space in Gurgaon. Rentals for farmhouses having areas between 2.5 acres and 5 acres vary in the range of Rs 1.75 lacs to Rs 3 lacs per month.

Bangalore

Capital values

• A number of software companies are moving into larger facilities in an effort to consolidate their various offices under one roof. This has led to companies looking at Koramangala, Indiranagar and Hosur Road as viable options where capital values are as low as Rs 1500 to Rs 2500 per sq. ft.

• Capital values have bottomed out and business is looking up as compared to last year. Capital values in the CBD vary between Rs 3000 to Rs 4500 per sq. ft.

• Though an additional supply of 50,000 sq. ft. is expected to come into the market, prices are expected to hold as 60 per cent of the supply has been pre-committed by companies such as 3M, Macmillan etc.

Rental Values

• Shortages of quality stock in the CBD has led many corporates to look for fully fit out places in SBDs.

• Effective rentals have remained stable around Rs 35 to Rs 65 per sq. ft. per month in prime buildings on M.G. Road, while on Airport Road, rentals have fallen to around Rs. 20 to Rs 25 per sq. ft per month Rental values have also fallen within a range of Rs 15 to Rs 25 per sq. ft. per month in traditionally residential areas like Indiranagar and Koramangala which are increasingly being used commercially.

• The present vacancy rates in the CBD are around 10 per cent but with additional space coming up, we expect the vacancy rates to go higher over the next couple of years.

Capital Values

• In the coming year the supply of flats ranging between Rs 15 lacs to Rs 25 lacs are expected to go up with around 3000 flats nearing completion.

• Capital values of apartments are expected to fall marginally within a band of 5-6 per cent in the next quarter.

Rental Values

• The demand for leasing is mainly restricted to three areas viz., Koramangala, Indiranagar / Airport Road and Palace Orchards. This is primarily because most of the offices are situated here.

• There is a shortage of good independent houses in Bangalore for residential purposes as most independent bungalows have been taken up by small software companies as offices.

Chennai

Capital Values

• While demand supply mismatch continues to drive prices of commercial property lower, the retail property segment continues to command a premium.

• Capital values for commercial properties were quoted between Rs 2500 to Rs 3300 per cent sq. ft in areas such as Mount Road, Nungambakkam and Cathedral Road, marginally lower than last quarter.

• Heightened demand is expected in the mid range price segment for retail showroom spaces as more and more corporates are looking at Chennai as a favourable destination to start their retail ventures.

Rental Values

• The mid-sized local software companies working towards developing software for international markets have created a demand for fully furnished and moderately priced office spaces, to save themselves on start-up time.

Capital Values

• Depressed market conditions prevail, with capital values declining across all the prime residential areas. There is a decline of around 5 per cent in capital values for all prime residential areas

• Prime locations such as the Boat Club and Poes Garden have capital values in the range of Rs 2200 to Rs 3000 per sq. ft. where as Anna Nagar commands prices in the range of Rs 1500 to Rs 2200 per sq. ft.

Rental Values

• In areas of Nungambakkam, Alwarpet and R. A. Puram, effective rentals are in the range of Rs. 8 to Rs 14 per sq. ft per month for apartments and marginally higher for bungalows.

• Rentals are expected to weaken further over the next 6 months.

Retailing

Retailing & Entertainment are the new thrust areas in the Indian real estate market.

For years now, retailers have sought the best locations for their stores knowing that the combination of high traffic, the right product mix and the right price guaranteed success. Expansion has come quick to retailers who have picked the right locations. Most of these retailers have considered real estate as one of their most important assets. They have thus become some of the largest holders of real estate in the world.

Within consumerism slowly gaining momentum in India, many Indian retailing chains are into expansion of their facilities. This coupled with many more Indian Corporates set to enter into the foray, the prices of real estate for such highly coveted and visible locations have firmed up. This has been partly due to the rising demand from retailers and partly due to scarcity in the availability of such prime locations in the Indian metros. As prices of real estate in these prime locations go up, retailers will be forced to increase sales to match the increased cost of retailing. In order to remain profitable and to grow, retailers will have to increase sales per square foot to cover the cost of these locations.

To survive and to prosper in this environment, retailers have re-focussed on items, price and efficiency - linked with in store promotions, entertainment and fun. Co-branding has also been a concept that has gained popularity with retailers in order to attract customers and remain profitable.

Thus, many stores have entered into strategic alliances with brand names such as Crosswords and Christian Dior in order to offer the customer more and also to sustain the rising real estate costs and enjoy higher margins. In addition to such add-ons being provided to create a complete shopping experience, many quick service restaurants have opened outlets seeking partnership with retailers thus drawing synergies from such an alliance.

Leading the retailing scene in India are stores like Shoppers' Stop which have planned major expansions all over India. With fully operational stores in Mumbai, Bangalore and Hyderabad, it shall soon be opening a 50,000 sq. ft. store in South Delhi and also another 25,000 sq. ft. store in Jaipur. Cross Roads is another mega retailing projects, being promoted by the Piramal Group. Commissioned in Tardeo, Mumbai, encompassing an area of 1,50,000 sq. ft., Cross Roads will be the biggest shopping mall of Mumbai.

In the entertainment sector, many corporates have announced plans of opening multiplexes all over India. With several State Governments such as Maharashtra and Gujarat announcing exemptions on the prohibitively high entertainment tax, India is set to see an explosion of entertainment centers in the near future.

Millennium Plaza is one such project being planned in Worli, Mumbai, which includes entertainment centres including theatre multiplexes. Hakone is another such mega entertainment project, which has been promoted by the Hiranandani group near Powai, Mumbai.

Predictably, retail space in cities such as Mumbai and Chennai are already commanding a premium over commercial space in the same localities. In Mumbai, where capital values vary between Rs.8000 per sq. ft. to Rs.17000 per sq.ft. for commercial properties in prime locations, retail properties command capital values as high as Rs. 20,000 per sq. ft. to Rs 22,000 per sq. ft. in the prime retail areas of Breach Candy and Bandra. Similarly, in Chennai, capital values of commercial property in prime localities such as Mount Road and Nungambakkam range between Rs 2500 to Rs 3200 per sq. ft. compared to capital values of retail property in the same areas ranging between Rs. 3000 to Rs. 5000 per sq. ft.

As the Indian family, progressively, has lesser disposable time and more disposable income, the future of family entertainment will depend on adding more value to every square foot exposed to the Indian consumer.

Real Estate

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