How do you see the current real estate market, and what is your outlook for FY 2023 and beyond?
Even through the pandemic’s ongoing cyclical highs and lows, the Indian real estate market has proven to be resilient. India’s strong position as a global economic engine and optimistic growth prospects across areas including office, industrial, logistics, residential, and alternative real estate is now showing a resurgence.
We anticipate the sector to benefit from the government’s sustained focus on infrastructure development and industrial growth in 2022, with categories including date centers, logistics, and manufacturing activity serving as focal points. As investors, developers, and occupiers incorporate health and wellness into their strategy, while increasing energy efficiency and lowering their carbon footprint, we anticipate ESG to transcend sectoral borders and become key business objectives.
What buying pattern in the housing sector have you seen post-Covid?
The Covid-19 outbreak has undoubtedly influenced homebuyers’ perception, particularly among millennials, who are increasingly considering owning a property. Mindset drift towards owning a physical asset has raised the demand. Furthermore, health and wellness, and prospect of a better lifestyle, have fuelled demand among buyers happy to settle in prime locations.
Additionally, modern-day buyers are seeking larger homes with open spaces like decks or balconies and are willing to spend for extra space to accommodate work-from-home realities and provide a breathable space for their entire family. Moreover, the demand for smart homes has also witnessed an uptick as safety and security have become a priority for homebuyers.
How is the unprecedented price hike of building materiels impacting developers and buyers?
India’s real estate sector has undergone a significant transformation in the last few years, with changing market dynamics forcing the industry to realign with the new norm. Since building materials account for 2/3 of the total construction cost, the rise in input cost has compelled developers to revise the prices. Demand has seen an uptick in the past few quarters in the affordable and mid-segments, despite the cost escalation. This depicts that price is unlikely to have any significant impact on buyers.
In just five weeks, the Repo rates have been hiked twice; what impact would this have on the real-estate market?
The RBI’s decision to raise the repo rate by 50 bps to 4.9% was a well-anticipated move, considering the steep rise in global inflation levels and the monetary tightening measures being adopted by central banks worldwide. We believe this decisive action will go a long way in curbing mounting inflation levels in the medium term. It is too early to assess the full impact at the moment, and we will have to wait for a while to determine any outcome.
What trends do you see in leasing/buying of commercial/office space given the growing number of start-ups and the hybrid work model?
We anticipate continued growth in office leasing throughout 2022. We expect gross absorption in office space in 2022 to reach 45-47 million sq. ft., up 13-14 % from 2021. Technology firms are likely to dominate leasing, while flexible space operators, BFSI, engineering, manufacturing, and life sciences are expected to contribute substantially to the expansion in office space take-up in 2022. Bangalore, Hyderabad, and Delhi-NCR are projected to continue to dominate transaction activity in 2022, similar to 2021.
Physical offices and the hybrid working paradigm are here to stay as workplace practices adapt to the new office role. Around 51-53 million square feet of new office space will be operational in 2022, representing an annual increase of 4-5 %.
Post the peak pandemic period, occupiers are now demanding a more sophisticated real estate offering – capable of meeting employee expectations for a safer and healthier working environment, and companies are asking for space flexibility. Moreover, the importance of ESG has grown exponentially. Over the past decade, green real estate assets have grown tremendously, with their share in total office stock increasing from 24% in 2011 to 31% in 2021. The certified inventory has also increased substantially, growing at a CAGR of 10.7% compared to 7.7% for the overall stock since 2011. Delhi NCR and Bangalore are the cities ahead of the curve and account for 54% of India’s certified office stock.
Furthermore, tech-enhancement of spaces would be needed across the lifecycle of an office building – from construction and project management to portfolio optimization, health and wellness, facilities management, admin, amenities, and occupancy tracking, to name a few. It is also imperative to note that space tracking has become crucial in order to optimize space usage in line with the new role of the office as a center for employee collaboration.
We also foresee that new-age technologies will likely be at the helm of a transition in the relationship between developers, investors, occupiers, businesses, and employees. Some of these technologies are already widely used across stages of office buildings, such as SaaS, IoT, and AR/VR, while others, such as Blockchain and RPA, are expected to have higher usage by 2030 in India.
Will the new trends like co-working, and pay per seat or usage benefit the developers and investors or will they limit the need for more projects?
Flexible spaces would continue to gain prominence in the occupier’s portfolio, with the new ‘core+flex’ strategies emerging amidst portfolio expansion and hybrid working. Managed offices and enterprise co-working spaces would be high on the radar of a diverse occupier base across varied sectors.
We anticipate that India’s flexible space stock is expected to grow from close to 29 million sq. ft. in 2020 by 28% y-o-y to touch 47-48 million sq. ft. by 2022. Several operators also plan to increase their average center sizes and expand in both tier-I and II cities in the medium to long-term. Flexible space operators and developers-backed brands also differentiate themselves by offering premium services featuring advanced technologies designed to cater to enterprise clients.
Warehousing is another sector which looks quite promising; what trends and prospects do you see in this sector?
We expect about 32-34 million sq. ft. of new warehouses to be operational in 2022, up by more than 12% annually. We anticipate warehousing space take-up to rise further in 2022. Ongoing up-gradation / expansion opportunities in tier-I cities, new market penetration in lower-tier cities, and the extension of local distribution networks in emerging logistics hubs will aid this growth. Supply addition is expected to be dominated by Delhi-NCR, followed by Mumbai, Chennai, Bangalore, and Pune in 2022.
We anticipate 3rd Party Logistics (3PL) players to continue to dominate leasing in the coming years as the 3PL market in India is estimated to grow by USD 10.7 billion from 2020 to 2025, progressing at a CAGR of 8%.
Rental growth is set to continue, and cities such as Hyderabad, Mumbai, Ahmedabad, Chennai, and Pune registered rental growth in the range of 10-20%, and cities such as Kolkata, Bangalore, and Delhi-NCR recorded a 2-7% y-o-y increase. We expect rental growth to continue across cities in 2022, especially in investment-grade, tech-enhanced, and strategically located assets.
We also believe e-commerce expansions would further accelerate across the country with a higher focus on urban fulfilment centers, last-mile delivery stations, and grocery distribution facilities. An expanding internet user base and increasing online sales will likely boost the e-commerce sector and their demand for warehousing space in the country.
In your report ‘Market Outlook 2022: Reigniting India’s Growth Engine’, you delved on onward trajectory/growth-path of Indian real estate in 2022. Are you betting more on commercial or the residential segment?
ESG is now embedded into the collective conscious of businesses and investors; health & wellness as well as improving energy efficiencies and reducing carbon footprint to be on the radar of all real estate stakeholders.
Tech application and acceptability - Greater application and acceptability for tech tools such as augmented reality (AR) / virtual reality (VR), blockchain, AI, and IoT across all RE formats.
Dynamic policy environment – Indian real estate benefits from a focus on infrastructure development and industrial growth; data center (DC), logistics, and manufacturing industries are likely to be the biggest beneficiaries.
Within traditional sectors, alternate segments are carving a niche for themselves – rental housing, flexible spaces, or REITs. Investors, too, are looking at these segments as a strategy to diversify their portfolios.
Traditionally, investing in residential and commercial real estate is profitable, sustainable, and has high-potential. During the pandemic, people who were reluctant of purchasing real estate, have stepped forward and are now fully committed to investing in property, either to own a home or for commercial purpose.
As noted in our latest report, Market Outlook 2022, residential and commercial real estate segments are projected to grow substantially over the next few years. The trends indicate that investors have renewed interest in both sectors this year.
Technologies like BIM, IoT, Big Data, and Artificial Intelligence have become an integral part of project operations - be it working from home, conducting virtual meetings, monitoring projects remotely, keeping remote eye on man, material, stocks, and up-keeping of equipment etc. What scope do you see for these technologies in Indian real estate projects? How will they help streamline the day-to-day issues and curtail project delays, losses, and cost overruns?
A slew of technological innovations and developments have made headway in the real estate sector, with the potential to transform the industry’s future. Indian real estate players have officially approved the revolutionary impacts of the cloud, VR (virtual reality), the Internet of Things, Machine Learning, and AI.
Artificial Intelligence may be used in property management to monitor and predict when critical maintenance systems need to be replaced. The system may also be used to keep track of rental developments in specific geographic areas and automatically raise tenant rents when leases expire.
There have been numerous instances of companies worldwide, including in India, using Virtual/Augmented Reality technology to improve worker safety training. The VR technology allows workers and work managers to visualize the more serious construction site hazards and prepare accordingly. In addition, firms link VR/AR technology to their BIM software using apps. For example, creating virtual walkthroughs of a structure before it is ready allows contractors and developers to make more informed design decisions earlier in the construction process and save time and money.
High-performance buildings can result in higher occupancy retention and reduced operating costs for developers. Employees’ welfare and safety are also improved in such technologically equipped structures. Construction management, project planning, and portfolio management are all areas of real estate where modern technology is making an impact.