Is the Indian realty market witnessing institutional investor interest?
Residential sales are witnessing an upswing post the second wave of Covid infections despite an increase in end-user prices. On the other hand, commercial real estate, that includes office spaces, are expected to see better absorption in another 3-6 months, as people make it back-to-offices after effects of the Omicron variant become more clear, says Vijay KR, Partner Deloitte India.
In an interview to BusinessLine, he talks about the current trends in real estate, the outlook for 2022 and how new asset classes – warehousing, data centre – are generating interest among institutional investors.
What do the residential trends look like for 2022?
Residential sales are witnessing a boom and it is expected to continue into 2022. There is a pent up demand in the market, plus buying habits have changed with work from home requirements. People are upgrading to larger apartments – from 2BHK to 3BHK – keeping in mind that they will keep one room aside for work requirements.
Moreover, home loan rates are low, State governments announced stamp duty cuts and there is supply in the market with construction and projects resuming post the second wave. We at Deloitte found that 74 -75 per cent CXOs are bullish about residential demand picking up.
Then there is also a concept people investing in new assets where residential sales have come in play again.
Moreover, the Centre has also stepped in with funding of stalled projects for homebuyers that has been received well.
The stock rally and the number of listed real estate companies is another clear indicator of buoyancy in the sector.
Do you expect commercial real estate to be back up in full swing too?
For commercial real estate, slower offtake is expected to continue for the next three to six months. People are settling in for hybrid models. But there again, as normalisation happens off-take will increase.
Yes some plans of going back to office was hit as the second wave of infection played havoc; but normalisation started towards the end of the year, post the festive season.
Now another interesting fact regarding office spaces is that with social distancing norms coming in, space requirements are going up to 120 sq ft per person. Against the normal benchmark of 125 sq ft per person, it had fallen to 80-100 sq ft per person. It started inching up to 100 sq ft and is hovering up further. So in short, this will mean that the need for larger office spaces will go up.
Banks and financial institutions will be among the first to go back to normalisation; but IT and ITES will be among the last to be back. Also in terms of markets, Mumbai would see a higher and quicker rebound, while IT driven cities like Hyderabad, Pune and Bengaluru would see slower absorption initially.
Rent-wise, I believe, Grade A office spaces will hold on to; or even move up. It is very unlikely that there will be any major downslide immediately.
What about other segments?
If its co-working spaces, then that too will see a rise in demand with occupancy rates shooting up. For instance, when Grade A offices are under construction, most of the large corporates will look at hassle free plug-and-play solutions. As IT and ITES look at work from anywhere, it will be the co- working spaces that will off-take.
Does Omicron post a threat to recovery?
As of now, we do not know how this variant will play out. There is a fast spread. Immediate numbers do not seem to be a cause of concern. Residential sales numbers have not been affected. At the most, commercial space absorption may see some delays. But, one thing with new infection variants is peaking happens faster. And after that the rebound in economic activity is even quicker. So lets wait and watch.
Do you feel Indian realty market is witnessing institutional investor interest?
International players are already making smart investments here. In 2021, Blackstone, Brookfield and some others made investments towards warehosuing, commercial office spaces, data centres and so on. Developers are also monetising assets. We saw two REIT listing despite the pandemic, and more are expected. I think, its a good time to invest in Indian real estate.
Moreover, alternate asset classes, by which we mean warehouse, data centres and so on are gaining popularity among institutional investors.
So what is the outlook on warehouisng and data centre investments?
In India, warehousing demand is up. Large warehousing requirements are being driven by e-commerce players and their fulfillment centres on one hand; while smaller warehouses – within the city – are driven by demand for or rise in quick commerce, like 30 minutes delivery and so on.
Data centre demand is up with increased internet penetration, and with focus on 5G. Moreover, the Data Protection Bill mandates that data of Indian users have to housed in the country which is expected to give a fillip to the segment.
Any outlook on commodity price movements?
To be fair, price movements in key items like steel, cement, copper and also labour and paints in some cases, are a concern. Most raw material prices are up and initial reports suggest this will the trend going into 2022.
Take for instance TMT prices. They have moved up from Rs 38,000 – 40,000 per metric ton to around Rs 55,000 – Rs 60,000 per metric ton.
And the high raw material cost cycle is expected to continue for some time. We do not see any immediate abatement.
Commodity cost rise has been to the tune of 20-30 per cent depending on what stage of construction the project is in. However, against this, the cost rise in completed projects is to the 10 -15 per cent, with some micro-market-specific variations.