Blind men and an elephant: Need for consensus in Indian commercial real estate
Gaps in the Indian real estate research are highlighted in this write up.
It’s been over twenty years since professional services began in Indian real estate yet even now we don’t have industry-wide, standard data points for tracking and analysing commercial real estate.
Every month or quarter major economic dailies publish data on one minor trend of commercial office space, extracting newsworthy snippet. Almost none of those data points provide the broad picture nor future estimates.
Thankfully commercial office segment is the most transparent, comprehensively researched and relatively easily measurable asset. Unfortunately our data still hasn't reached level of strength that would merit large international research firms to set up base here. I believe, considering the maturity level reached, time is ripe for creating standards which can further the industry.
Over the past twelve months, we have tracked research reports available in public domain or in the media of all large international property consultants. Several fundamental and glaring gaps came out. To elaborate:
1. Basic data of key parameters is not available in public domain in a consistent manner. Some firms would only provide stock and absorption but leave out new supply added. Others will bring out annual reports without giving out quarterly trends.
2. There is a significant gap between basic data assumptions of all the firms resulting in uneven figures. For example, India-wide stock of office space estimated by one firm varied by 25 mn sft from the other. Only two firms dared to peg a number to total India level stock.
3. No one makes an attempt to forecast implications of the changes in these key parameters. So if vacancy levels are coming down, (a) is that happening across all cities/ markets (b) will that result in an upward movement in rents and if yes then by how much and in how much duration?
4. The data and subsequent analysis provided, especially in the media which most people rely on, is for a city or specific to a region. Very often the research is only presented to the media and they spread the message that suits their story. Other equally relevant information gets lost.
Research of fundamental parameters is critical for healthy growth of any industry. Institutions can take better business decisions and individuals can take a more informed call when the basic data is freely available and is transparent.
One can argue that such gaps exist in research of all industries. Several stock analysts may take pride in crunching numbers of listed developers but these developers are only a handful, many are not relevant after the current slowdown and are still not bellwethers for commercial office spaces.
So as the first step, we can agree on the key parameters on which office spaces should be analysed. There would be very little debate on this as most firms already follow these in some form and shape. For a particular year, these are:1. Existing stock: The total chargeable area of buildings in sft, already constructed, at the beginning of a calendar year
2. New supply added: Total chargeable area of buildings in sft that became operational during that calendar year
3. Absorption: Total space that got committed in that calendar year
4. Vacancy: How much of area is ready yet to be committed to an occupier
5. Rental values: In Rs/sft/month
The above seems fairly straightforward. However, when specific questions are asked, data turns grey and there is no consensus among research teams of large firms. To explain:
a. Committed: Is the area mentioned in a registered lease taken for analysis? What about hard options i.e. spaces tenants have a right on but would take-up after an agreed period of time. How would purchase of self-use in a complex or a multi-tenant building be considered?
b. Capital values: Should and how the capital values in a market tracked? Historically this was very opaque due the element of “black money”. However with government action on that front and increasing self-use buyers, how should this be tracked?
c. Quoted rents or transaction values: Most researchers resort to sharing quoted rents and not final, exact transaction values. The latter are difficult to source and may result in confidentiality issues. Both matter can be easily resolved by tracking registered lease document at the Registrar’s office of each relevant business district.
I have already made a few assumptions above. Specifically, calendar year should be followed for the analysis, buildings should be Grade A in nature, all key cities and micro markets to be covered etc. However none of these are agreed upon in the Industry and there is no consensus!
Issues to be addressed
These are some of the points which come up for clarification whenever commercial real estate data is analysed in India.
1. What will be tracked? Currently most firms only focus on select Grade A buildings in select markets across key cities. However a significant quantum of leasing also takes place in industrial areas, refurbished Grade B office buildings and institutional buildings.
2. Definition of Grade A: there are several Grade-A buildings with strata-title, across all key cities. What aspect of that project/ building still allows it to be treated as Grade A?
3. Should Grade B be tracked at all? Parts of Gurgaon and Noida, similar industrial areas in Bangalore and Mumbai witness significant leasing activity. In fact over the years several of them have seen development of Grade A buildings as well. If and how should these be tracked?
4. Future commitments: Several large transactions take place with the tenant reserving the right to expand on the same floor/ building but over a period of time. Depending on market conditions these rights can be spread over 12-36 months as well. Should all of that be taken as absorption as the space in not available or should one wait for the commitment to be executed?
5. Annual/ Quarterly: Shouldn’t all analysis be done on a quarterly basis and then necessarily collated on an annual basis. For internal or external reasons many Research teams, even in large real estate advisory firms, are unable or willing to retain these standards.
6. Which cities?: Kolkata, Pune and Hyderabad are always jostling for space in this asset class where Bangalore, Mumbai and Delhi NCR take all the limelight. In fact many firms don’t even include Kolkata in their analysis and during the Telangana agitation Hyderabad dropped off the radar of a few firms.
7. Define each micro market: where does the CBD of Bangalore begin and where does an SBD of Mumbai end? It is easy to form such boundaries yet they have only been done by individual firms resulting in numerous terminologies which confuse the occupiers and disappoints an investor.
All the above questions can be easily be answered. Either through an industry consensus or through a third party collating and analysing the publicly available data. As the former is difficult to achieve at this stage only a third-party can make an initiative to (1) set a norm for how each parameter should be collated based on experience in Indian commercial markets over the past 20 years (2) create consensus estimates of the various research documents which should guide both institutional and individual investor/ occupier to take decisions based on data which is broadly agreed by all the key firms.The writer is Founder and CEO at GenReal