Marginal dip in residential supply expected post RERA, office rents likely to rise in low vacancy markets

“Going forward, the implementation of RERA by state governments will be the key inflection point for residential markets and we expect a slow and steady rise in capital values. Initially, this will be a reflection of reduced supply, as only those developers confident of completing projects timely will undertake new projects. Later, as the market becomes more transparent and well regulated, end-users and investors will find their way back, keeping capital values up,” it says.

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In the first quarter of this year, Bengaluru was the biggest contributor to quarterly sales with a 26.6 percent share and was followed by Mumbai with a 19.2 percent share. Pune was at the third spot with its contribution to quarterly sales being 18.9 percent.

Under the India Residential Capital Value Index, Thane-Navi Mumbai and Pune continued to be the front runners on capital value appreciation. NCR and Noida recorded reduced unsold inventory quarter-on-quarter after a prolonged stagnancy.

Impact of RERA

The Real Estate Regulatory Act (RERA) will have an impact across all stakeholders in the real estate markets. Overall capital values are likely to go up across most cities as there will be a slowdown in supply, while demand will remain robust. A more regulated, transparent market will also see the eventual return of the investor, as he will see price rise accompanied with increased sales activity.

Projects with smaller unit sizes will witness more traction than projects with larger unit sizes, says the report.

“With the implementation of RERA, we expect a reduction in new launches across all cities as only those developers confident of meeting timelines will undertake new projects,” the report says.

With reducing new launches and a simultaneous dip in unsold inventory we should see a steep appreciation in capital values. Capital values will rise across all cities in the near term, keeping in mind the inflation delta. In NCR however, where there is an oversupply, stability is expected in capital values, the report says.

Post RERA, major developers are likely to enter into joint venture partnerships or undertake joint development with smaller developers to complete stalled projects. Transparency in the market is expected to increase.

Home loan rates will look soft in the near future and this will give a boost to residential markets. In its recent monetary policy announcement on June 7, the RBI has reduced the amount of money, banks have to set aside (as security) on home loans. Already, banks like SBI have started lowering home loan rates.

Impact of IT/ITeS sector on real estate

The impact of slowdown in the IT/ITeS sector on demand for mid-premium residential housing is likely to be felt- especially in Bengaluru. If this bracket of consumers faces a serious risk of getting pink slips, there is a possibility that the recovery of residential sector in the mid-premium category will be delayed.

Impact on office markets

Office markets continued to look attractive with Bengaluru showing the lowest office market vacancy rate of 3.2 percent among all the top seven Indian cities in the first quarter of 2017. Bengaluru and Mumbai accounted for 60 percent of the total absorption during the quarter.

IT/ITeS sector revenues were under pressure due to increase in wage costs, appreciating rupee and changes in the industries to which the Indian IT sector caters.

However, with IT/ITeS companies looking to reskill employees, changing towards agile model of software development and looking for alternative areas of growth, we feel that the impact on space requirements will be marginal. Technology is not only displacing current jobs, but also creating new ones, it says.

REITs markets are likely to kick-start in 2017 and will be a major inflection point for office markets. As per JLL-REIS Office Rental Value Index, IT/ITeS and BFSI to dominate leasing. Despite the emergence of newer sectors like e-commerce, logistics, manufacturing etc. the IT & ITeS sector along with BFSI backend operations is expected to continue to occupy a significant share in the overall office spaces pie, the report says.

Rents are likely to rise faster in low vacancy markets of Pune, Bengaluru and Hyderabad in a range of 6-8 percent year-on-year, while select other sub-markets such as suburbs of Mumbai, NH8 of NCR and SBDs of Chennai will also fall into this category. The tier II cities which are now showing momentum in the absorption of spaces, should build more to meet the growing demand

Impact on retail markets

Variety of experience will be the key inflection point for the success of malls, with food and beverages and entertainment facilities increasing in importance.

Innovative developers are introducing new entertainment options in the malls and retailers are trying to merge online experiences with offline ones to enhance the experience of the consumers. This has been made possible with technological innovations.

On a pan-India level, against the net supply of -0.2 million sq. ft., an absorption of 0.2 million sq. ft. was recorded in the first quarter of 2017. Vacancy in superior Grade A malls was at a minimal 2 percent in Chennai. Mumbai vacancy levels were at 8% and Bengaluru and NCR were at 5 percent and 10 percent respectively. India’s overall vacancy remained unchanged at 14.8 percent in the first quarter of 2017.

In terms of supply, 2017 appears to be a strong year, with over 7.7 million sq. ft. of net supply expected to come on stream, says the report.

By the end of 2017, NCR Delhi will have a Grade A retail stock of 27.4 million sq. ft. while Mumbai is expected to have a stock of 19.1 million sq. ft. for Grade A retail space, the report says.