Joint Developments

Land acquisition by developers over the past one year or so, hit roadblock as debt-ridden developers found themselves cash-strapped amidst sales slump, to buy land for new projects, especially for large land parcels. The valuation mismatch between sellers and buyers together with regulatory and legal hurdles, also made developers to shy away from outright purchase of land.

In this backdrop, real estate developers preferred to go for joint development model. This model suits distressed developers as this is not only capital light model but also brings in much needed liquidity, helping builders to focus on construction and delivery. Several key players from NCR & Mumbai, Bengaluru like Tata Housing, Embassy Group, Brigade Enterprises, Lotus Green, Radius Developers, Deserve Builders entered into development management agreements. Mall developers like Oberoi Realty and Phoenix Mills are tapping global PE funds like Morgan Stanley and Canadian Pension Plan Investment Board for partnerships to develop malls. The industry also witnessed another aspect of joint developments with smaller developers joining hands with bigger players for project execution and marketing.

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Focus on Delivery

As developers’ credibility got a hit and prospective homebuyers deferred purchases in the backdrop of large scale project delays, the focus turned on completing and delivering projects in order to win back the confidence of consumers, especially in view of RERA’s provisions to penalise erring developers. Sitting on huge inventory amidst slow sales, developers got liquidity infusion through PE funding and NBFCs to complete their projects and give possession to homebuyers.

Especially in Delhi NCR, high on delivery defaults, developers focused on delivery in a big way. Ajnara India offered the possession of 2,000 units while Raheja Developers lined up 1,600 units for delivery including 300 in Raheja Arthava and Vedanta, 800 units in Raheja Navodaya and Sampada and 250 units in Aranya City. Emaar India commenced the handing over in Emarld Hills by issuing intent letters for possession to 413 home buyers. 

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Office Retail Complexes

On the retail front where absorption was nearly twice the supply in 2016, a number of malls which were not doing well, were redeveloped into office complexes and shopping centres. As such, the year saw the emergence of new format of retailing- Office Retail Complexes (ORCs). The highlight of this mixed use developments is that it’s a win win for both mall developers and retailers. While developers have a strong differentiation to boost commercial occupier retention and revenues, retailers get better value for money with comparatively lower rents, especially for sought-after ground floor retail spaces and greater footfalls.

The Indian retail market appears to have bottomed-out the slack and is expected to grow rapidly in the coming years. With foreign retailers entering the country and expanding aggressively, brands are preferring to be located in well-performing malls that see higher occupancy levels. Hence, over the next few years, investors will be on a lookout for professionally managed, well-run malls that would witness yields improving and rental values inching up, thereby improving returns for investors. — Anshul Jain, Managing Director, India, Cushman & Wakefield

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Global investors shop for stressed assets

In the wake of prolonged slowdown, the fund-starved real estate sector threw up an opportunity for global investors looking for good deals of stressed assets (bad loans and stuck projects) Brookfield Asset Management, has been specially active in buying apartments in bulk at deep discount, taking advantage of slump in sales and high unsold inventory. 

Peninsula Brookfield bought luxury apartments worth Rs 120 crore from Omkar Realtors. HDFC Capital launched a new equity fund- to pick up equity stakes in mid- income housing projects. Piramal was biggest investor in residential projects investing Rs 232 crore in Lodha Group’s  World Towers.

There is a lot of activity on the commercial real estate front. Global PE major, Blackstone bought 1 msf  mall space in Seawood area in Mumbai, from L&T Realty. Piramal intends to finance completed office projects worth Rs 1500 crore through flexible lease rental discounting model. While PE funds like KKR, SSG Capital Management etc have already acquired stakes in Asset Reconstruction Companies (ARCs) to buy bad loans, Brookfield, Piramal Enterprises, Apollo Global, Bain Capital have earmarked $2 billion to collectively buy stressed real estate assets.

Credit worthy developers and projects have seen a rush of investment by Realty funds as well as FDI funds. Many funds such as Piramal and Milestone have also been able to exit their investments in property developments at above 20% internal rate of return. Many funds, like Blackstone, have been purchasing rent-worthy properties, especially in the commercial sector, as a precursor to entering the Real Estate Investment Trusts (REITS) market. 2017 should be the year when this injection of formal funds into the property markets will get crystallised. — Jayashree Kurup, Head, Content and Advisory, Magicbricks. 

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Municipal bonds for smart cities

The year also saw several civic bodies tapping bond market to arrange funds for making their smart city development plan functional. Under Centre’s Smart City Plan, 100 cities were selected for upgradation of physical and social infrastructure, with a view to enhance the quality of urban life. Many municipal bodies like Pune, Hyderabad, Bhopal, Vishakhapatnam, Panaji are out to tap bond market to raise funds as bonds have not only longer tenure but also do not require guarantees or physical collateral. Greater Hyderabad civic body plans to raise Rs 3,300 crore through municipal bonds over the next three years. These bonds hold attraction for long-term investors like insurance and pension companies, besides mutual funds. For the Smart Cities Mission, the central government wants to create a fund of about Rs 1 lakh crore, contributing Rs 48,000 crore over five years to improve public services and infrastructure. Since a matching contribution  needs to be made by states/municipal bonds, they are increasingly taking to bond market to raise money, in order to reduce their dependence on grants and local taxes.

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Home sales overtake home launches

The year 2016 saw a unique trend of residential units sold, outstripping those launched during the first three quarters of the year — a sort of record over the past eight years. Reeling under slowdown and sitting over huge inventory, real estate developers, successfully managed to sell 1.20 lakh residential units compared to 1.06 lakh units sold between January and October, across Mumbai Metropolitan, Delhi NCR, Pune, Bengaluru, Kolkata, Chennai. However, according to Cushman & Wakefield “after witnessing a slowdown in launches in 2015, 2016 (Jan-Sept) saw the launch of approximately 90,000 units across the top eight cities in India (recording an increase of 16% year-on-year), led largely by a two-fold increase in the launch of units in the affordable segment. 

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Co-working spaces

The year saw the emerging trend of conventional office spaces giving way to flexible, fully serviced co-working spaces to meet the growing needs of start-ups, small and medium entrepreneurs, consultants and freelancers. Considering that there is a saving of 30-70 per cent, depending upon team size and utilisation of space, co- working spaces have gained popularity with a number of players including InstaOffice, Cowrks, Hire, Meeting & Offices, doing a good business. 

From the economy of scale point of view, co-working spaces are good for small offices and there’s good demand for them. But amidst rising rentals and shortage of ready-to-move grade A offices in prime property markets, these co-working spaces are popular with corporates as well. And in view of rising demand, co- working spaces have the potential of developing as a separate asset class attracting investment of $400 by 2018, paving way for global players to enter this domain.

To reduce their financial burden and also to motivate and retain talent, more corporates could turn towards co-working spaces. There is currently very limited supply of co-working spaces; however, once that situation improves, the demand for them will be considerable. As bigger co-working players enter India and more such facilities emerge across cities, this category will prove to be a disruptor. — Anuj Puri, Chairman & Country Head, JLL India

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Consolidation of property portals

There was frentic activity on the online front in 2016, with mergers and acquisitions, leading to the consolidation of property portals space. Online classified major with a real estate vertical, Quicker.com, went on a major shopping spree, acquiring Commonfloor, India Realty Exchange and Grabhouse. Quicker acquired real estate portal, Commonfloor for $ 200 million ( Rs 1,300 crore). 

It was followed up by the acquisition of IRX, a mobile first aggregator of real estate agents. Quicker’s other acquisition, Grabhouse, a home rental start up, was reportedly for $10 million.With this Quicker is making available listings on flats for rent of Quicker Homes and subsidiary Commonfloor, on Grabhouse. Proptiger.com, a Newscorp- backed digital real estate marketing and transaction services provider, acquired property listing and classified player- Makaan.com, creating a comprehensive online real estate platform to offer end-to-end services to home buyers, real estate developers, property brokers and private equity investors. Proptiger also acquired Bengaluru-based OutofBoxInteractives (OoBI), a pioneering digital interaction design company that specialises in designing real estate projects in an efficient and immersive way. Property portal Magicbricks.com also made acquisition of property analysis platform Properji.com for an undisclosed amount.

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MCLR — New Home Loan Regime

The year saw lenders shifting from base rate to MCLR ( Marginal Cost of Funds Based Lending Regime) in the new financial year, providing much relief to home loan takers. Under this system, which is considered to be more transparent for calculating benchmark rates, banks review rates every month and are able to reduce the net effective rate for customers. In H1 2016-17, according to RBI, the median one year MCLR of banks declined up to 25 bps.

MCLR has not just ensured decline in lending rates, but has also resulted in faster transmission of  interest rate cuts in the backdrop of banks not passing major part of 175 bps rate cut effected since Q4 2014- 15.