Investment Opportunities
Article-1In the mid-nineties, the Indian real estate was booming. Projects were being launched (and sold) across all cities and price points. It turned out that most of the frenzied buying was being done by investors - both local and overseas. Towards the end of 1996-97, the party wound up. A bloodbath followed, investors pulled out and projects were left incomplete. Property prices halved and in some cases even reached one-third levels vis-à-vis their peaks.
From then on it was a very slow and painful recovery, leaving only the best men standing, a `going back to the roots' scenario. A turnaround was witnessed in 2000 when markets started strengthening; the middle class consumption (driven by low rates of interest) increased dramatically. Also the off take by the IT sector has been huge, prices have moved upwards, in some cases too sharply for comfort.
There are opportunities available today for investment across all types of real estate and across all budgets. Let us begin by discussing the opportunities arising in the commercial office space sector.
Nowadays, office spaces are mostly taken on a 'leave and license' basis and not purchased outright by the user/occupant. The licensee enters into long-term contracts for periods ranging from five to ten years. Typically, the yields are between 10%-11% pa along with built-in escalations of approximately 5% pa. Assuming such a property is purchased by an investor, he can then borrow against the property (and against future rentals) amounts upto 50% of the property price albeit it can stretch upto 70%-80% of the property price in some cases. And the cost of borrowing locally is with in the 8%-8.5% pa range; if borrowed internationally, the cost of borrowing is much lower.
This financial engineering/arbitrage results in an additional yield of about 3% to the investor. Assuming a modest annual appreciation of 3%-5%, the total returns work out to a handsome 17%-18% pa. And all this with relatively less risk since the property is still in ownership of the investor, the client is a well reputed corporate, the laws provide for speedy recovery of the premises among others. Sounds good, doesn't it, but remember that there is nothing like a free lunch. With every opportunity, there are risks. Risks of the occupant leaving and the premises remaining vacant, risk of the market falling, risk of the building not being maintained well enough thereby reducing the property values, risk of a higher running or maintenance costs than anticipated. In spite of the risks, this is an opportunity worth considering.
The next category could be a property suited mainly for the IT sector. Here the property sizes are usually much larger with a minimum floor size being upwards of 30,000 sq ft. These properties are usually located at city suburbs and rented out by IT companies, the ITES sector and BPO companies. These properties tend to be very price sensitive and hence a windfall rise in prices is not usually expected. Reason being that the IT companies need space within a very tight price band, if the properties cost a lot more, they simply move to a lower cost destination. The infrastructure and planning is specifically designed for the IT/ITES sector, and is such that can hardly be used by a non IT company. But, the positive is that once an IT company uses a space, it usually does not leave it for a very long time, and that too only if it really has to. So, predictability of rental flows is high. Secondly, the growth in IT is so huge that there is today a larger demand than supply for such properties. It is estimated that over the next five years, the IT sector will require 75 million sq ft of space. Some of the regions where such opportunities can be found are Gurgaon, Chandigarh, Pune, Kolkata, Chennai and Hyderabad. The yields are more or less the same as in the case of commercial properties discussed above.
Another opportunity could be in the retail segment. Retail, so far has largely been unorganised. Recently, mall developments have taken place across the country. Presently, only 3% of all retail is in the organised sector, so really there is a long way to go. Here, an investor could buy space in a mall and rent it out to a multinational like MacDonalds, KFC, Nike or a local company like Barista, Provogue. An investor can opt for a pure rental model or a revenue sharing model where his rentals are linked to the sales or revenues of the store by a pre-fixed formula. This way, he gets to ride the retail story and participate in the upside / growth of the retail business. Lot of investors are in this sector already, but the scope is huge, so there is still enough space for new entrants. The thing to worry about here is the oversupply of malls in certain pockets as well as the dynamic nature of the business. A mall planned for today can become obsolete very soon, as new formats evolve with lightning speed. Article-2
Indian Cities are Investors' Top Real Estate Investment Locations in 2005
Investor Sentiment Survey - Asia also highlights continued investment interest in the region this year
New Delhi: The Indian cities of Mumbai, Bangalore and New Delhi have emerged as the top three investors' choices for real estate investment in 2005, according to Jones Lang LaSalle's annual Investor Sentiment Survey - Asia. The survey also noted that investment interest in the region will continue to be robust this year with more confidence towards the retail and office property markets across the region.
"The Investor Sentiment Index measures investors' expectations of total returns and is an average of the responses with 1 being positive, 2 neutral and 3 negative. The majority of the cities surveyed received a positive or neutral assessment in the short term (12 months ahead). Mumbai and Bangalore topped the list of preferred real estate investment locations in 2005 with a sentiment index of 1.13, followed closely behind by New Delhi (1.17). This can be attributed to India's strong economic performance and its established position as an offshoring destination for many multinational corporations, which has translated into a more robust real estate market environment," says Mr Leslie Chua, Head of Real Estate Intelligence Services - Asia at Jones Lang LaSalle.
"Similar to 2004, investment interest in Asia will continue into 2005 although the average sentiment index has declined from 1.33 last year to 1.62 this year as a result of cautious growth expectations amidst macro factors including the persistent weakening of the US Dollar and fears of further US interest rate hikes. The medium-term outlook is however more optimistic, with over 60% of the survey respondents expecting total returns to improve, resulting in a medium-term sentiment index value of 1.54. With most of the property markets in Asia in the upturn stage, we expect the real estate investment market in this region to continue to be robust, with more market transactions, as sellers are now more likely to find buyers for their assets," says Mr Chua.
Indian Cities are Investors' Top Real Estate Investment Locations in 2005
Other key findings of the survey are: Tokyo remains the preferred investment destination and is likely to emerge as the investment beneficiary in the next 12 months, provided that the assumptions of a sustainable economic recovery can prevail. Tokyo retail was ranked by investors as the top buying preference, followed by Singapore retail, Seoul office, Tokyo office and Shanghai retail.
Majority of the respondents were looking to sell their properties in the Chinese cities, with residential being a prominent exit sector. Hong Kong residential, Shanghai residential and Beijing residential took the top three spots. "This survey result is counter-intuitive to the general market perception that China is still a prominent investment destination. Some investors however feel that the market in China may be overheating and hence, are opting to exit," notes Mr Chua.
Eighty-one percent of the respondents expressed an interest in increasing their overall real estate allocation in the next 12 months with the retail and office sectors continuing to be the most preferred sectors. Prime Retail and Prime CBD Office stood out as the top performing sectors with a sentiment index value of 1.52 and 1.50 respectively.
vv Direct real estate market remains the preferred choice, despite a growing interest in indirect real estate investment vehicles. However, the latter is expected to expand and attract increasing investment interests as the market matures across the region. Mr Chua points out that most companies have already started to re-evaluate their real estate investment strategies on the back of the recovery of most South East Asian economies. "Close to half of the respondents have already started to increase their investments in the region with 21% stating that they would continue to monitor the situation before making any investment decisions," he says.
"In terms of investments in China, the majority of the respondents (83%) said that the current interest rate environment in China had no impact on their real estate investment strategies. However, despite its strong economic growth, respondents indicated that further growth potential of real estate returns in these two cities may be limited. Lack of regulation also remains a concern for investors. There were also persistent fears that the Chinese government may introduce regulatory measures to curb real estate growth in these cities," states Mr Chua.
Jones Lang LaSalle's Investor Sentiment Survey - Asia is conducted annually. Top executives from the most influential real estate investors - developers, real estate funds, Real Estate Investment Trusts and private investors - across the region participated in the third and recent issue of the pan-Asia survey. The survey solicits investors' views on the outlook for various property sectors in 14 major cities across Asia and seeks to provide insights into expectations on investment returns and hence serves as a leading indicator of real estate investment sentiment and strategy.
