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Trend 10: Real Estate Trends: An Opportunity in Distress

Investment Outlook – Trend 10 , Published Mar 16, 2017

Shrewd investors are seeing the potential for investing in distressed real estate assets across India. Already, some investors are buying such assets in tier II and III cities where such value-buys could be available.

Value Unlocking Possible

The second half of 2016 has thrown opportunities for value investing in select micro-markets for reasons of over-supply or liquidity needs of the seller / developer. Although availability of such distressed properties is typically limited and known to a small circle of investors, with more bank auctions, it could be more widely recognised. Nudged by the RBI, banks are attempting a clean-up act pushing developers to accept more reasonable valuations, which may continue for few more quarters. In some cases. Developers are offering attractive pricing and striking risk-adjusted returns to bulk purchasers.

Hospitality Sector

As per HVS India, the hospitality industry saw an occupancy increase nationwide coupled with a growth in Average Daily Rate. New /Organised supply grew by 9.9% Y-o-Y.

Demand outpaced supply to increase by 16.4% resulting in an occupancy of 63.4% (6% Y-o-Y) in 2015/16. Mumbai achieved the highest occupancy (74.3%) over the past five years. New Delhi witnessed the highest occupancy growth of 8.2% in 5 years.

The hospitality industry is heading towards an overall improvement in its health.

Commercial Sector

The office market in top 6 cities has remained stable in 2016 with transactions of ~41mn sq.ft, almost the same as in 2015 despite Brexit, US elections and the slowdown in IT/ ITeS spending by Europe/USA. As per Knight Frank, the new supply of quality offices was 29mn sq.ft, down from 35mn sq.ft, in 2015. The outlook for offices looks promising with vacancy levels falling from their peaks (~20%) in 2012 to lowest levels (~13%) across the major micro-markets (6-9% in cities like Pune/Bangalore) predominantly driven by demand from IT/ITeS.

Retail Sector

India has jumped 13 positions from last year to rank 2 as per 2016 Global Retail Development. Organised retail (malls) that limped for the past few years is attracting retailers and investors.

Retail segment received highest PE investments in H1-2016 (worth INR 33,500 mn) – the highest since 2008. According to Oxford Economics, consumer spending is expected to increase7.8% in 2016 compared to 7% in 2015, giving an impetus to retailers. Metro cities (Mumbai, Bangalore, NCR etc.) may see leasing activity gaining traction with the rentals’ status quo maintained.

Residential Sector

As per Knight Frank, H2-2016 started on a positive note with Q3-2016 showing growth in sales volume, holding steady at 67,000 units sold per quarter in the top 8 cities.

Residential Sector

However, demonetisation brought the new launch scenario to a halt. Developers have held back on new launch announcements as buyers turned cautious. Sales volume in the top eight cities has dropped by 9% in 2016 to 244,680 units from 267,960 units in 2015 due to dismal sales in the December quarter. In H2 2016, the Mumbai market saw launches and sales tumbling by 53% and 26% respectively Y-o-Y. H2 2016 recorded housing sales of 25,403 units and launches of 9,740 units; the lowest since GFC. Amongst micro-markets, premium markets of South-Mumbai and Central-Mumbai (Prabhadevi-Mahalaxmi) took the biggest hit whereas Thane and Central Suburbs (Kalyan-Karjat) were relatively better-off.In H2-2016, Bengaluru saw launches and sales dropping by 45% and 27% respectively Y-o-Y. However weighted average pricing was steady without any drop.

Sales were affected in North (Hebbal/Yehlanka) and West(Malleswaram-Vijaynagar). North Bengaluru, in particular, needs adequate social infrastructure and reduction in prices, amongst other factors. NCR market was the worst performer and has been on a sliding path since the last few years. Inventory pile-up, low consumer confidence due to litigations/infrastructure delays are major factors that have decelerated new launches and sales. Only ready-to-move-in properties have attracted any buyers. All micromarkets have

With no bottom or improvement in sight

been under pressure in NCR. However, Noida, due to improving connectivity and well-laid infrastructure and Ghaziabad, due to affordability have witnessed interest from buyers.

Opportunity seems to be shaping up well for investors looking for investing in significant distressed assets.

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Investment Outlook 2017