May 10, 2019

India’s economic growth forecast continued to move upwards to 7.5%1 in January 2019 ensuring that it remains the world’s fastest growing major economy. According to the Reserve Bank of India (RBI), crude oil prices and unpredictable global financial markets are expected to have a bearing on India’s retail inflation. Policy reforms across various sectors in 2018 led to a tremendous improvement in India’s Ease of Doing Business Ranking. According to the World Bank, India ranks at 77 and the ranking is anticipated to improve further in the coming years backed by progressive government policies.

As supply addition for the office segment increased in 2018, demand also rose substantially, surpassing last year’s absorption as space take-up crossed 47 million sq. ft. Leasing activity continued to be dominated by Bangalore, NCR and Hyderabad. Growth is expected to continue in 2019 as well where demand and supply will be focused across major cities. Tech is expected to shape office demand in a huge way with occupiers adopting workplace strategies to realign their portfolios. The approaching date of the sunset clause is anticipated to further propel occupier demand in the SEZ segment. Office demand is expected to advance across most sectors in 2019, including flexible spaces. The changing nature of jobs and increased interest from global as well as domestic firms will be the key catalysts for growth in the office segment.

Retail demand saw a healthy mix across brand categories, further strengthened by the completion of nearly 5.1 million sq. ft. of investment grade supply in 2018. Southern cities of Hyderabad, Chennai, Bangalore led this supply addition. Although the recent clarification of FDI rules for the e-commerce segment may be a dampener for online sales, omnichannel retailing will continue to redefine retail formats in 2019. Consequently, ‘click-and-brick’ enterprises will remain popular among buyers. Expansion by domestic and international brands across tier II and tier III cities is anticipated to rise with retailers adapting to the consumer base in these cities. In a bid to enhance consumer experience, developers and retailers are likely to embrace new trends such as experiential retail, concept stores and retailtainment.

The logistics sector picked up tremendously after the implementation of Goods and Service Tax (GST) and granting of ‘infrastructure status’. Absorption reached an all-time high of nearly 24 million sq. ft. in 2018. Cities such as Mumbai, NCR and Bangalore were the primary demand drivers, closely followed by Chennai and Hyderabad. Although quality supply has remained a prime concern across this segment, the situation is expected to improve in 2019 as prominent developers continue to acquire land assets and partner with international players to develop world-class warehousing facilities. The government’s push to bolster growth in this sector through the implementation of favourable policies has garnered tremendous attention from international players and foreign investors. This trend is likely to continue in 2019 with sizeable private equity investments expected across major cities.

As the after-effects of the implementation of Real Estate (Regulation and Development) Act (RERA) and GST slowly faded, residential demand and supply inched upwards in 2018. The residential segment was also backed by several government initiatives to promote affordable housing, leading to a marginal increase in supply across this segment. As quality supply and credible developers are establishing their foothold in the market, share of unsold inventory is expected to decline further. Recently, the Non-Banking Financial Company (NBFC) sector - the major source of funding for many developers was hit by a liquidity crunch. Although, this may lead to liquidity issues for a few developers, alternate sources of funding are also expected to emerge in 2019.

With a large number of global and domestic institutional investors, India is inching closer towards becoming an organized market. Nearly USD 4.7 billion of investments were witnessed in the real estate sector in 2018, primarily in the office and retail sectors. Share of land deals increased in 2018 and land assets will continue to witness further traction in 2019 as well. Investment across greenfield projects is expected to rise especially in the retail and logistics sectors, as availability of investible developed assets remains a concern. Although the liquidity crunch faced by NBFCs is expected to lead to greater due diligence while lending, consolidation across NBFCs is expected to result in the availability of quality capital. The long-awaited listing of India’s first REIT in March 2019 is expected to pave the way forward for several retail / institutional investors.

1International Monetary Fund (IMF)