Anshuman Magazine, chairman and managing director (South Asia) of CB Richard Ellis – an international property consulting firm – feels higher institutional funding and financial sophistication will take the Indian real estate sector to the next level. In an interview with Nivedita Mookerji and Dilasha Seth, Magazine talks about the changes in the industry, developers’ debt, the economic slowdown and more. Edited excerpts:
What are the major changes that you have noticed in the Indian real estate space?
One big change is money or capital that is going into the real estate market. About 15 years ago, people on the development side were not getting any money from banks or financial institutions. A lot of development that one did earlier was either through pre-sales or private investments. So, there was very limited debt. From the consumer side, there was no mortgage available, there was no housing loan. Now, from the developers side, there’s debt and equity, and from the consumer side, housing loan is available. That made a major difference to the Indian market, both residential and commercial.
What has been the impact of easy access to money?
In the housing market, the average age of purchasing a house has come down significantly. Earlier, people could buy houses when they were 50 or more, if at all. Now you see youngsters buying. The supply has also increased significantly from the mid-nineties. This, of course, is tied to the economy. We have also seen quality improve in the residential and office market. The office market improved mainly due to the demands from multinational companies. The residential market improved because the income levels rose and because of competition.
If you look at retail, there’s organised retail now, signifying a major change. The quality has improved significantly, if you look at the first retail mall that came up and the ones being developed now. Also, I would say the market has become more organised and there’s more information available. Some 10 to 15 years ago, one didn’t know what was happening in the real estate sector. Now, it’s not so because of real estate consultants, private equity players and IPOs [initial public offerings]. Everyone knows about real estate now, the buyer knows what he’s going to buy.
As information is spreading fast, isn’t volatility in the market increasing too?
That’s the real world. As the market becomes more efficient, it attracts more capital. But high capital turns it into a high-risk market as well. And that is across the globe and across businesses.
Still, we are far away from the developed countries in real estate. What should we be looking at, apart from legislation, to strengthen the sector?
We are far from the developed countries in infrastructure and institutional funding. Let’s compare with America. In the US, there’s pension fund, insurance, REIT [Real Estate Investment Trust] funds, and other institutions like university endowments investing in real estate. In India, the government approved REMF [Real Estate Mutual Fund]. Some builders tried that in India, but because of the global downturn, it could not take off. In mature markets, they look at getting high returns by putting small allocations in real estate since its high risk and high return. I feel the financial sophistication has to improve in India. Investment has improved, but more institutional money has to come into real estate.
Do you see any movement in that direction?
The movement is very slow. But it is inevitable. There will be a REIT structure in India some time in the future that will bring in more transparency. Also, land is a state subject in India. So, there has to be some kind of uniformity in laws and legislation. Rationalisation of stamp duties and property tax must also happen. There are some other small issues but infrastructure is a key issue.
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What’s your view on the large debt in the books of real estate developers? Many of them are trying to sell their non-core assets to write off debts.
While I agree that many builders are planning to sell their non-core assets to reduce debts, there’s another side to it. Large-scale development took place in the real estate sector because of debt. But yes, some developers have large debts, for which interest cost is very high.
Do you see many developers vanishing from the scene because of another slowdown?
I don’t think any big developer will vanish. However, some small builders could get impacted. Earlier also, there have been talks of developers being badly hit by the economic situation, to the extent that some of them were seen at a risk of going off. But nothing of the sort happened.
What is your outlook on the retail scene in India?
Retail is certainly going to be big. The sector was hit by a slowdown, but it bounced back last year. Now it is all set to grow once again. The point is that the retail market is still small, and the potential for growth is significant. In the next five to seven years, retail will be huge in India, with consumption levels registering steep growth. The revenue-sharing model in retail has worked well.
Do you think an event like Indian Grand Prix Formula 1 will be transformational for real estate of that area?
Events like these are economic drivers. They generate confidence and get attention to the place. Why just sport events, even call centres bring a change in the perception of a place. In Gurgaon these created not just jobs, but also residential and retail facilities. Similarly in the case of F1 in Greater Noida, infrastructure and support service around the venue could change the value of the location.
What is the scope of real estate development in big cities like Delhi and Mumbai, considering there’s hardly any land left?
Mumbai and Delhi are quite different from each other. In Mumbai, there’s still some land left, in areas like Thane and Malad etc. In Delhi, going vertical looks logical. Even if there’s land left in some parts of Delhi, these are not preferred locations. But with infrastructure and connectivity improving, these areas too could assume more value.
How bad will the current global economic slowdown be for the real estate sector in India?
I believe the global slowdown will have some impact on India, including the real estate sector. But, the Indian economy is still growing, if not in double digits, at 7.5 per cent at least. I think that will sustain the real estate market.
What about property prices? Are we about to see a price correction in the real estate market?
Price movement will vary from place to place. But, prices could come down in most metros. In fact, there’s a strange co-relation between stock prices and real estate. Both do well together or fall at the same time.
Is the luxury real estate actually doing well, or is it another hype?
Well, luxury is a relative term. Anything from 5,000 sq ft upwards is referred to as luxury apartments. Basically, it’s about better services, better quality and proximity to “destinations” like, say, a golf course. Although this segment is expected to only increase, large demand is still from the mid-segment.