Demand for office spaces to continue rising in country: Senior JLL exec

India's skilled workforce and rise of global capability centres helping demand for commercial real estate, says Karan Singh Sodi

Indian real estate reported capital inflows of $4.8 billion in the first half of 2024. More than half of the investments were in office space, increasing almost 62 per cent compared to inflows of around $3 billion in the first half of 2023. Alongside, the availability of affordable houses is declining in the country. KARAN SINGH SODI, senior managing director of the Mumbai metropolitan region and Gujarat and head of alternatives, India, at global real estate investment manager JLL, spoke to Prachi Pisal about the sector in an interview in Mumbai. Edited excerpts:

Which real estate segment will gain momentum faster?

The office segment is experiencing growth in terms of investments. In the first half of 2024, the Indian real estate sector attracted a significant amount of capital inflows, reaching a total of $4.8 billion. Notably, around 54 per cent to 56 per cent of these investments were directed towards office spaces, highlighting the strong performance of this market segment.

Global capability centres (GCCs) have also gained substantial traction within the country. In mature markets, hiring highly skilled labour has become increasingly challenging, making India an attractive destination for companies seeking top talent. The presence of artificial intelligence (AI) engineers in India has further contributed to technology development for global companies.

Given the abundance of skilled talent and the growing demand for office spaces, there is no foreseeable challenge in terms of talent availability soon. This positive outlook will continue to drive the demand for office spaces, positioning India as a promising market in the next 10 years. You can trust in the potential of India during this timeframe.

Prices of residential properties are rising. Is there any chance of moderation, if not decline?

We can confidently state that the demand for properties in Mumbai, Delhi, and Bangalore remains consistently high. Consequently, sales are thriving in these cities. Therefore, it is unlikely that we will witness any significant price corrections in the near future. Although real estate is a cyclical business and price fluctuations are inevitable, experts do not foresee any immediate scenario where capital values will experience a notable decline

Availability of affordable housing is declining and luxury housing is gaining momentum. How would you explain this?

Land rates have become increasingly firm due to the premiums imposed. These premiums have a direct impact on the capital values of properties. In Maharashtra, the introduction of the unified development control and promotion regulations has resulted in an upward surge in premium rates. Developers are now seeking to maximise the floor space index and are required to pay higher amounts to acquire premium FSI from the government. It would be beneficial for affordability if the government could re-evaluate and potentially reduce the burden of these premiums.

Redevelopment is a big deal in Mumbai. How do you look at it from the perspective of investors and its impact on the market?
 

Redevelopment projects are proving to be a significant advantage in a city like Mumbai, where land is scarce. Typically, investors can expect a return of around 1.25 per cent to 1.5 per cent when investing in residential units. However, with the rise in redevelopment projects, we are witnessing returns reaching nearly 2 per cent. The large-scale nature of these redevelopment initiatives has contributed to an increase in residential rentals, as occupants of buildings undergoing redevelopment must temporarily relocate to rental units. As a result, there is an evident impact on the demand for rental properties in the market.

The central government recently amended long term capital gains (LTCG) tax rates. How do you see its impact on the real estate sector?
 

It is a positive move for investors as it brings in more transparency. It is 12.5 per cent at the end of the day, and I don't see any major impact on the volumes. The sector will continue to attract investments. It is a good diversification to have in a portfolio.
 

Do you think small and medium REITS will be able to attract investors?
 

It is important to understand the distinction between large and small medium (SM) REITS. While larger REITS primarily focus on entire buildings, SM REITS cater to a different segment of the market by offering fractional ownership opportunities in smaller, floor-by-floor buildings. Investors who choose to participate in larger REITS typically gain exposure to a diversified portfolio of assets, while those who opt for SM REITS have the flexibility to invest in individual buildings or even specific floors within a building. This opens up opportunities in the overall market for small SM REITS, as they have the potential to launch multiple schemes under a single entity, with each scheme having its own set of assets and unit holders. This can attract investors’ interests into the SM REITS.

Listed developers’ average inventory turnover ratio this financial year stood at 0.35 and at 0.43 in FY23. Do you see any trend of inventories increasing?

Realtors have gone and acquired a lot of land parcels. They are also gearing up to cater to the demand. You might see a slight increase in inventories on a quarterly basis, but from an overall perspective, it is still fine.