REIT will provide for a new asset class in the Indian capital market for investments

01 Sep 2014 CW Team

Shishir Baijal, Chairman & Managing Director, Knight Frank (India)

This real-estate consultancy firm has over 900 experts across Mumbai, Bengaluru, Delhi-NCR, Pune, Hyderabad, Chennai and Kolkata in India. Indeed, Knight Frank (India) offers its clients services across advisory, transactions, facilities management and project management. In a move to reinforce its commitment to the Indian market, Shishir Baijal assumed the position of Chairman & Managing Director in October 2012 with the ambition to "get the company to its rightful place"- his vision is for Knight Frank (India) to become the advisor of choice for all clients and customers. He elaborates upon the need for a real-estate regulator, REITs and market sentiments in conversation with SHRIYAL SETHUMADHAVAN.

Indian companies have been investing in international property, especially in London...
Indian developers have been establishing their presence in the overseas market for a while now. With companies like Hiranandani and Sobha in Dubai, developers have been investing in other cities in the UAE and Australia. Of course, London has been one key change in this direction with Lodha Groups acquisition. So, when the real-estate industry was going through a gloomy phase, many developers planned on diversification or expansion in international markets. They selected cities where they could explore their expertise and grow. But with the main markets being tapped, there is a lot of scope for companies to expand within these. For instance, markets in the UK - particularly London - and Dubai in the UAE are attractive.

Speaking of India, high prices led to low sales last year leading to piles of unsold inventory and lack of liquidity. Which cities top the list here?
In the past couple of quarters, the amount of unsold inventory picked up substantially in Mumbai and NCR. The number of quarters required to liquidate unsold inventory doubled in Mumbai from five in December 2011 to 12 in June 2014. Similarly, in NCR it went up from four in December 2011 to nine in June 2014. So the stress levels of unsold inventory have been severe, and there has been no noticeable price correction in the market.

Another initiative has been the implementation of the real-estate investment fund (REIT). Do you see any ease of pressure in the debt scenario?
The implementation of REIT will offer investment opportunities to institutions and an exit route for many developers to liquidate their stock in the market. Commercial real estate will be a fundamental part. It will pave the way for a new asset class in the Indian capital market for investments and give avenues to long-term capital such as pension funds and insurance companies. REIT will further help developers offload their existing assets to get cash to complete their existing projects and invest in new ones. Moreover, it will bring in the required transparency and accountability in the realty sector.

Also, in 2013-14, several factors led to a decline in private equity (PE) deals in real estate. What were these and can REIT change the situation?
In 2005-06, there was a fair amount of excitement when PE funds came and invested in the realty market. But eventually, there were substantial procedural and permission delays and many PE funds got stuck with lack of exit opportunities. Further, with the global financial crisis, a lot of realignment took place and the PE appetite for real estate reduced. Generally, PE funds invest in two types of assets, one of which is income yielding. But in India, 100 per cent of the portfolio comprised purchase of developing projects. Hence, there was a complete development risk involved along with permission and market risks. This made it challenging for a PE fund to invest in pure equity deals. But again, with the introduction of REIT, there should be a far more balanced approach.

Further, with the Government allotting Rs 7,060 crore for 100 smart cities, is this amount viable?
It looks like a great direction to be in. The amount allotted could not be the entire investment in 100 smart cities. Also, as smart cities is a concept that has just taken off, it is crucial to understand the feasibility reports of various cities and then the implementation. Today, a country like China has 200 plus smart cities. But for India to first get a dozen actual success stories and then replicate them, it is more important to ensure that issues related to smart cities are solved. Also, with new corridors and the new Governments thrust on infrastructure, new cities have been coming up. This looks very promising for the real-estate business. Alongside, Tier-I, Tier-II and Tier-III cities will develop simultaneously.

What are the existing irritants in the real-estate markets operations? What measures do you suggest to change this?
The key issues the industry grapples with are transparency, inadequate liquidity and the need for a real-estate regulator. In terms of unsold inventory, ultimately this is all a function of demand-supply and the right place. Today, the cost of acquisition of properties is expensive and cost of construction has shot through the roof. So obviously there are a fair amount of constraints developers have. Hence, a real-estate regulator will actually give the industry a much-needed fillip and greater impetus for sales.

With the general election and Union Budget, how did the first half of 2014 pan out for the realty sector? How do you see the sector heading towards positive growth?
We release a FICCI-Knight Frank sentiment index. If analysed, this index focuses on the supply side on the sentiments of the developer, funds, institutions, construction companies, etc. It has been observed that from an extremely pessimistic view in Q4 2013, the views have turned dramatically positive by Q2 2014 in all aspects, be it commercial or residential. Both developers and financial institutions expect the real-estate sector to perform much better in the coming six months. For the first time, 64 per cent of the people - as against 10-11 per cent in Q4 2013 - responded to the survey and felt that there could be a price increase. However, in pure transaction terms, there have not been too many trends or numbers showing a dramatic increase in transactions. Also, there is always a lag between actual transactions happening in the market and the numbers coming out. By the time they get recorded, the volumes have gone up, albeit on a small base. While things are getting far more positive, major growth in transactions, volume and launches is expected to happen within 8 to 12 months from now.

To share your views on real estate market write in at feedback@ASAPPmedia.com

Shishir Baijal, Chairman & Managing Director, Knight Frank (India) This real-estate consultancy firm has over 900 experts across Mumbai, Bengaluru, Delhi-NCR, Pune, Hyderabad, Chennai and Kolkata in India. Indeed, Knight Frank (India) offers its clients services across advisory, transactions, facilities management and project management. In a move to reinforce its commitment to the Indian market, Shishir Baijal assumed the position of Chairman & Managing Director in October 2012 with the ambition to "get the company to its rightful place"- his vision is for Knight Frank (India) to become the advisor of choice for all clients and customers. He elaborates upon the need for a real-estate regulator, REITs and market sentiments in conversation with SHRIYAL SETHUMADHAVAN. Indian companies have been investing in international property, especially in London... Indian developers have been establishing their presence in the overseas market for a while now. With companies like Hiranandani and Sobha in Dubai, developers have been investing in other cities in the UAE and Australia. Of course, London has been one key change in this direction with Lodha Groups acquisition. So, when the real-estate industry was going through a gloomy phase, many developers planned on diversification or expansion in international markets. They selected cities where they could explore their expertise and grow. But with the main markets being tapped, there is a lot of scope for companies to expand within these. For instance, markets in the UK - particularly London - and Dubai in the UAE are attractive. Speaking of India, high prices led to low sales last year leading to piles of unsold inventory and lack of liquidity. Which cities top the list here? In the past couple of quarters, the amount of unsold inventory picked up substantially in Mumbai and NCR. The number of quarters required to liquidate unsold inventory doubled in Mumbai from five in December 2011 to 12 in June 2014. Similarly, in NCR it went up from four in December 2011 to nine in June 2014. So the stress levels of unsold inventory have been severe, and there has been no noticeable price correction in the market. Another initiative has been the implementation of the real-estate investment fund (REIT). Do you see any ease of pressure in the debt scenario? The implementation of REIT will offer investment opportunities to institutions and an exit route for many developers to liquidate their stock in the market. Commercial real estate will be a fundamental part. It will pave the way for a new asset class in the Indian capital market for investments and give avenues to long-term capital such as pension funds and insurance companies. REIT will further help developers offload their existing assets to get cash to complete their existing projects and invest in new ones. Moreover, it will bring in the required transparency and accountability in the realty sector. Also, in 2013-14, several factors led to a decline in private equity (PE) deals in real estate. What were these and can REIT change the situation? In 2005-06, there was a fair amount of excitement when PE funds came and invested in the realty market. But eventually, there were substantial procedural and permission delays and many PE funds got stuck with lack of exit opportunities. Further, with the global financial crisis, a lot of realignment took place and the PE appetite for real estate reduced. Generally, PE funds invest in two types of assets, one of which is income yielding. But in India, 100 per cent of the portfolio comprised purchase of developing projects. Hence, there was a complete development risk involved along with permission and market risks. This made it challenging for a PE fund to invest in pure equity deals. But again, with the introduction of REIT, there should be a far more balanced approach. Further, with the Government allotting Rs 7,060 crore for 100 smart cities, is this amount viable? It looks like a great direction to be in. The amount allotted could not be the entire investment in 100 smart cities. Also, as smart cities is a concept that has just taken off, it is crucial to understand the feasibility reports of various cities and then the implementation. Today, a country like China has 200 plus smart cities. But for India to first get a dozen actual success stories and then replicate them, it is more important to ensure that issues related to smart cities are solved. Also, with new corridors and the new Governments thrust on infrastructure, new cities have been coming up. This looks very promising for the real-estate business. Alongside, Tier-I, Tier-II and Tier-III cities will develop simultaneously. What are the existing irritants in the real-estate markets operations? What measures do you suggest to change this? The key issues the industry grapples with are transparency, inadequate liquidity and the need for a real-estate regulator. In terms of unsold inventory, ultimately this is all a function of demand-supply and the right place. Today, the cost of acquisition of properties is expensive and cost of construction has shot through the roof. So obviously there are a fair amount of constraints developers have. Hence, a real-estate regulator will actually give the industry a much-needed fillip and greater impetus for sales. With the general election and Union Budget, how did the first half of 2014 pan out for the realty sector? How do you see the sector heading towards positive growth? We release a FICCI-Knight Frank sentiment index. If analysed, this index focuses on the supply side on the sentiments of the developer, funds, institutions, construction companies, etc. It has been observed that from an extremely pessimistic view in Q4 2013, the views have turned dramatically positive by Q2 2014 in all aspects, be it commercial or residential. Both developers and financial institutions expect the real-estate sector to perform much better in the coming six months. For the first time, 64 per cent of the people - as against 10-11 per cent in Q4 2013 - responded to the survey and felt that there could be a price increase. However, in pure transaction terms, there have not been too many trends or numbers showing a dramatic increase in transactions. Also, there is always a lag between actual transactions happening in the market and the numbers coming out. By the time they get recorded, the volumes have gone up, albeit on a small base. While things are getting far more positive, major growth in transactions, volume and launches is expected to happen within 8 to 12 months from now. To share your views on real estate market write in at feedback@ASAPPmedia.com