Published on March 01, 2020
In the Leadership series EDGE webinar on February 26, 2020, titled ‘Attractiveness of Real Estate as a Sector for Business in India’, Sanjay Dutt, CEO and MD, Tata Realty, dispelled the sombre mood surrounding Indian real estate. He also dwelled on the preparations of the company to cut through the sector’s gloom.
The demand side
According to Mr Dutt, the broadest portfolio in India’s real estate sector — the residential segment – has been plagued by stagnating demand. It has given rise to a ‘gloom and doom’ impression, which is not a conclusive assessment. Mr Dutt opined that the decline in the residential segment was significantly offset by the boom in the commercial office space segment — a trend borne out by some facts he presented.
The first nine months of 2019 had seen a high 47 million square feet of leasing of commercial real estate primarily driven by the demand in technology, BFSI and flexible workspaces.
The entry of global companies in India is the prime reason for the increased demand for office space. Fifty percent of the global workforce of multi-national IT giants including IBM, Accenture, Genpact, etc. are located in India. Post the implementation of the Goods & Services Tax, many international warehousing and logistics players including Goldman Sachs and Warburg Pincus, have set up shop in the country, pushing up demand for commercial space.
Occupiers of office spaces in India are not limited to the IT sector alone. Fifty percent of the occupiers of commercial space last year were non-IT entities, including pharmaceutical companies, banks and financial institutions, telecom players, e-commerce entities, etc. The geographies in and around Mumbai, Bengaluru, Chennai and Hyderabad are chiefly at the centre of this growing consumption of office space. While the main tier 1 cities were getting saturated, the satellite areas around the tier 1 cities have expanded to accommodate the growth in demand for e.g. Whitefield in Bengaluru or Gurugram and Noida in NCR.
Commercial real estate is expected to have a positive rub-off on the residential segment in the coming few years. Increased utilisation of office space points to an increased workforce. The increased workforce would cumulatively be needing approximately 500 million square feet of potential residential space shortly. Clearly, the demand side presents a positive outlook.
The supply side
A significant development has been the formation of India’s first Real Estate Investment Trust (REIT), courtesy a joint venture between global investment company Blackstone and realty firm Embassy Group. REIT is an investment tool, similar to a mutual fund, having a portfolio of rent-yielding real estate assets, including apartment buildings, office spaces, hospitals, warehouses, hotels, shopping centres, etc. REITs are listed and allow investors to invest funds and earn dividend-based returns.
REITs now enable global investors to buy a piece of property without having to lock capital in high-gestation assets. These investors can further expect a certain amount of guaranteed dividend returns, with a high possibility of capital appreciation. It is a highly liquid asset as it can be conveniently traded on the stock exchanges.
Mr Dutt opined that the REITs could also provide an avenue for project developers to list their assets for maximum capital appreciation. He was confident that approximately 300 million square feet of commercial space will get listed on India’s bourses through more such REITs in the next five years.
Positive structural reforms have also boosted the sector, resulting in the sector becoming more transparent and regulated. It has, in turn, increased the amount of investment in India’s real estate market. 2018 saw $6.8 billion private equity investments in India, while H1 2019 has already had $3.8 billion private equity investments in the sector. Commercial real estate remains the preferred asset class for institutional investors in India, contributing nearly 69 percent of the total portfolio in 2018.
The Tata Group’s realty eco-system
The Tata Group’s realty division has reflected the movements in India’s real estate space. The Group had many entities operating in the real estate sector, including Tata Realty and Infrastructure (TRIL), Tata Housing and Tata Value Homes.
Over the last two years, the Group has integrated the companies under one management, resulting in the emergence of strong synergies and elimination of redundancies. Currently, the Tata realty division has leased out commercial office space to the tune of 6.1 million square feet.
Mr Dutt outlined the plan to explore the creation of mixed-use development projects in the next phase of operation. These projects will see commercial spaces co-exist with retail space, enabling a walk-to-work facility. Further, on the lines of harnessing synergies, Tata Realty would be exploring the possibility of providing a ‘Tata’ experience to corporate customers by creating a comprehensive eco-system comprising residential apartments, office space and hospitality and retail properties, within the same premises.
For many, the real estate sector may not be in a great space at the moment. However, the Tata Group sees the downturn as temporary and an opportunity for a strategic market correction.