Commercial realty does better than residential in 2015: report

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The year 2015 witnessed decrease in home loan interest rates coupled with various incentives being offered by developers. However, the transaction volumes in residential real estate continued to remain on the lower side across cities. Though select cities witnessed increase in enquires towards the end of the year; in general, the residential buyer was cautious. According to a report by Grant Thornton Advisory Pvt. Ltd, Indian Real Estate Sector Handbook 2015, the primary reasons for this restraint are increasing delay in the existing under-construction projects, quality issues and higher price points.

Delhi’s prime residential transactions volume remained grounded in 2015. But expatriates and top executives kept the leasing market alive. Noida project launches took a back step. Only 6,300 new units were launched in 2015; 36% lesser than the levels recorded in the previous year. Gurgaon also recorded low transaction volumes as investors remained at bay. Only 10,300 new units were launched in 2015, 45% lesser than the levels recorded in the previous year.

In Mumbai, too, the residential market registered a decline in new launches. About 35,000 new units were launched in 2015; 40% lesser than the levels recorded in the previous year. Pune recorded lesser transaction volumes and new launches compared to the previous year.

Bengaluru market was, however, driven by end-users. North and east Bengaluru saw interest from buyers. Chennai residential market also remained steadfast. It showed some signs of revival despite the floods and low sales velocity.

Commercial market

The year 2015 turned out to be a relatively good year for the Indian office market, with improvements in both demand and supply. The office market got much needed support at the macro economy level. The economy expanded to 7.4% in 2015 underpinned by low inflation, low interest rates and growth in investments.

The ratio of absorption to new supply, one of the key metrics used to gauge the supply-demand equilibrium of the commercial real estate (CRE) markets, indicates that office occupants absorbed more space than what was added to new supply. This indicates a drop in vacancy rates.

Across the seven key markets, the sector witnessed supply of 33 million sq. ft whereas the absorption was at 39 million sq. ft. This is an increase of 39% on the supply side and 13% on the absorption as compared to 2014. These are encouraging signs for this segment as 2014 had experienced a decline of 19% on the supply side and an increase of 9% on absorption as compared to 2013.

The Delhi office market took a step back in 2015. Absorption declined by 25% to 0.89 million sq. ft compared to the year-ago period. The Noida office market recovered, recording a 45% year-on-year increase in demand. Gurgaon experienced its highest absorption rate in the past five years. With 5.59 million sq. ft, office absorption reached to the levels of 2011.

Mumbai also showed strong demand. Office absorption doubled in 2015 to over 6.5 million sq. ft. In Pune, too, absorption crossed 5 million sq. ft, with 74% of the total absorption coming from information technology (IT) and IT-enabled services.

Bengaluru continued to top in office market performance. Absorption was of over 13 million sq. ft. In Chennai, the technology sector drove demand; absorption was up by 25% as compared to the previous year.

Real estate investment trusts (REITs)

While the Indian REIT regime is aimed at providing a professionally managed ecosystem that is risk averse and focuses at protecting the interest of the public, it has also been plagued with several uncertainties such as applicability of minimum alternate tax (MAT) and foreign investments in the assets.

Real estate developers and private equity (PE) funds, which were planning to set up REITs, have shelved their plans in fear that the MAT would make these investment vehicles unviable.

In a move intended to make REITs more investor friendly, the government later announced that MAT would be applicable on REITs only when there is actual transfer of their units. Gains and losses arising from exchange of shares within the units of a business trust REIT was given exemption from the levy of MAT. This partial relief from MAT levy was followed by another boost when the Cabinet approved a proposal to enable foreign investment into these assets. The proposal recognises REITs as eligible financial instruments or structures under the Foreign Exchange Management Act (Fema), 1999.

Therefore, those entities that are registered and regulated under the Sebi (Real Estate Investment Trusts) Regulations, 2014, will be able to access foreign investments.