The Lang LaSalle Report and Nagpur

Lang LaSalle Report & Nagpur

Jones Lang Lasalle is a world leading real estate consulting firm based in UK, which has projected special role of Nagpur in Indian economy uprising >>>

Ahmedabad, Chandigarh, Indore, Kolkata and Nagpur, the Tier III cities in India are best positioned to emerge as major centres for offshoring activities by IT companies over the next five years, according to a recent Jones Lang LaSalle report.

The report titled “India - The Next IT Offshoring Locations. Tier III Cities”, which is part of the firm’s World Winning Cities research, highlights these five cities as fulfilling the requirements that IT companies look for, when deciding on offshoring locations, namely availability, costs of labor and real estate, business environment as well as physical and social infrastructure.

Comparison :
Nagpur currently provides a cost advantage of about 15 per cent over Kolkata, which offers a 10 per cent cost advantage over Pune. From a real estate perspective, Kolkata provides the largest availability of grade A office space, with large developers such as DLF and Unitech, who have traditionally operated in Tier I cities now operating in Kolkata.

From a facility cost view, Nagpur and Ahmedabad provide a 25 to 30 per cent cost advantage over Kolkata and Delhi. Ahmedabad and Chandigarh provide the highest cost advantage amongst the Tier III cities and are therefore likely to attract occupiers that place a high weight on the cost factor

Indian Real estate Market
Some industry players feel that there are pockets of Tier II and Tier III cities in North India, which have seen massive escalation of price over the last six to 12 months, which may not be sustainable in the long run. Whether the stock market meltdown triggers a correction in these markets remains to be seen. On the whole, rising real estate prices may take a breather in certain pockets but there will be no holding them back across the board, they say.
A PricewaterhouseCooper’s report says the venture capital fund flow in the sector could touch $7 to 8 billion over the next 18 to 30 months. The US alone is said to have committed $2 billion for Indian real estate.
Consultancy firm Cushman& Wakefield study says urban India alone requires 12 million housing units with scope for 400 townships in 5 years across 30-35 cities, each with a five lakh population. Today, real estate is giving 20-50 per cent returns, up from 15-20 per cent a few months ago. So, anyone who can afford it, is parking his money in this asset class,” says a property consultant.
Prices of homes in India have on average tripled in the last two years and will probably expand fourfold in the next three to four years, they said.
According to a Deutsche Bank study “Building Up India” around $850 million additional capital was invested into Indian real estate in 2005, much of it as lending by commercial banks to the sector. Private property companies and individuals’ holdings of real estate also grew by 40 per cent year-on-year. With huge amounts being raised this year, it is very likely that 2006 too will see a high growth. Growth in the housing market, too, should continue despite higher interest rates, because mortgage debt as a percentage of the GDP is only 5 per cent, very low by international standards.
Real estate benefits in either case – whether the Sensex booms or tumbles. The profits booked in scripts are invested in real estate as a safe investment and when
Residential mortgages as percentage of GDP is just over 2.21% in India
compared to over 30% in south Asian countries, over 45% in Europe and over
70% in USA. Scope exists for over 400 residential townships for the next five
years in tier two and tier three towns having a population of over half a million.
Mix of horizontal & high-rise developments in housing:
Yield in residential sector:
(1) On an average to a developer is 25% to 40% on investment deployed or
10 to 15% on turnover.
(2) On an average yield to investor is 20 to 30% on investment on yearly
basis.

OFFICE PROPERTY :
Office property market in India is booming. There is great demand for modern
office buildings in India. The demand for new office spaces alone has grown from
estimated 3.9 million sft in 1988 to over 16 million sft in 20045. Cumulative
demand for office space in India between 2005-2008 is estimated to be in excess
of 85 million sft. This represents an annual growth rate of 14.5 % over the next
three years or approx. 20 million sq. ft. per year. Approx 80% of this demand
is created by IT & BPO sectors.
ITES contributes 28% of the total software service export from India during the
year 2004. ITES and BPO segment registered a growth of 54%. NASCOM and
McKinsey study has predicted that ITES sector in India will provide additiona

It is estimated that presently additional 46 million sq ft. for malls, multiplexes is being added in India out of which 32 million sft is spread over across seven major Indian cities. As many as 45 malls with over 9.5 million
sft of retail real estate is expected to come up in tier-2 cities like Jaipur,
Chandigarh, Ludhiana, Nagpur, Baroda, Surat, Kochi by end of 2007.

Real estate is estimated to capture about 18-20% of the total FDI coming to India
in 2005-2006. Close to US $ 1.2 billion worth of real estate investments are
foreseen to be made by real estate venture capital funds in 2006-2007.

Realty on the upsurge
BANGALORE: India’s real estate investment market has grown rapidly over the past three years. Average return of around 50 percent per annum in the sector for last four years has attracted huge investments from various quarters.

The main sources of investments in the sector are high net worth individuals (HNI), private equity funds and now the foreign direct investments (FDIs) as the government has partially relaxed FDI regulations in Feb 2005.

According to global consultancy firm CB Richard Ellis, the response from foreign investors is overwhelming . In a report, the firm says that by varied estimates, more than $15 billion (Rs 70,000 crores) of foreign funds are awaiting investments into India.

In the last one and a half year, domestic realty funds have also raised $4.5 billion (Rs 20,500 crores) to invest in the real estate sector. However, there is no official estimate made on the investment from HNI group. But according to banking sources the amount could be anywhere around Rs 1 lakh crore.

MD of CB Richard Ellis, South Asia, Anshuman Magazine says that the money is not a problem for the real estate sector, it is there. But the problem is the availability of good quality investment opportunities in the country. If the real estate market becomes more transparent, the fund flow would further improve.

The good news is that things are improving. According to Jones Lang LaSalle’s latest Global Real Estate Transparency Index (2006), India has achieved one of the region’s most significant improvements in real estate transparency over the past three years.

Moreover, the increasing participation of foreign investors and the emergence of new investment vehicles including the introduction of real estate investment trusts (REIT) will continue to force the pace of structural change over the remainder of the decade.

However, as large amount of funds are chasing few good projects in Tier I and Tier II cities like Delhi, Mumbai, Bangalore, Pune Hyderabad and Chennai, the prices have gone up substantially in the last four years. This has reduced the expected returns on investment in these cities.

However, the return could be maximised if one chooses the right investment locations and segments. JLL in its report point out that India is a vast and diverse country, and risks can be reduced by careful selection of location and segment like residential, commercial and retail. Suburban offices, retail and the residential sectors are likely to offer the greatest opportunities over the short and medium term.
Commercial

The demand for offices in suburban market is likely to grow with the rapid growth of IT and ITES sector at more than 30 annually. Strong growth in emerging sectors such as telecoms, financial services, pharmaceuticals and biotechnology will also boost demand and broaden the occupier base, the JLL report points out. State-of-the-art campus developments are expanding rapidly, and sale & leaseback opportunities are emerging.

Residential

Favourable demographics, urbanisation , rising incomes and easier access to finance are fuelling strong demand for residential accommodation. India has an acute shortage of housing, with analysts assessing a shortfall in urban areas of over 20 million units. The rise in the interest rates might affect it temporarily but if the overall growth is maintained, the demand for residential real estate will continue to grow.

Retail

India has huge potential for retail expansion, and the sector is growing in the region by 10 percent a year. Organised retailing currently accounts for only 2-3 percent of the market, but the sector is undergoing structural change, with leading domestic retailers going through rapid growth, format migration and consolidation, JLL report adds.

There is a huge untapped potential for high quality shopping mall development . Liberalisation of FDI norms will create opportunities for cross-border investors, mall developers and operators. This will also increase the investment opportunities for domestic investors.

Cities

Tier I cities Mumbai, Delhi and Bangalore will remain the preferred option for many new market entrants. but there are fewer partnering opportunities. The returns from rental income is in the range of 9.5 to 10 percent of the capital value of the commercial real estate assets in the Tier I cities.

Tier II cities are currently favoured - notably Hyderabad, Chennai and Pune - where there are greater partnering opportunities. Prime office yields in Tier II cities are in the range of 10.5-11 .5 percent, compared to 9.5-10 percent in Tier I cities.
Tier III cities first mover advantage can still be achieved, where office yields in the region of 12 percent of the capital value. Kolkata and Ahmedabad, the largest Tier III cities, are displaying impressive economic dynamism . Of the smaller cities, the report favours Chandigarh, Ahmedabad, Kochi, Mangalore, Mysore, Jaipur, Thiruvananthapuram and Bhubaneshwar .