Anshul Jain, the India CEO of DTZ, the global property advisory, tells Nivedita Mookerji the retail sector is now the biggest opportunity for real estate in the country. On the proposed land acquisition legislation, he says he hopes for equitable distribution of profit between developers and farmers. Edited excerpts:
What are your thoughts on the second round of a global economic slowdown?
It’s a concern on the horizon. But we are making too much of the downgrade of the US economy by Standard & Poor’s. It is an initial reaction, I think. Other rating agencies have not brought down the US rating. It’s nowhere near or as bad as the 2008 sub-prime crisis. All of us would agree the US may not remain the biggest economic superpower of the world. This is perhaps the beginning of that. As for its bearing on our business or general economy in India, I think it will have a short-term impact. Fundamentally, the Indian economy will remain stable.
How does the real estate sector look, in particular?
The residential segment will remain down and flat over the next 12-18 months. That’s mainly because of two reasons. It had run up far too quickly in the past 18 months. And, the credit and mortgage rate is becoming very expensive. The slowdown in the residential market would make room for smaller and cheaper units in the Indian residential market. We will gradually see extremely short cycles of boom and then flat and then boom again.
What about the commercial space?
In the commercial real estate space, the demand is pretty robust. There’s no significant slowing in the leasing business. But a weakening towards the end of the calendar is likely. Borrowing is tight due to the high interest rate. Even if the construction slows, there’s a supply overhang.
There’s a buzz that many real estate developers may exit the hospitality business.
The hospitality business is quite different. The dynamics are different. Hospitality is not a core business for any developer. The developer will, of course, build the hotels, but operating these is not a developer’s job. I think some developers are thinking they would focus on their core competency, commercial and residential. Also, what was earlier an under-supply situation has now become an over-supply scenario in the hotel business. However, tourist numbers are not in sync with the supply of rooms. Leisure tourism is not good for India. Business tourism is doing better. Specialised hotel funds, however, are trying to acquire properties in this space.
What is your expectation from the retail sector, now that FDI (foreign direct investment) is expected to be allowed? Do you see foreign retailers coming and setting shop?
There’s enough interest in India. If FDI is allowed, there’s no reason why international retailers will not come. Brands are talking of entering India all the time. But, while one can’t ignore the Indian market, there may not be a sudden flood of foreign retailers. In India, it takes time to understand the system. So, a gradual build-up is likely, rather than a sudden flow of investors.
One has seen significant action from private equity funds in the real estate and other sectors. What is the reason?
Private equity was not active in 2009-10 because the interest rates were low. There was an alternative mode of funding. When interest rates suddenly went very high, PE money came relatively cheaper. In the next 12 months, PE funds will remain active in the real estate sector.
In which part of real estate will PE remain active in the next 18 months?
Residential will be the flavour of the season. We will probably see more of rescue capital and finishing capital in the residential segment. Retail will catch momentum. As for commercial, offices and hotels, funds will be driven by location of the property.
Any trend in the real estate sector that you could highlight?
In 2010, India logged about 32-33 million sq ft of office space. This year, we’ll do another 36 million sq ft. I think this trend will continue for two or three years. Another major trend in India is that of micro markets. One cannot generalise about Delhi or Mumbai. For example, in Mumbai, markets are so different from one another. Take the rate of vacancy and rents across Nariman Point, Parel, and BKC (Bandra-Kurla Complex), and you will know.
Do you think the proposed legislation on land acquisition will have a long-term impact on real estate in India?
It is expected to increase transparency in the sector, so that’s the good news. Not so good news at the moment is there’s a lot of speculation whether it would drive land prices up. With input cost going up significantly, developers’ profit will come under pressure. There has to be a re-alignment in developers’ minds on what kind of profit to work on. I would hope for more equitable sharing of profit between developers and farmers in the future.
DTZ is present in a big way in China. What is your impression of the real estate market there?
The Chinese real estate market is at least 10 to 15 times the Indian market. It’s much more evolved.
In India, when you look at the entire real estate market, where is the biggest opportunity?
The retail sector. The first reason is the retail market will open up, whether it is now or in six months. Also, the projects we have seen so far in retail real estate are first-generation. There are very few reasonably good shopping centres. There lies the opportunity — create something truly international.