India real estate debate: India’s real estate market comes of age


Elliot Wilson
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After a few years of underperformance, India’s property market is back on form. Prices are rising in commercial and residential real estate, with demand driven in large part by inward investment from blue-chip US corporates. The next big step is listed onshore real estate investment trusts, set to hit the market in 2019.


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• A strong US economy is encouraging US corporates to lease more office space in India, boosting demand and prices in commercial property

• Across office, retail, industrial and logistics, occupiers are moving away from C-grade and into A-grade warehouses, further amplifying demand

• Foreign investors new to the market are interested in the three ‘Ps’: they want a good partner, a good product and a good price

• Within five years of its launch in 2019, the Reit market in India will be well on the way to being an important asset class

• Risk-adjusted returns are at their highest levels in middle-income housing, as the market has not fully discovered that asset class

• There is unrealized potential in commercial brownfield projects, as well as co-working, co-living and even student housing

• The single goods and services tax has simplified the tax system but raised transaction costs for businesses

• Demand for residential and commercial property is highest in big Indian cities. But it is also growing in tier-two, tier-three and tier-four cities

Elliot Wilson, Euromoney India’s real estate sector is performing well after some tough years. What is driving the industry’s comeback?

Khushru Jijina (KJ), PCHF For a long time, the problem with Indian real estate was that everyone painted the entire industry with a single brush. First and foremost, what is very important for everyone reading this to know is that real estate in India is not just a residential story – there is growing interest in commercial property as well. But residential is where the primary growth is.

In residential, the demand is coming from the middle-class/middle-income space. India has a large middle class and Indians want to buy homes, want to live in their own homes. So even if in terms of basic numbers a rented house is cheaper, the Indian psyche is to own his or her own home.

What has gone wrong in recent years in the residential space is the construction of an excess of luxury homes. The problem with the luxury space is volume. So, say you are in Worli or Breach Candy in Mumbai and you build 20 or 25 luxury apartments – given the limited supply, they will sell. The problem comes when developers build 200 luxury apartments. If I have money, I don’t want to live surrounded by 200 people. Unfortunately because of this one semi-troubled segment, some people say real estate is dead, but they are wrong.

The second important thing, and the reason why Piramal has done well, is because we went deeper than others into the sector to understand where the opportunities lay. We saw three or four years ago that real estate was facing massive consolidation. The customer started demanding quality and we started seeing the emergence of a group of new developers of greater scale and higher quality.

Today, as a customer, I know who to buy from if I’m a developer, who offers a discount and who I won’t buy from. It’s a fundamental change in the way Indians are buying real estate. That is leading to this massive industry consolidation. So if you deep-dive into the sector, you realize that there are plenty of developers and investors who are doing extremely well, because at the end of the day, as you rightly said, India is growing. The economy is doing well and there is an expanding and overwhelmingly young population that needs to live somewhere and wants to own their own home.


Getamber Anand (GA), ATS The industry has been returning to a better state of health for many years. The developers who are not just surviving but thriving are those best placed to comply with new regulatory requirements – and that is driving consolidation.

In India, our population is our biggest asset. The benefits are being found, and will continue to be found, in the first-tier cities, but also beyond, in second- and third-tier cities. There is still a shortage of more than 10 million housing units in first-tier cities and a deficit of 40 million housing units across the whole of urban India.

When the current government [under prime minister Narendra Modi] came to power, the first promise they made was to expand the housing pool. But the profit and the potential is also found across the sector, from residential to areas of commercial real estate like warehousing, logistics, cold-storage and so on. The gloom is lifting; real estate is a huge opportunity for local and foreign investors. The industry will continue to do very well going forward.

Euromoney Anuj, from your perspective, are you seeing rising interest in real estate from foreign investors?

Anuj Puri (AP), AC There is a huge amount of private equity capital that wants to enter the market. Essentially, Blackstone is the largest commercial developer in India today. The demand for grade-A office spaces remains very strong and there is fresh demand for around 34 million square feet getting incorporated into the market every year.

Interestingly, every year, US-based corporates are taking more space on lease than Indian corporates. In a way, the American economy and the demand for office space it is creating here – from the likes of IBM, Microsoft and Accenture – is more important than the strength of the Indian economy. And the demand is moving upstream.

A few years ago, demand was being driven by call centres. We then moved on up through business and knowledge process outsourcing, and into software development and now into high-end R&D. These occupiers are willing to pay more money as well, which has been driving developers to produce better-quality projects.

These high-end corporates don’t want to occupy factory sheds on the outskirts of a city. They want prime buildings, easily accessible and with all the right facilities. We’re starting to see the quality of development going up and the occupier profile changing, all supported by private equity. I am very hopeful about the next 12 to 18 months.

Abhishek Lodha (AL), LG Demand is growing in various yield asset categories, notably office, retail, industrial and logistics. We’ve seen big changes under the current government, from GST [the goods and services tax] to big infrastructure projects, which is injecting a huge amount of demand into the market.

Occupiers are moving away from C-grade and into A-grade warehouses, which is augmenting demand. Yield-on-cost is in excess of 10% and yield-on-value is in the 7% to 8% range – both exciting from a global perspective. In addition, there is rental and, hence, capital value growth of between 4% and 5% per annum – a fabulous total return of 12% plus.

These asset classes require significant capital, so the supply is not excessive. Given the returns and supply-demand characteristics, they are attracting significant interest from long-term investors – largely foreign investors like sovereigns and pension funds, and some domestic interest which will grow as the financialization of savings grows in India.

So the entire non-residential site is just a fantastic place for developers, because you have the right occupiers in place who are paying rising rents. If a good commercial project hits the market, it gets occupied in months. This is as stable and positive as I’ve seen the sector in a decade.


Euromoney What are the main dynamics driving the market and driving various asset classes?

AL, LG First, once you look at the mix of real estate in this country from a volume perspective, residential is somewhere between 75% and 80% of the total annual production and then you get about 10% to 12% office, 3% retail and the balance is in areas like industrial and warehousing. This is not dissimilar to other parts of the world. China, for example, is in the low 70s when it comes to the weight of the residential mix.

The second facet that one has to take into account is the fact that as India’s economy transitions from being a low-income to a middle-income economy, real estate is playing an important role because it’s the best way the middle class can participate in the nation’s wealth creation story.

You’ve seen that play out in the US, UK and China, and there’s no reason why it should in any way be significantly different in India. The demographics are there, the growth is there, and the aspiration to buy is there.

We have seen the initial green shoots of this trend in the middle-income housing segment over the last two years – this category has strong demand and is being aided by growing incomes and government policies.

However, you have a situation where the premium residential real estate sector is seen as struggling right now. Five years ago, the office sector was seen as struggling. And what was the reason? It was due to an imbalance of supply. So in spite of the existence of a strong absorption capacity, there just wasn’t enough demand to absorb all the new supply, which is why the office market flat-lined. People left the market, but it has picked up again.

That is now happening in the residential real estate sector. Huge amounts of investment were misdirected into premium residential real estate on the back of the post-global financial crisis monetary stimulus. And you’re seeing the impact of that now, with the existence of oversupply. But in the last two or three years, a lot of that oversupply has dried up. New projects are not coming onto the market.

For anybody who takes a moderately long-term view, demand is fairly solid. No one can question the fact that the demand is there. I think that over the coming 12 to 18 months, we are going to see demand outstrip supply, in both the office and the residential spaces.

Euromoney Are there any clouds on the horizon?

KJ, PCHF We should also mention the NBFC [non-banking financial corporation] crisis, which is really more of a ‘forced crisis’. It has actually been good for the industry, as it has resulted in much-needed consolidation, with good developers doing well and other developers struggling. The NBFC story is actually good for the industry.

The reason is very simple, because in consolidation terms, there are players who will either become national players or who will drift away and die. So you’re going to witness the emergence of some really well-run and seriously scaled NBFCs, providing real estate projects with the liquidity they need.

Euromoney Why has this happened?

KJ, PCHF Because the NBFCs at the smaller end were hurting everyone by under-pricing loans to the competition and to the developer. The developer community was losing too. For example, if a project was to get distressed, the logical reaction by a developer is to halt it. But some NBFCs just kept feeding failing projects with cash flow, which disrupted the market. The trouble that has hit some NBFCs is good for developers and good for better-run NBFCs like Piramal.

Euromoney We talked about the influx of private equity money. Is this primarily coming from international funds and firms or from other sources?

AP, AC One of the key factors here is the emergence of private equity and international funds who, above all, want the right long-term partner. In previous years, private equity investors would go straight out and buy land at the development stage, only to realize later on that they were in trouble.

Now, they want the right partners whom they can trust and who can work with them on land acquisition. A decade or so ago, some of the less-scrupulous developers would price land in excess of its true value and then cash out on day one, leaving private equity high and dry.


GA, ATS What happened previously was that you saw international funds coming in, getting their fingers burned and leaving. Now those funds are more comfortable because of improving regulatory compliance and a government that is getting smarter at promoting and overseeing the industry.

Private equity is getting more comfortable with the market, though you are seeing some uncertainty from the development community, which is resulting in consolidation everywhere. There is growing demand across the board, whether it is the residential or the commercial space, co-working or co-living.

After the global financial crisis, the residential market did not offer investors the right kind of opportunities. But then the office sector started attracting the capital, and it has done really well. What you’re seeing now across the board is improving risk-adjusted rates of return – and they are going to stay good. And that is true even on the residential side; you are seeing affordable housing and middle-income housing growing in demand, and that is also where private equity capital wants to be, because the kinds of returns that India can provide just are not available anywhere else.

So the question becomes: where will all that money go? It will of course be channelled through the right partner and into those sub-sectors within real estate where the supply and demand balances are right. And right now, that balance is found in affordable housing, the retail space, and co-working and co-living.

KJ, PCHF This is exactly the right time for private equity, and that is why we have a platform with Ivanhoé Cambridge, part of CDPQ, the Canada pension plan. And you will see us announcing a host of new deals and projects very soon.

AL, LG Clearly there is a lot happening right now. You mentioned quite a lot of different categories so the question becomes, for customers and investors: what, over the coming months and years, are going to be the best places to invest? What is the coming attraction near you – the next big film, as it were, to arrive in your cinema?

My view is that risk-adjusted returns are at their highest levels right now in middle-income housing, in part because the market has not yet fully discovered that asset class. The supply-demand balance is good and government policies are very proactive towards that segment.

Euromoney Market growth is underpinned by rising consumption and incomes, and driven by a young population.

AL, LG Exactly. And you also need to recognize where the price point is right now. The median annual income in urban India is incredibly low, somewhere between $4,000 and $5,000, but over the next 10 years, as income levels rise, demand will continue to grow.

Euromoney When you look at the overall market, where do you see the greatest potential?

KJ, PCHF We have been through so many crises and stress-events over the past decade, be it the global financial crisis, the introduction of the GST, demonetization, and now the NBFC crisis. And we have emerged in good shape, primarily because we have been canny in how we invest and with whom we invest. Your projects need to be the right ones in the right location with the right developer.

I believe that there is a great opportunity to be had in the commercial space with brownfield projects. A lot of past projects remain unfinished and I would like to partner with the right developer to get more of them to completion. In fact, we are in the process of finalizing our strategy there. In Mumbai for instance, we have been looking for partners on a number of brownfield sites.

In brownfield projects, in commercial and in industrial warehousing, we are at the forefront of the industry. We started there earlier than anyone else. The warehousing sector reflects the positive impact of the GST, of an improving economy and of increasingly streamlined and simple regulations.

Euromoney Moreover, India has improving infrastructure all the time, and, presumably, also demand for residential and commercial projects is rising in second- and third-tier cities?

KJ, PCHF This government is focused heavily on building up the roads system and infrastructure in general. This will actually bring more prosperity across the board, in big and small cities alike. As income rises across the board, you will see more demand and housing coming from millions of middle-income homes and, as I say, also more demand from the industrial sector, from warehousing and retail.

Euromoney What are you looking at and designing – where do you fit in to this picture Getamber?

GA, ATS Our unique selling point, our particular ability, is where we are able to step in and say to the developer: ‘OK, what do you want?’ There is so much demand for real estate, and much of it has been pent up over the last few decades. The guy who couldn’t afford a house – he can now, as his income rises. Aspirations are rising here along with incomes, and that provides a huge opportunity for us and for everyone around this table.


Euromoney Anuj – do you agree?

AP, AC The demand is obviously highest in the top eight or 10 Indian cities. However, we’re also seeing demand percolate through into tier-two, tier-three and tier-four cities. This is the same phenomenon we have seen in other countries, most notably in recent years in China.

We’re also starting to see some real noise and activity emerge in what before were very small, very niche alternative asset classes. Co-working office space, for instance, is very popular, as is co-living. Student housing as an asset class has just broken through. We never heard about this as an asset class in India, and now it’s very much on the radar.

Some of these will never become major asset classes in themselves, but we are starting to see international private equity wanting to explore these opportunities.

Euromoney Is this a clear sign that the local market is changing and adapting to international rules and norms?

AP, AC When you talk to private equity investors, you need to ask what they are looking for in terms of location and assets. Are they looking for capital? Are they looking for immediate returns or long-term returns? What is the first thing they say to you?

In my view, investors are interested in the three ‘Ps’. They want a good partner, a good product and a good price. The priority is usually the partner. Once that is in place, they look at the right product and then at the pricing of that product. Of course, other events can hijack other priorities – a great product means nothing if another financial crisis hits. So, a little bit of another ‘P’ – namely praying – gets added to the equation.

KJ, PCHF I’ve been saying it all along: this is a very different market to other markets, so having a good partner, who you trust and who trusts you, is absolutely critical in India. The partner has to be reliable and trustworthy, knowledgeable and liquid. Don’t forget the last one.

AP, AC That is a very good point. A good partner is also a liquid partner. In India, one of the challenges is that, while there are some very good partners, we still don’t have a significant number of them. The first thing I tell foreign investors is that they need to suit up with a really good local category-A partner. That is the only way to get any significant skin in the game here.

Euromoney Let’s rewind a few years to a time when international investors might enter the market without a good partner. Were some international investors arrogant or naïve, assuming they could just walk in with a lot of money and magically make it work?

KJ, PCHF Lots of international firms and funds have entered the market over the years with the aim of getting results and made the wrong call. To make money in the long haul in real estate, you need first to really understand the sector. And again I come back to the point of having the right partner by your side. The days of going to India with some money in your pocket and hoping to stumble across the right projects and returns has gone.

Euromoney At the moment are prices reasonable?

AL, LG I think affordability has increased significantly over the last three to four years. Mortgage interest rates have fallen, government has introduced tax and mortgage incentives for first-time buyers, salary growth has been in the high single-digits and real estate prices have grown slower than inflation. Asset prices today are a lot more rational and a lot more realistic than they were prior to 2014.

Euromoney This is important because in order to continue to build the country – and to grow the sector – you need to make home ownership affordable. Without that, the aspirations of India’s fast-growing and increasingly urbanized middle class cannot be realized.

KJ, PCHF Absolutely. If anything, I would say that asset pricing needs to increase, because in residential and commercial property a lot of cities still aren’t back to 2008 levels. So, we need to see the asking price going up.

Second, I believe that where the residential value is today, it will need to rise, as the costs of construction, financing, marketing and land acquisitions are all on the rise. The ability of the remaining big-ticket developers to be able to up the ante and to take prices with them is paramount.

AP, AC Because of the slowdown in recent years and because of consolidation in the industry, the challenge is that we’re not seeing proper risk-adjustment for real estate developers in the current market. I would hope to see this change over the next few years. It has to happen; otherwise I see more real estate names struggling.

Euromoney What new asset classes are you hoping and expecting to see come through in the next few years? Where are you most excited about market developments across the property sector?

KJ, PCHF One of the big changes we are expecting to see in the months and years ahead will be the advent of onshore real estate investment trusts [Reits].

AP, AC This is going to be a seriously important step-change for the entire industry. It’s going to add so much to the market. We’re going to see three, and maybe more, Reits listed in Mumbai over the next 12 to 18 months.

The Reits sector has been several years in the making – regulators haven’t rushed into it. It will be a significant growth market for decades to come and a natural destination for foreign institutional capital keen to profit from an asset class it understands.

Euromoney Will we see residential real estate based Reits or will the first few that come to market in the months and years ahead likely to be underpinned by prime commercial or retail property in first-tier cities?

KJ, PCHF Commercial will overwhelmingly be the initial focus, due to the expectation of solid returns, with some Reits also possibly entailing some additional retail element. Residential might follow but only much later. You might also see a bit of hospitality included in the trusts, but it will largely be a commercial operation.

International investors will be leading the charge: global funds and investors are likely to buy something like 75% to 85% of the first real estate investment trusts, as they have the capital and they really understand the asset class.


Euromoney Do you think this is going to be an important moment in the development of real estate onshore in India?

KJ, PCHF I believe the Reit market will be a genuine game-changer for India.

AL, LG This is a pivotal moment for the industry because when wholesale investors see that there is a new asset class in which to invest, they will get involved. Within five years the Reits market in India will be well on the way to being a significant asset class.

This is completing the cycle of investment and I think it is going to significantly cut the cost of capital coming into India, because the risk of exit becomes that much lower. Plus of course, with Reits you have a simple and natural process of entry and exit from an investment, which isn’t something you necessarily had here in the past. Once you invested in the past, exiting could be a strenuous, stressful affair, particularly when the chips were down in the market.

AP, AC I would reinforce that point. One of the problems the domestic industry faced before was that while one could build really good real estate, the opportunities for exit were limited. One doesn’t necessarily want to sit on top of physical assets for ever. In that situation, you tend to hope – pray even – that a big investor or investors will come along and take the asset from you.

Euromoney The Reits market has been on the drawing board for a decade now. What was the reason it was finally approved after so many years of consideration?

AL, LG Clearly the government of prime minister Narendra Modi has been able to take the advent of an onshore Reits market closer to completion. The intent from the top has been there from the start. Definitely the prime minister, when he came in, began almost immediately to resolve some of the pending issues, most notably the uncertainty surrounding double taxation, which had understandably proved so unpopular among local and foreign investors.

Modi’s team tweaked legislation so domestic Reits would adhere to the same international rules and norms you see everywhere else. The regulatory side of the journey with Reits is now almost 98% to 99% complete.

AP, AC Credit has to be extended to the regulator for the way they have moved on this and the way they revisited and changed the rules. I must say the Securities and Exchange Board of India has been very proactive in listening, consulting and making the right changes that everyone knew were paramount to making the new asset class work.

Euromoney The single goods and services tax was much lauded on its arrival. But how much of an impact has the GST had on what you do?

AL, LG The GST has simplified everything to a single, unified tax structure, spanning your entire business. However, when it comes to real estate, whether it’s office or residential, GST has if anything raised transaction costs. Higher transaction costs are an impediment to transactional activity.

Is the rate of GST higher than a neutral might want or expect? Yes. And this is something for the government to review. But, equally, a single tax structure has simplified the tax process. So, it’s a mixed bag.

Euromoney What would you like to see happen in Indian real estate over the next few years. Which asset classes across India’s fast-growing economy are you most excited by?

KJ, PCHF We have all been on a long journey from an investment standpoint. The real estate market took off in 2005, soared, struggled and is now on the recovery path for a few developers. We’ve learned many lessons along the way.

This is a really good time to enter the market. We are seeing a second round of consolidation take place, and commercial real estate is carving out into new asset classes. Real estate is starting to act and think and operate like a real industry.

Plus, you have to look at the tenets underpinning the sector. India is a young and fast-growing country, with a huge and hugely aspirational middle class. I do not believe you can find a better place in which to invest, or a better industry in which to invest, anywhere.

AP, AC I fully agree. You have historically low non-performing assets across the sector. For foreign investors, given better regulation, a booming economy and the imminent arrival of the Reits market, there has never been a better time to put money to work in Indian real estate.

But one still needs to enter the market with your eyes wide open – which comes back to hitching your wagon to the right partner.

AL, LG Foreign private equity is increasingly attracted to areas like office space, retail, warehousing and industrial, all of which are doing well as India industrializes and infrastructure improves. When you look at investment data, you see all these foreign institutional investors who are really keen to enter the market. I think it is also a good time for investors to be looking at the mid-income residential market.

Real estate debate participants


Khushru Jijina (KJ) is managing director of Piramal Capital & Housing Finance. Jijina has been with Piramal Group for 18 years. He oversees origination, investments, asset management, exits and fund-raising. He also spearheads the financial services arm of Piramal Enterprises, the group’s flagship company.


Anuj Puri (AP) is chairman of Anarock Consultants. Puri has 27 years of experience in multi-disciplinary advisory and transactions. Before joining Anarock, Anuj headed JLL India, where he was responsible for the overall direction, strategy and growth of one of India’s largest premier real estate services firms.


Abhishek Lodha (AL) is managing director and chief executive of Lodha Group. Lodha has 12 years’ experience in management and construction. Before joining Lodha Developers, he worked at McKinsey, advising Fortune 500 companies.

Getamber Anand (GA) is chairman and managing director of ATS Infrastructure. Under Anand’s leadership, ATS has become a highly trusted real estate brand in the national capital region around New Delhi. Over the past two decades he has instilled greater transparency and introduced best-practice procedures into the industry. 

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