Dr Samantak Das, Chief Economist and Head of

Dr Samantak Das, Chief Economist and Head of Research & REIS (India), JLL.

 

“The Indian economy grew better than expected by posting 8.4% growth during Q2 FY22 indicating the strength of the economy. The growth has been led by good monsoon, faster pick-up in economic activity and increased vaccination. ‘Construction sector’ GVA which comprises physical activities of the real estate and infrastructure sectors grew by 7.8% as against contraction of 7.2 % during the same quarter last year. The services part of real estate - ‘Financial, real estate and professional services’ segment grew by 7.8% as against a de-growth of 9.1% during Q2 FY21. Overall, it can be said that real estate sector has already been on the growth trajectory and the future would be even better if there is no other external shock. Indian residential real estate has been leading the growth story, with sales witnessing an upward growth of 65% on a sequential basis during July-September quarter. The economy is expected to perform better going ahead due to vaccination progress, improved momentum and better resilience which will augur well for the overall real estate business.”

Dr. Samantak Das, Chief Economist and Head Research

 Dr. Samantak Das, Chief Economist and Head Research & REIS, JLL

 

The Model Tenancy Act is going to give a guiding framework to all states to make their respective Tenancy Acts contemporary. Current Acts will give way to the new ones where uniformity will prevail, and it will give confidence to homeowners for renting out of existing vacant properties. Also, if the states implement the Tenancy Act in true letter and spirit of the Model Act, we will inch towards institutionalisation of rental housing market. In case of RERA, the central Act helped states like Maharashtra to make MahaRERA successful to a large extent. In similar lines, we may expect Tenancy Acts in states to become more efficient in providing level playing field to both owners and tenants.

RBI maintains ‘status quo’ to cushion the economy in

         Dr. Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

RBI maintains ‘status quo’ to cushion the economy in the light of the pandemic resurgence; low mortgage rates to provide room for continued residential real estate growth

 

“The resurgence of the pandemic and resultant concerns of its impact on economy and businesses demanded a resilient approach. The Central bank has responded by taking an accommodative stance, kept the repo rates unchanged. The health of the economy has now become more contingent on the progress of vaccination and control of pandemic. In such a scenario, holding the repo rates at 4% is likely to cushion the impact on economy due to intermittent and regional lockdowns. The government’s decision to retain the inflation target of 4% with a tolerance band of +/- 2 percentage points for the coming five years provides continuity to the stance of the monetary policy committee.

Demand for residential real estate has revived as homebuyers took advantage of the lowest mortgage rates along with realistic pricing and various freebies and options rendered by developers. Residential sales in Q1 (Jan-March) 2021 recovered to more than 90% of the volumes witnessed during pre-Covid times across the top 7 cities. The sustained growth in sales presents clear signs of demand and buyer confidence coming back to the market. The recent surge in the spread of the pandemic is likely to impact the home buying sentiment for a few months. However, we believe that overall residential sales are likely to surpass the pre-Covid levels in the coming quarters.”

Net absorption in Office market slower in

Key Highlights:

• Net absorption in Office market slower in Q1 2021 at 5.53 million sq. ft
• Bengaluru, Hyderabad, and Delhi NCR accounted for nearly 80% of net absorption
• 31% of the new completions during the quarter were already pre-committed
• Maximum pre-commitment levels were observed in Bengaluru and Hyderabad
• On a year-on-year (Y-o-Y) basis, net absorption in Q1 2021 stands at 64% of the levels witnessed in Q1 2020
• On a Y-o-Y basis, new completions across the top seven cities jumped by 56% from the 8.6 million sq. ft recorded in Q1 2020; new completions even surpassed the average quarterly levels of ~13 million sq. ft witnessed during the historic year of 2019
• Overall vacancy increased from 14.0% in Q4 2020 to 14.9% in Q1 2021\
   
  
• Net absorption in Office market slower in Q1 2021 at 5.53 million sq. ft: JLL

• Bengaluru, Hyderabad, and Delhi NCR accounted for nearly 80% of net absorption

• 31% of the new completions during the quarter were already pre-committed
• Maximum pre-commitment levels were observed in Bengaluru and Hyderabad

The overall office market in India witnessed a net absorption decrease of 33% in Q1 2021 quarter-on-quarter (Q-o-Q), with 5.53 million sq. ft leased during Jan to March 2021, according to JLL Office Market Update - Q1 2021. On a year-on-year (Y-o-Y) basis, net absorption in Q1 2021 stands at 64% of the levels witnessed in Q1 2020. Bengaluru, Hyderabad and Delhi NCR accounted for nearly 80% of the net absorption during the quarter. Moreover, Bengaluru and Delhi NCR were the two markets which witnessed an increase in net absorption when compared to Q4 2020.

Net absorption dips after a two consecutive quarter rally

City	Q2 2020 (mn sq. ft)	Q3 2020 (mn sq. ft)	Q4 2020 (mn sq. ft)	Q1 2021 (mn sq. ft)	Growth (%) Q1 2021 over Q4 2020
Bengaluru	0.45	2.72	1.37	2.22	61%
Chennai	0.10	0.21	0.86	0.37	-57%
Delhi NCR	0.50	0.20	1.02	1.07	5%
Hyderabad	1.18	1.54	2.83	1.09	-61%
Kolkata	Negligible	0.023	0.15	0.04	-73%
Mumbai	0.45	0.28	0.96	0.24	-74%
Pune	0.64	0.46	1.05	0.50	-53%
Total	3.32	5.43	8.24	5.53	-33%

Source: Real Estate Intelligence Service (REIS), JLL Research

“While 2020 ended on a relatively high note, there was still uncertainty in the market with respect to resumption of business as usual. Occupiers continued to adopt a cautious approach and focused on reassessing their real estate portfolios and long-term commitments. To add to the woes, increasing fears of a spike in COVID-19 cases in the second half of March further pushed the occupiers to press pause again and postpone their real estate decisions,” said Dr. Samantak Das, Chief Economist and Head of Research & REIS, India, JLL. “As the vaccination drive is gaining momentum and occupiers remain cautiously optimistic, the year 2021 is expected to witness close to 38 million  sq. ft of new completions, while net absorption is likely to hover around the 30 million sq. ft with a marginal downward bias. This will be at par with the average annual net absorption levels seen during 2016-2018,” he added.

Significant role of pre-commitments, leasing volumes [2] strong

Pre-commitments in new completions played a significant role in driving net absorption. In the first quarter, 31% of the new completions during the quarter was already pre-committed. Maximum pre-commitment levels were observed in the southern markets of Bengaluru (51% of the new completions) and Hyderabad (45% of the new completions). At the same time, it is important to note that the leasing momentum in some of the larger markets have remained promising in the first quarter of 2021. The quarter witnessed gross leasing volumes of 7.5 million sq. ft across the top seven markets. Interestingly, the larger market of Mumbai saw a massive jump in leasing volume from 0.5 million sq. ft in Q4 2020 to 1.6 million sq. ft in Q1 2021. This was majorly driven by select large pre-commitment deals in upcoming spaces within the BFSI space. Further, Delhi NCR saw a marginal increase in leasing volumes from 1.9 million sq. ft in Q4 2020 to 2 million sq. ft in Q1 2021.

New completions maintain the growth spree

City	Q2 2020 (mn sq. ft)	Q3 2020 (mn sq. ft)	Q4 2020 (mn sq. ft)	Q1 2021 (mn sq ft)	Growth (%) Q1 2021 over Q4 2020
Bengaluru	0.0	4.70	2.30	4.33	88%
Chennai	0.0	0.0	2.99	-	-
Delhi NCR	1.94	0.22	1.35	4.01	197%
Hyderabad	2.38	3.33	3.72	2.20	-41%
Kolkata	0.0	0.0	0.10	-	-
Mumbai	1.45	0.30	1.46	2.18	50%
Pune	0.0	0.63	0.86	0.70	-18%
Total	5.77	9.18	12.78	13.43	5%

 Source: Real Estate Intelligence Service (REIS), JLL Research

New completions during Q1 2021 were recorded at 13.43 million sq. ft, a marginal increase of 5% q-o-q. In sync with net absorption, the markets of Bengaluru, Hyderabad and Delhi NCR accounted for nearly 80% of the new completions during the quarter. On a Y-o-Y basis, new completions across the top seven cities jumped by 56% from the 8.6 million sq. ft recorded in Q1 2020. Interestingly, new completions even surpassed the average quarterly levels of ~13 million sq. ft witnessed during the historic year of 2019.

Vacancy in Grade A office space increases in most markets

City	As of June 2020 (%)	As of Sep 2020 (%)	As of Dec 2020 (%)	As of March 2021 (%)
Top 7 cities	13.1%	13.5%	14.0%	14.9%

Source: Real Estate Intelligence Service (REIS), JLL Research

Occupiers continue to review their real estate portfolios and are adopting consolidation and optimisation strategies in order to rationalise space required while minimising costs. The subdued net absorption levels could not keep pace with new completions. This resulted in overall vacancy increasing from 14.0% in Q4 2020 to 14.9% in Q1 2021. Despite the rise in vacancy levels, Bengaluru, Chennai and Pune continued to hover in single digits.

Rentals across markets remain stable

Office rents in Q1 2021 remained stable across the major office markets in India. With vacancy levels still below 15% and limited upcoming Grade A supply across key markets in the next few years, the office market in India continues to be tilted towards landlords. Hence, reduction of headline rents is not a popular phenomenon and rents are expected to remain range bound in the short to medium term. However, landlords continue to be accommodative to the demands of occupiers and are providing flexibility via increased rent-free periods, reduced rental escalation and fully furnished deals to occupiers to close deals.

Occupiers remain cautiously optimistic about the future

The leasing momentum in the upcoming quarters will mainly depend on the time taken to contain the second wave of COVID-19 cases. However, it is important to point out a few things that give us confidence that there is light at the end of the tunnel.

The increasing attendance in offices across the major markets before the second COVID-19 wave bears testimony to the confidence and commitment of corporates to get back to working from office. It is important that landlords continue to be receptive to the demands of tenants and offer flexible options, in terms of space as well as value.  

JLL’s inputs on the probable impact of

 JLL’s inputs on the probable impact of extension of Stamp Duty Concession on realty sector.

 

Attributed to:  Dr. Samantak Das, Chief Economist and Head Research & REIS, JLL.

Reaction to:  State Government of Maharashtra may look at extension of Stamp Duty Concession

 

If the State Government decides to extend the Stamp Duty Concession further, then.

 

“Amidst the fear of rising cases of Covid -19, this will be a timely second shot in the arm that will help the real estate sector continue its buoyancy. 

The larger markets of Mumbai and Pune in the state saw a growth of 13-15% in residential sales during the first quarter of 2021 over the previous quarter, well abled by the government’s proactive measure of providing stamp duty concessions in the second half of 2020, paired with the State’s Mission Begin Again programme. The extension of stamp duty relaxation will further significantly support the real estate sector to regain the volumes lost during the pandemic and register robust growth.”

 

Hyderabad houses FLEX SPACE one of the fastest grwoing

 Hyderabad houses 4.5 million sq. ft. of flex space; one of the fastest growing flex markets in the country: JLL

 

Hyderabad hosts 4.5 million sq. ft. of the total flex space stock in India and is one among the fastest growing markets in the country, according to a recently launched report by JLL, Reimagine Flexspaces A 360⁰ view.

The demand for flexible spaces in large cities such as Hyderabad is likely to grow, with businesses having a greater need to accommodate portfolio expansion and contraction along with crisis support. This indicates the inherent growth potential of the flex office market in India.

“Flex space operators provided organised workspaces with a lock-in-period of 1-2 years. Companies that have pre-leased with scheduled delivery over next 1-2 years have shown interest in such flex spaces to have their temporary offices. Apart from big MNCs, Hyderabad also houses many start-ups and small companies in the field of Consulting, IT, and logistics. Flex spaces have become financially feasible for such small players as well with low capex,” said Sandip Patnaik, Managing Director and Head (Telangana & Andhra Pradesh), JLL India

The flex space market in Hyderabad saw major traction from mid-2018 and peaked in 2019. Flex spaces accounted for 28% of total office space leasing in 2019 in the city. While flex spaces already enjoyed popularity amongst start-ups and small-sized companies, there has been an increased traction amongst large BFSI and IT-ITeS occupiers mainly as managed office spaces as well as incubation spaces. This supports the significant expansion by flex space operators in the city during the last 2-3 years.

As per a recent report by JLL strong signs of recovery were witnessed in the Hyderabad office market in Q3 2020 with a healthy gross leasing at 1.9 million sq. ft. At the same time, net absorption grew by 31% from the previous quarter to 1.5 million sq. ft. in Q3 2020.

The country is expected to witness deeper penetration, throughout 2021 and beyond, the flex space market is forecast to grow at a slower pace and more organically. Irrespective of several short-term disruptions and challenges, increased demand from large enterprises, will support the growth of the flex space market to more than 50 million sq. ft. by 2023. It is anticipated that flexible space will grow by an average of around 15-20% per annum over the next three-to-four years, although this trajectory will not be linear. Previously expected levels of new investment are unlikely to be seen, as operators look to solidify their existing operations and it is likely that certain operators will not be able to weather the storm.

As corporates return to the workplace, they are likely to further leverage flexible space to reduce capital expenditure and create cost savings, while allowing for split teams and de-densification requirements. Developments that initially drove the growth of the flex market, like the focus on utilizing workplaces to boost productivity and drive dynamic work cultures, enhance emphasis on employee health etc., will continue to influence the next phase in India.

 “While the flex-space market more than tripled in the last 3 years, the momentum going ahead will be relatively slower. Players are likely to tread cautiously, and the overall market is expected to expand 1.5 times from the current size. At the same time, demand for flexible space is likely to remain resilient and we expect the size of the flex space market to cross 50 million sq. ft. by 2023, led by increased demand from larger enterprises,” Dr Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

In the commercial real estate space, flex spaces have become synonymous with adaptability. As preferences evolve, a range of flexible space options have taken shape to suit changing business needs, including remote working. To respond to the current disruption, and to lay the groundwork to deal with what may be permanent changes for the industry, flex space operators have been agile and are recalibrating their business strategies. They are now laying a greater emphasis on profitability and evolving strategies to ensure stable occupancy levels in their flex space centres.

 Large enterprises to drive demand

The densification trend that had emerged over the last decade will likely reverse with enterprises leaning on flexible office space to relax space density. Large enterprises might also look at splitting up their offices to reduce commute times and dependence on public transport. However, with expected economic uncertainty, companies will be hesitant to commit large capital to real estate. In terms of strategy, leasing directly to a third-party flexible space operator is the most widely adopted model. A partnership model allows both landlords and operators to leverage each other’s strengths. There are several ways to implement a partnership, with revenue shares and management contracts being the most common. Under the revenue share option, both parties split the upside. In the case of a management contract, the operator gets a fixed payment, while the landlord assumes all the leasing risk and enjoys the upside. Despite the benefits of this approach, partnerships are relatively less common in India for now.

What the future holds

The entry of more than 300 flex space operators into the country helped commoditize the market. Prior to the pandemic, most of these operators were focused on attaining scale and capturing market share. However, the availability of capital, in the current scenario, will be a challenge. Players who have embarked on aggressive growth so far will find themselves strapped for capital. In such a scenario, the market is likely to witness consolidation activity driven by larger operators with financial wherewithal acquiring smaller ones. 

Flexible workplaces will continue to be a major influence on the future direction of the Indian office market. There will be an even greater focus on providing customized office space solutions and demand for flexible space will not only return but increase, as occupiers embrace the core plus flex model more widely. Despite the massive disruption from the impact of COVID-19, the future of flexible workspaces will remain optimistic.

Delhi NCR saw residential sales move up

Delhi NCR saw residential sales move up 38% in Q3 2020, ready-to-move-in homes in higher demand: JLL

 ·         Major traction from Noida, contributing nearly 48% to the overall sales·         Affordable and mid segment projects garnered more interest from homebuyers
·         Price remained range-bound across most submarkets within Delhi NCR

The capital city of India, Delhi NCR, witnessed an improvement in sales by 38% Q-o-Q, according to JLL Research. Most of this traction was witnessed in Noida, contributing nearly 48% to the overall sales as it caters to all price segments. This was followed by Ghaziabad constituting 31% of the sales and it mainly caters to mid and affordable segments. Gurugram accounted for nearly 1/5^th of the overall sales during this quarter.

 

	Q2 2020	Q3 2020	Growth (%) – Q3 2020 over Q2 2020
Launches (units)	Negligible	699	-
Sales (units)	2,250	3,112	38%
Average prices (INR /sq ft)	4,769	4,729	-1%

Source:  Real Estate Intelligence Service
The quarter saw a preference for ready-to-move-in projects by reputed developers. The affordable and mid segment projects garnered more interest from homebuyers as compared to high-end and luxury projects. The emerging corridors of suburban markets such as Noida-Greater Noida Expressway, Golf Course Extension Road and Dwarka Expressway in Gurugram continue to drive sales on the back of expected augmentation in physical and social infrastructure in these markets. Given the current business environment, developers exercised restraint and caution in launching new projects. Developer floors in Gurgaon has also seen a surge in demand in last two quarters, since the floors offer quick and quality construction, limited to four liveable floors per plot and reserved parking at the stilt level and provides for basic amenities like power back up.

 Three projects were launched during the third quarter, two in Gurugram and one in Noida. While launches were in high-end and upper mid segments in Gurugram, the projects launched in Noida catered to mid segment buyers. Real estate developers continue to focus on offloading the existing unsold inventory and completing projects under construction. Prices remained range-bound across most of the submarkets within Delhi NCR during the quarter.

Manish Aggarwal, Managing Director, Delhi NCR, JLL India, said, “With the upcoming festive season, sales are only expected to increase from the current levels. Also, attractive pricing and developers doling out lucrative schemes and freebies will further incentivise fence sitters to effect buy homes. With the phased unlocking of businesses, it is encouraging to see the resumption of construction activities across most parts of Delhi NCR and physical site visits have also began. At the same time, it is interesting to note the growing acceptance of digital platforms amongst both developers and homebuyers to effect transactions.”

Residential market in India, on road to recovery with strong sales

India’s residential market was more active in Q3 2020 with sales increasing by 34% versus Q2 2020. Mumbai accounted for 29% of the total sales in the quarter, while 22% of sales was contributed by Delhi NCR. Growth in sales activity was also driven by stronger demand in Chennai, Hyderabad and Pune. Residential market activity is also being supported by renewed interest from NRIs in Q3 2020,  resulting in more pent up demand in the market and increased enquiries received by developers.

Sales volumes increased across markets

	Q2 2020 (in units)	Q3 2020 (in units)	Growth (%) – Q3 2020 over Q2 2020
Bengaluru	1,977	1,742	-12%
Chennai	460	1,570	241%
Delhi NCR	2,250	3,112	38%
Hyderabad	1,207	2,122	76%
Kolkata	481	390	-19%
Mumbai	3,527	4,135	17%
Pune	851	1,344	58%
Total	10,753	14,415	34%

 

 

 

 

 

 

Residential market activity all over India, is also being supported by renewed interest from NRIs in Q3 2020,  resulting in more pent up demand in the market and increased enquiries received by developers.

“The further easing of lockdown restrictions and the upcoming festive season might help in bringing buyers back to the market. An assessment of years to sell reveals that the expected time to liquidate stock has increased from 3.6 years in Q2 2020 to 4 years in Q3 2020. While the residential space remains unpredictable, favourable supply dynamics could deliver potential upside for both homebuyers and developers in the medium-term,” said,
Dr. Samantak Das, Chief Economist and Head of Research & REIS, India, JLL.

 Focus on mid and affordable segment continues

 New launches were restricted with 12,654 units launched in the third quarter, a decline of 14% quarter-on-quarter. Developers focused on completion of under construction projects and clearing their existing inventory. Hyderabad and Mumbai accounted for over 60% of the total new launches in the quarter. The drop in new launches was driven by Bengaluru, which witnessed a substantial decline of over 80% as compared to Q2 2020. Development focus on mid and affordable segments continued in Q3 2020 with nearly 75% of the new launches in the sub INR 1 crore category. Moving ahead, the focus on these price segments is expected to continue with developers focusing to reap the benefits of strong pent up demand.

 

	Q2 2020 (in units)	Q3 2020 (in units)	Growth (%) – Q3 2020 over Q2 2020
Bengaluru	6,135	1,074	-82%
Chennai	182	1,487	717%
Delhi NCR	Negligible	699	-
Hyderabad	5,034	5,396	7%
Kolkata	Negligible	Negligible	-
Mumbai	2,294	2,242	-2%
Pune	1,135	1,756	55%
Total	14,780	12,654	-14%

 

 

              

 

 

  Unsold inventory dips across the country

Q3 2020 witnessed sales outpacing new launches as unsold inventory across the seven markets (Mumbai, Delhi NCR, Bengaluru, Hyderabad, Chennai, Pune and Kolkata) decreased marginally from 459,378 to 457,427 units. Mumbai and Delhi NCR together account for more than 50% of the unsold stock which are at various stages of construction.

	Q2 2020 (in units)	Q3 2020 (in units)	Growth (%) – Q3 2020 over Q2 2020
Aggregate (7 cities)	459,378	457,427	-0.4%

Over the last few years, residential prices in most markets have remained stagnant. Developers have been operating with low margins and the chances of a significant reduction in prices is unlikely. In Q3 2020, prices remained largely stable across all the seven markets when compared to the previous quarter. However, it is important to note that developers in certain markets are providing moderate price discounts to kickstart sales, thereby facilitating cash flows to tide over the crisis in the short term. Moreover, developers are offering flexible payment schemes such as no EMIs for a year and other schemes to attract prospective homebuyers who pressed ‘pause’ in the last few months. This could be the first signs of a broader recovery of the residential market in the country.

NOTE: *The comparison pertains to only last two quarters since the current crisis has no parallel and has infused uncertainty which we have not witnessed in the past decades.