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Commercial, retail real estate on strong footing even as housing segment faces challenging times

Sanjeev Sinha
real estate, real estate in India, residential real estate, commercial, retail, warehousing sectors, REIT, Commercial office space, PE inflows

The housing segment has recorded subdued growth even during the festive season. Thankfully, however, that is not the case with commercial, retail and warehousing sectors, which are said to be on a strong footing. Industry experts say that investors have started to explore other investment opportunities in real estate owing to the prevailing challenges in residential real estate.

According to ANAROCK research, commercial, retail and warehousing segments have been on a positive footing and have witnessed significant activity over the last few years. For instance, office supply in 2019 is expected to see a rise of 13% against 2018, reaching to nearly 43 mn sq. ft. Similarly, absorption is likely to see 11% yearly growth in 2019 and touch about 37 mn sq. ft. Likewise, retail segment is also doing fairly well with the share of organised retail gaining ground. Currently, the share of organized retail in the overall Indian retail market is mere 8%, which is likely to reach 13% by 2020-end.

"Not just this, seeing the untapped potential in India, even the private equity players are posing their faith in these sectors within the Indian real estate. Commercial office space has seen total PE inflows of more than $10 bn between 2015 till the third quarter of 2019. Meanwhile, retail segment saw total investments of over $2 bn while logistics & warehousing saw private equity inflows of nearly $1.2 bn during the same period. The trend is likely to continue in 2020 as well with these segments in terms of investments, new supply and absorption," says Anuj Puri, Chairman, ANAROCK Property Consultants.

Developers’ Take

Property developers say that as compared to the housing sector, demand for retail, commercial & warehousing segments is likely to remain stronger over the next few quarters as has already been witnessed during the past few months.

"This trend is likely to continue as there is still substantial inventory overhang in residential real estate, and there is hardly any price appreciation during the construction of the project, due to which it has primarily become an end user-driven market, which is basically witnessing sales only in ready-to-move-in units. However, in the case of commercial, retail and warehousing, there is a strong demand from large tenants as many large global conglomerates have entered the country or have drawn up large expansion plans for India. This expansion is being witnessed pan-India and not only in the Metros, owing to which there is strong demand for these segments across India. Also, across office, retail and logistics, occupiers are moving away from C-grade and into A-grade developments, further amplifying demand," says Uddhav Poddar, Managing Director, Bhumika Group.

Pankaj Jain, Managing Director, Realistic Realtors, says, "Commercial and retail markets are doing quite well, contrary to the residential market because both the segments cater to different categories of investors. There will always be demand for commercial projects because India is an emerging market from all perspectives. Several foreign players continue to outsource more and more to India, hence increasing the demand for commercial projects. Then the rentals continue to grow every year. Therefore, despite a slump in the residential market, the commercial market is likely to grow further."

2018, in fact, proved to be one of the great years for these segments, but reports show that 2019 is going to yield even better numbers. "We expect commercial REITs to raise over $25 billion for the Indian real estate in the next three years. Retail and warehousing segments too are attracting good capital, especially from overseas," adds Jain.

Developers say that earlier people were more interested in buying their own homes, and a majority of people used to buy more than one house mostly for investment purposes.

"However, over time, people have started realising that commercial projects can generate better returns. Rental yields of commercial units are higher than those of housing units and resale value is also more. One major factor behind the rise in sales of commercial units is the timely possession of projects. Commercial projects are delivered faster than housing units. Hence people looking to buy property just for investment purposes favour commercial units over housing units. Moreover, India is an emerging market and outsourcing from foreign players is increasing every day, further boosting the demand for commercial spaces," says Ashish Bhutani, CEO, Bhutani Group.