DELHI: The economic downturn has subdued office and retail markets, resulting in a sales slowdown as well as pressurized capital values across leading cities—according to CBRE Research's year-to-date coverage of trends in India's real estate sector. Buyer sentiments in the housing market have remained largely cautious because of relatively high price points and sticky borrowing costs, amid an uncertain economic climate. As a result, investment has slowed considerably across segments, resulting in weaker construction activity in most cities.
From the perspective of commercial office space alone, demand declined during the third quarter of 2013, because corporates focused on consolidating and downsizing their space portfolios, and/or relocating to peripheral markets. While this has contributed to rental stability in most markets in recent months, subdued demand and high vacancy levels have resulted in a decline in office space supply over previous quarters, weighing in on future investment plans.
Against the current economic and political backdrop, demand for commercial real estate is likely to remain subdued in the medium term. Corporates are expected to continue their focus on optimal space utilization and cost cutting measures and transaction activity is expected to be mainly restricted to take up of small and medium sized space. Supply backlogs are likely to exert pressure on rental and capital values as well.
Recent indications of revival in the global and domestic economy however, should contribute to better performance and improved economic prospects towards H2 2014. For instance, since the investor pull-back from emerging markets between June and August this year, the Rupee has recovered somewhat — reaching 61.23 against the dollar as of October 2013, as compared to a low of 68.8 reached during August 2013 — and domestic stock markets have rallied too.
Non-resident investors are now permitted to purchase shares, while domestic firms can invest 400% of their net worth in foreign markets at present. During the next six months, CBRE Research expects reforms to be approved for opening the banking sector to foreign competition and deepening corporate debt markets, which will promote investment and raise efficiency in the financial sector.
The export sector is also showing signs of strengthening, with a broad-based pick-up in demand expected for H2 2013, marked by leading economic indicators and domestic initiatives to revive exports and curb imports. All in all, prospects for an improvement in the trading sector and India's external balances look decidedly better than they did six months ago.
This year's healthy monsoon points to strong agricultural production. This is a boon for food prices, the key contributor to the recent inflation pick-up; and augurs well for weakening of inflationary pressures in the future, possibly leaving scope for monetary softening.
With respect to state support, the government is working towards permitting more foreign investment in key sectors. To boost investor sentiment and revive growth, the government is targeting sectors such as multi-brand and single-brand retail, hiking limits for foreign investment in telecommunications and insurance sectors, as well as setting up a committee to fast-track approvals for mega infrastructure projects. That said, implementation is key; and going forward success will depend upon minimizing obstruction from interest groups and delivering clear, unambiguous guidelines for foreign investors.
Looking beyond the results of the upcoming General Elections in April 2014, the economy will not only need a clearly defined vision and competent economic management, but will also require proactive, industry-centric decision making along with sweeping reforms in a number of areas to drive faster growth. From the standpoint of both the economy and the commercial real estate sector, reforms are specifically required in areas, such as slow project approval processes, supply bottlenecks, opening up key sectors like retail to FDI, and infrastructure creation through PPP projects.