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A 2017 review of Indian retail real estate and peering into 2018: JLL

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As a landmark year for the real estate industry draws to a close, it’s time to review the major events of 2017 for Indian real estate and look at some upcoming trends in 2018.
For the real estate industry, 2017 was a watershed year, with the roll-out of game-changing policies such as GST and RERA. Demonetization’s impact started to taper off slightly, while real estate investment trusts (REITs) did not take off this year as expected.

A 2017 review of Indian retail real estate and peering into 2018
Delhi-NCR saw eight malls being withdrawn in 2017 after 2016 when negative supply was first recorded in the history of Indian retail real estate

REITs are set to provide investment opportunities to smaller investors next year. India’s real estate markets are poised for growth in the medium-to-long term on the back of higher transparency and further consolidation. India’s Tier 1 cities are expected to move up from their current 36th rank in JLL’s 2018 Global Real Estate Transparency Index (GRETI) on the back of continued improvements in structural reforms, implementation of RERA and GST aimed at making India a modern economy.

Let’s revisit the top trends in real estate in 2017 and examine what can transpire in 2018.

Retail Asset Class

New retail space of 6.4 million square feet got completed in 2017 – making this year the second-best after 2011 in terms of net absorption (i.e. after withdrawal of 4.7 million square feet from failed malls). Shopping mall stock is projected to grow strongly in next 3-4 years in these seven cities of India, as around 20 million square feet of supply is expected to come up by end of 2019. Out of this, around 11 million square feet of supply is expected in 2018 if completion delays are not accounted for.

As of now, the majority of stock is concentrated in Delhi NCR, Mumbai and Bangalore. However, the percentage share of other cities is expected to rise in next few years. The supply-side analysis is critical for investment, as it ensures that there is a pool of properties that can be considered for expanding portfolios, and also apprises about the prospective competitors in the long run.

Delhi-NCR saw eight malls being withdrawn in 2017 after 2016 when negative supply was first recorded in the history of Indian retail real estate. Prominent high street locations across India have limited availability of space, similar to premium malls. Fast fashion, F&B and entertainment operators again dominated leasing, with premium malls the main target for space. F&B operators remained the most active retailer category in India’s major high streets, followed by apparel.

International brands have been entering the country and expanding in the past couple of years, and more are expected to look for quality space across the country. In the past few months, increased private equity interest in key leasehold retail assets has been observed across the country. The upcoming REITs platform has attracted the attention of private equity players, who are now gearing up to expand their retail portfolio across Indian cities. While rental values have seen marginal appreciation, numerous retailers have started preferring the revenue-sharing model over the fixed-rent model in the last few years.

Warehousing And Industrial Asset Class

The warehousing and industrial asset class, which has been seeing big-ticket investments in India, had also seen the biggest-ever investment deal in the country’s logistics space in 2017. With JLL India as transaction partner, the Canada Pension Plan Investment Board (CPPIB) acquired a majority stake in IndoSpace, the warehousing and logistics real estate arm of Everstone Group. As part of the US $500 million deal, CPPIB will acquire 13 industrial and logistics parks totalling 14 million square feet.

It is pertinent to note here that even though CPPIB is the biggest deal in this space so far, investors from other nations – especially Asian countries like China, Japan and Korea – have shown considerable interest in developing industrial projects in India. In the GST era, warehousing is emerging as an attractive asset class for investors and private equity players. The stock of modern and better-managed warehouses is increasing, and the trend is set to continue in 2018 as well.