Think & Act

Actionable insights for strategic real estate planning

Flexible furniture a value-add in smaller homes

May 16, 2022  

Offering residential units within budget, convenience & more usage of space

In recent times, real estate market has witnessed entry of furnished apartments. Furnished apartments include offering plug and play residences. These are usually offered where in the project size exceeds 150 units and has smaller sized units - 300 sqft studio, 450 sqft 1BHK, 620 sqft 2BHK and 800 sqft 3 BHK.

In this product, developers are selling units with fixed but flexible furniture. The flexible furniture includes wardrobe, foldable dining table, sofa-cum-bed, kitchen cabinets, convertible study table and others. Most of this furniture is flexible and has multiple uses. The units are likely to have moveable walls along with flexible furniture, helping to serve different functions during the day and the night.

This product is well received by the buyers. The buyers with a budget less than INR 60L are evaluating standardized offering and are happy with plug and play apartments within their budget having latest design elements. The developer charges approximately INR 800 per sqft towards fit-out expenses and is reasonable from customer perspective as they end up spending more for this quality furniture.

Currently, developers are mostly using international vendors to support this type of product. But, as the market grows, Indian companies will be able to cater to this requirement. It is a good product offering for the developer not only from the profitability perspective, but it also improves their unit designing and overall project planning. As a lot of hydraulic systems are used, success and scalability of the product are dependent upon regular maintenance and quality of the product offered.

In coming 1 – 3-year horizon, this product type is likely to be restricted to smaller unit sizes and may see a penetration in built-to-rent projects.

Rising demand for big sized developed plots

May 09, 2022  

An opportunity for current landlords and small development firms

Investment for land has increased substantially post outbreak of COVID-19. Demand for residential and agricultural plots has seen steep uptake in the recent past. This has resulted in many developers lining up launches of plotted development across major growth corridors of the city.

There is a sizeable demand for land priced between INR 3CR to INR 10 CR from UHNIs, HNIs and NRIs planning to buy few acres of land along major growth corridors of major cities. Investors want to hold these land parcel for long term (10 years and more) and either trade or do a joint development post holding period to unlock the value of the land. However, supply of such land parcels is limited.

This set of investors are comfortable paying 20% to 35% premium to the ongoing prices of large land parcels. Price of current supply of plotted and farmhouse developments are based on sqft basis. As developers of these developments need to add infrastructure development, amenities and land holding costs. The investors are looking for acquisition based on acre basis. Investors are looking for a land with road access with electrical, water supply and drainage infrastructure. They do not need any other amenities or infrastructure.

It is an opportunity landlords/ land aggregators holding lands. They can bifurcate large land into plots of small parcels. Landowners can also formulate a partnership with development partners & marketing agencies, required to cater this demand.

Investing in Commercial Properties

May 02, 2022  

Retail investors keep asking us for options for investing in commercial properties. Most of them have typically same requirement: Grade A development, MNC Client, rental yield of 8% - 9%, good location, new property, long lock-in period and fit-out investment from tenant. Trust me, satisfying all these parameters is next to impossible.

Currently, pipe of good investment in commercial properties are limited. Few parameters of the above list and rental yield of 7.5% - 8.5% is a realistic expectation.

Our recommendation to the investors also includes evaluating investing in a greenfield commercial property located in good location and developer of repute. In these developments, investors can avail entry rental yield between 9% and 11% on investment. Yes, it has vacancy and development risks. But these risks can be mitigated through construction aligned payment terms, good selection of development partner and location.

What to expect while evaluating Co-Living Facility?

Apr 25, 2022  

Co-Living sector witnessed a lull immediately after the breakout of pandemic. H2 2020 until year end 2021 was an uncertain phase where the operators were extremely cautious in expansion strategies. With businesses returning to normalcy, operators are now considering expansion. A few changes that are witnessed across most of the co-living transactions are:

Occupancy levels in strategically located Co-Living facilities are back to pre-COVID-19 levels. A few facilities as of April 2022 are logging in an occupancy level of 85% - 90%. However, last one year witnessed closure of facilities that were facing low occupancy or management issues. The operational stock is estimated to have reduced by 15% as compared to March 2020. Property and bed rentals are poised to increase if the offices resume 5-day working offline.

With uncertainties, year 2021 witnessed largely revenue or profit sharing proposals. With colleges starting offline and people returning to work, Co-Living sector has witnessed traction as compared to what it was during the year 2020 – 2021. Asset owners (land owners) can now expect pure rental proposals from the Co-Living operators. The operators today are willing to discuss pure rental proposals while offering 3 month – 4 month rentals as security deposit. Brownfield developments in proximity to office clusters and colleges continue to be preferred over greenfield assets.

As an end user (occupier), one can expect reduction in the security deposit amount that is payable to the operator. Prior to March 2020, the end users were expected to pay 60 days – 90 days rentals as security deposit. As of now, end users are expected to pay a minimum amount equivalent to 30 day rentals.

How to assess lease rent for a vacant land?

Mar 29, 2022  

Property owners and occupiers often ask the question - "how to assess lease rent for a vacant land?"

The fundamental question here that needs to be answered is "what is the income potential of the vacant land?". Sometimes it is easy to assess while many a times it is difficult.

The most suitable method to understand the lease rent for vacant land is the capitalization method. Capitalization rates for vacant land are usually 2% - 4% lower compared to on-going capitalization (cap) rates for a commercial (office) property. For example, if the average cap rate for an office building in the micro-market is 8%, the cap rate for a vacant land shall vary between 4% and 6%.

Another method to understand the prevailing monthly rentals for vacant lands is the direct comparison method. However, getting a comparable transaction with accurate information is always a challenge.

Hence, most of the times in practice, both the methods are used to arrive at market land rent.

What is the annual rental escalation expected for industrial assets?

Mar 22, 2022  

Office assets have witnessed annual rental appreciation of 5% - 8% during 2015 to 2020 across different micro-markets. Historically, Grade A office space rentals have witnessed an annual escalation over 5% even in long term. Going forward, this is likely to continue for Grade A assets.

Today, occupiers of Grade A industrial and warehousing assets are committing annual escalation of 5% or 15% every 3 years.

Knowing industrial assets are cost centres for occupier, rental values of industrial and warehousing assets may not increase at their previous rates. In medium term to long term this asset class is expected to command annual escalation between 3% and 5% (in open market). Therefore, one needs to capture future annual escalation considering demand - supply, location and quality of construction for computing ROI and terminal value of the assets.

Why do foreign PE funds prefer to invest in commercial (core assets) but not in residential (development assets)?

Mar 14, 2022  

Foreign institutional PE funds are investing in commercial & industrial assets including office, warehousing, mixed-use but vary to invest into residential which constitute almost 75% of the total real estate industry in India. There are 4 major reasons:

  1. Tenants: Commercial and Grade A warehousing assets are largely occupied by MNCs. Fund houses have immense confidence on creditworthiness of these firms as compared to retail investors – target audience for residential development.
  2. No development & design risks: Most of the investments made by PE funds are in core assets. This is a good risk mitigation plan for regulations, design, and development risk.
  3. Exit via REITs: REITs in India is still in nascent stage. India has seen successful listing of 4 REITS in last 3 years and many more to come. Performance of Indian REITs is encouraging and fuelling more investments in this asset class.
  4. Attractive and growing economy: India is one the fastest growing economy of the world and it is currently 5th largest economy. Growth in economy has direct correlation of growth of commercial and industrial performance.

Therefore, overseas investors are keen on commercial and industrial assets in India.

How is social sector (education & healthcare) real estate different compared to commercial real estate?

Mar 08, 2022  

Investors have always had avid interest in commercial real estate which includes office, retail, warehousing, and hospitality. Investor focus towards social sectors has been historically low, despite these sectors being relatively stable than conventional real estate classes. Commercial real estate is more closely linked to the performance of economy than education and healthcare sectors.

Education and healthcare properties seek a longer commitment ranging between 30 years and 60 years from the occupiers; whereas typical lease terms for office and other commercial assets range between 3 years and 9 years. At the same time, rental values for social sectors are usually 15% to 30% lower compared to prevailing commercial space rentals (in the comparable micro-market) and annual escalation is between 3% and 5% compared to 5% that of commercial assets.

Social assets are more specific to occupier needs and therefore either the occupier prefers to buy or lease a Built-to-Suit property. In case the occupier defaults in paying rent for education and healthcare assets, it generally takes longer period for investors or owners to get property vacated because Government rules offer protection as these assets serves the social needs of the society.

Social assets can be built on red (public and semi-public use) zoned properties whereas commercial assets can be built only on commercial use properties. In most of the cases red zoned lands are cheaper compared to commercial zoned properties. Therefore, owners of red zoned properties can lease premises at lower rentals to occupiers.

In past, most of the education institutes and healthcare facilities are owned or donated by Government organizations. But with increasing property prices and use of technology, there is an opportunity for investors to participate in this sector more aggressively. Investments in social assets are likely to balance the overall real estate investment portfolio.

What is the good profit for residential developers?

Feb 28, 2022  

There are two terms which are widely used when it comes to understanding the profit for a residential development – Gross Profit of the project and Return on Equity (RoE).

Gross profit (or, EBITA) of the residential project varies between 15% and 25% of the total project revenue. This band varies for different types of residential segment projects: luxury, premium, mid-segment and affordable.

In terms of absolute numbers, gross profit for developers usually ranges between INR 800 and INR 3000 per sqft; higher gross profit on per-sqft-basis is for luxury or premium segment projects and lower for budget constrained housing projects.

Return on Equity (RoE) for a JDA projects is 3X to 4X of the total equity infused over the period of 3 to 5 years. Generally, developer’s project equity for JDA projects is sum of deposits payable to landowners, due diligence expenses, transaction costs for JDA, approval expenses, initial designing fee and token advance to civil contractor. Beyond these expenses is financed through bank finance and customer advances.

RoE for self-developed projects is 2X to 3X and here developer’s project equity also includes land price and other costs mentioned above.

Length of property cycles in India

Jan 25, 2022  

India’s real estate story is more than 2 decades. It is a good time to look back and assess property cycle lengths in India. As per our experience, in India currently different asset classes enjoys a growth period of 4 to 7 years followed by downturn period of 3 to 5 years based on maturity of the segment. These periods are dependent on various parameters including economic indicators, real estate market dynamics & others.

For example, the commercial segment did very well during 2004 to 2009 and from 2014 to 2019; while the residential performed well from 2010 to 2015 and now has again started picking up from 2020 onwards.

Emerging sectors has comparatively longer growth phase followed by shorter consolidation phase. For example, the warehousing is expected to have growth cycle of 5 to 7 years followed by consolidation period of 3 years.

These property cycles may change over the next decade or two based on economic outlook for the city/ country.