‘India real estate market needs greater transparency’

‘India real estate market needs greater transparency’

Hyderabad: India has become the fastest-growing market for commercial property broker Jones Lang LaSalle Inc., whose local unit employs 4,000 people – a fifth of its headcount in the Asia-Pacific, and contributes $700 million to revenue. But the country’s real estate market needs greater transparency and lower barriers to foreign capital to become more efficient, according to the Chicago-based company’s Asia-Pacific chief executive Alastair Hughes.

In an interview on a recent visit to Hyderabad, the Singapore-based Hughes, a Scotsman, spoke about the state of property markets in India and other parts of Asia in the aftermath of the global financial crisis, and related issues. Edited excerpts:

On Jones Lang’s Indian presence:

In India, we are now in 12 cities. The number is changing all the time as we grow. We are twice the size in India as our nearest competitor. We think we are the same size as all the rest of our competitors put together, which is a good position to be in. We act for a huge number of the big multinational corporates who are in India. We have very strong businesses in Mumbai, Delhi, Bangalore, here in Hyderabad and various other offices. Our clients are big multinational corporates, and increasingly Indian companies, international investors who ask us for advice on investing via development funds into the Indian market, and Indian investors who use our services for looking after their properties, and for buying and selling.

On the state of Asia-Pacific property markets:

In 2007, the markets were all raging. In 2008, the European markets and the American market fell away in the first half of the year. We were hoping that the Asian markets would be decoupled from the global financial crisis. But when Lehman Brothers went down, it was clear that this part of the world was going to be affected as well.

So from the end of 2008 there was a big correction in the market. Rents everywhere fell very quickly because there were fewer occupiers. Most occupiers were trying to shrink to cut costs just as a whole lot of supply was coming to the market. The biggest fall in the Asia-Pacific was in Singapore, where rents fell 60% in six months, the fastest and furthest fall of rents ever. Hong Kong rents fell by 50%, Tokyo rents fell by 50% and no one was immune. So they were difficult times for investors and developers. On the other hand, (they were) quite good times for occupiers – good times to the extent that their occupational costs were going down but the business environment was very difficult.

2010 is slightly harder to explain in a nutshell because although there was a synchronized downturn, we had a kind of variable recovery depending on the conditions in each market... So you have got China and Hong Kong – rents are growing. You have got Japan pre- and post-earthquake, rents are flat. In Singapore, rents have just turned the corner and were beginning to grow again last year. On the other hand, you have Seoul, where there is still lots of supply and the economic growth isn’t huge so rents are still falling. So it’s a kind of a patchwork picture around Asia in terms of the markets.

On outlook for Asian real estate:

In terms of looking forward, it seems pretty clear now that although there are still issues in the West economically, it seems very unlikely that there’s going to be a double-dip, and businesses -- our clients -- are beginning to plan again with confidence. There’s a slightly different tone to what was in 2007. In 2007, it was just ‘grow, grow, grow.’ This time they want to grow, but they want to be efficient in their growth. And with regard to real estate, that means looking carefully at their real estate decisions to maximize their use of property and people are looking for all sorts of techniques to make sure that they are efficient. In some corporate entities, the average desk is only used half of the time and is a heck of a waste. So occupiers are devising techniques like desk-share and things like that.

Demand is growing and supply isn’t growing that much but nonetheless right now, occupiers are taking the opportunity to consolidate. Last year… many companies were deciding to either upgrade their real estate or consolidate to one building from many buildings at a time when rents were much lower than they were a couple of years ago.

Because though rents have turned the corner and are growing, even in Hong Kong, which is the market that has recovered the quickest, rents are still 20% below where they were at their peak in 2007. In Singapore, even though there been a turnaround, rents are currently half of what they were and in Tokyo half what they were… Not many buildings were started at the end of 2008 because obviously the global financial crisis had come along, which means that supply in a couple of years’ time, the supply that is existing at the moment, has been gradually taken up and not much supply is currently being built…What we predict is going to happen is that rents will continue to rise in virtually in all markets so if an occupier wants to do something, this is a pretty good time to do it.

On the Indian property market:

The property market has behaved in sync with the rest of Asia. It had a kind of boom period in 2007 and then it came off a bit in 2008 and 2009 and it is gradually recovering in 2010 and 2011. India has a lot going for it. That’s why people feel relatively optimistic about the prospects for the Indian economy and Indian real estate. One thing is that the lessons that people learnt from 2007 are the same. People want to grow but they want to grow efficiently. One way of growing efficiently is that you are leveraging what India can offer a Western corporate. So a bit more outsourcing etc. And a lot of clients are saying we want to outsource more as we want to grow on an efficient basis.

It used to be that people talked about India as being a kind of low-cost solution. There has been a subtle change in the last 12 months. People are realizing that it is not only relatively low-cost but it is also extremely high quality. And so if you are looking to grow in an efficient manner, it is a very good solution to some people. So we see more outsourcing to India. That’s really good for the Indian real estate market. Second good thing is all the demographics. Wherever I’m in Asia or in the world, people talk about the demographics of India… smart, well-educated, big, growing workforce, and the economic growth that it causes. So we are optimistic about the Indian real estate market. If you go Mumbai at the moment, it is buzzing. In most markets, there’s lots of supply and there’s also lots of demand. And that’s a great real estate market to have.

On need for transparency:

The most transparent liquid markets in the world are places like Australia, Singapore, the UK and America. In their markets, everything is very transparent. Most buildings have been traded on several occasions, there is a relatively standard form of lease, the buying and selling of land is a very straightforward and regulated process and they are very, very efficient markets.

India has obviously improved massively in the last decade, but there are still things that would be good for the Indian property market. Transparency is a key factor in any efficient property market. What people want to know is that they have they have got absolute security over their title. They want to know that if there’s an issue with regard to the property development, they can go to a court and get a quick and predictable outcome. They want to know that their interests are protected by reliable planning or zoning legislations. Somebody doesn’t want to buy a shopping centre only to find the next day that somebody is building a shopping centre next door. A more regulated Indian market would be good.

On barriers to foreign investment:

In due course, it would be great to allow foreign capital to invest in India. At the moment, there’s a lot of money in the world that’s looking for a home in real estate. That money can go to China and buy a building. It can’t come to India and buy a building. You have to invest via an intermediary into a development. It doesn’t matter where you are in the world, the development process is riskier. Besides the risk factor of development rather than investment, you have got the perceived risk factor of India.

What that means is that the kind of foreign money that is investing in India is very demanding in terms of the returns it requires to compensate for those two risks. That means ultimately that rents have to be higher than they could be and we could argue that’s a slight brake in terms of economic and property development. So if it is possible to make the market more efficient and transparent, that would lower the perceived risk. And if it were possible one day to allow foreign capital to buy completed developments rather than have to get involved in the development process, that would also decrease the barrier to entry which means more benign capital rather than opportunistic capital would be attracted to India which should be good for the market overall.