Analysts bet big on Reits, FDI for 2008

Analysts bet big on Reits, FDI for 2008

Among the trends that real estate developers and analysts are forecasting for 2008 are a threefold jump in foreign direct investment (FDI) inflows into the sector, the introduction of Reits, or real estate investment trusts, the emergence of new sectors such as logistics and warehousing, and a stronger strategy for investment in the smaller, cheaper cities by information technology (IT) companies that have been hit by a rising rupee.

In the residential sector, industry analysts are predicting a divergence between thebig developers and the mid-level ones.

“The residential sector will see the emergence of two kinds of developers—the big ones will move towards the premium segment and will start branding themselves as premium builders," says Anuj Puri, chairman of Jones Lang LaSalle Meghraj, a real estate consultant firm. “The small developers who will step into their shoes will dominate low-income and mid-market housing," Puri adds.

“As income levels have risen people are willing to pay for an assurance of quality that comes with the branded products," says Vicki Oberoi, managing director of Oberoi Constructions.

But, the biggest event of 2008 could be the introduction of Reits, predicts Pranay Vakil, chairman of Knight Frank India Estates, a real estate consultancy firm. “Sebi (Securities and Exchange Board of India) has finalized the guidelines, and they are likely to be released to coincide with the Budget in the last week of February at the latest," says Vakil.

Indeed, M. Damodaran, chairman of markets regulator, Sebi, said this week that the guidelines for Reits would be released in early 2008.

A Reit is a corporation or trust that uses the pooled capital of many investors to purchase and manage income-yielding property or mortgage loans. Reits are traded on major exchanges much like stocks. While Reits also get special tax considerations, they are required to distribute 90% of their income, which may be taxable in the hands of the investors.

A Reit structure is designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. The key statistics to look at in a Reit are net asset value, adjusted funds from operations and cash available for distribution.

“One of biggest advantage of the introduction of Reits would be that the sector will become liquid with easily tradeable assets. A lot of retail investors who have stayed away from the real estate market will be able to enter it. As properties are listed, there will also be greater transparency in terms of valuations, so the runaway valuations of 2007 would be corrected," says Vakil.

With the introduction of Reits, the inflow of FDI into the sector is also expected to increase dramatically.

“We expect to see around $12 billion (Rs47,280 crore) coming into FDI-compliant projects in 2008," says Vakil. That is a threefold increase from 2007 when $3 billion were committed by global investors for projects in India.

But Ambar Maheshwari director (investments) at DTZ, another real estate consultancy firm, offers a word of caution: “FDI will continue to come, but there may be some caveats—if prices, especially land prices, don’t correct," said Maheshwari.

Investors who raise funds abroad may not be able to get the 20-25% returns they have come to expect from India, though returns in the early to mid-teens would still be assured."

Another major trend in 2008 will be the emergence of a much stronger strategy for investments in tier II and tier III cities by IT companies that are already feeling the pinch from a rising rupee, says Puri of Jones Lang.

According to data provided by the National Association of Software and Services Companies (Nasscom), an industry lobby, small towns such as Dehradun, Visakhapatnam, Guwahati and Indore are now beginning to see an influx of such companies.

A recent report by Jones Lang LaSalle Meghraj also names cities such as Guwahati, Chandigarh, Indore, Visakhapatnam, Dehradun and Vadodra as the likeliest IT destinations for 2008. Data from Nasscom, IT industry’s lobbying body, suggests that already more than two dozen business process outsourcing (BPO) companies, apart from the state-owned Software Technology Park of India, have set up campuses in these cities.

Guwahati has two BPOs, Chandigarh has seven, Nashik, Visakhapatnam and Indore have four each, and Dehradun has three. A Nasscom spokesperson said most of these cities are attractive to IT industry given their high level of literacy—around 77%—which promises a continuous pool of talent.

“Land prices in these cities have not risen that much in these cities, so it makes sense for IT firms that are looking at cost cutting will benefit in two ways—their real estate costs will be significantly lower, at same time they will also gain from the far lower employee attrition rates, bringing down their recruitment and training costs," says Puri.

Among the underserved sectors in real estate, logistics and warehousing are expected to emerge as a key growth areas for investors, says Maheshwari of DTZ. “With the growth in retail and the need for warehousing, this sector will emerge as a key growth area this year," he says.

Though the biggest players in the warehousing business have been the state and Central Warehousing Corp., private companies are also showing interest. Reliance Industries Ltd, the Adani Group and Future Group, for instance, are among the companies that have announced plans to enter the business.

A recent Ernst and Young report says that logistics and warehousing business in India is set to touch $125 billion by 2010, driven mainly by the growth in retail, which is growing at 30% year on year.

This is expected to generate a demand for 5 million sq. ft every year. “It is this opportunity that is attracting the big players," says Maheshwari. Around 40 million sq. ft of warehousing space is available in India.

Among the formats that are expected to take off in the sector are port and airport-based warehouses, inland container depots and freight stations, custom bonded warehouses and specialized warehouses and cold storages.