After spending 20 years in the real estate world of the UK, Europe and the Middle East and now eight years navigating the hugely varied markets of Asia Pacific, there is one market I find the most intriguing of them all and that is India. Every market has its challenges and opportunities, but none where the challenges are so frustrating but the opportunities so alluring.
The challenges are well known: despite the ‘Incredible India’ campaign, GDP per head is still half that of China, infrastructure improvements are lagging economic growth, the real estate markets are rather opaque, planning policy and other licensing is somewhat inconsistently applied (to be polite about it), and the legal system is the antithesis of slick, speedy and predictable.
But the opportunities are so mouth-wateringly tempting that they are impossible for anyone with an innate appetite for real estate to ignore.
India has a huge (1.3bn), young and growing population, which will be bigger than China’s within six years. It is a democracy, the economy is growing at 6%-7% pa, the business language is English, there is growing occupier demand from Indian and international companies (both front office and back office), from retailers, from logistics companies and from manufacturers. There is also an almost insatiable demand for, and perennial shortage of, low- to mid-market urban housing.
Some international private equity investors who were burnt by “dodgy developers” in the aftermath of the global financial crisis remain cynical. They were drawn in then by the macro story but having been bitten once, now placed India in the “too difficult” box. They might be right but some shrewd investors have noticed a few interesting signals from India and are looking again.
Several major changes have occurred over the last couple of years. Mr Modi was elected as the 15th prime minister of India in May 2014, replacing a chronically fatigued congress government. He has brought a reform-minded vigour to government which includes two key changes to the real estate scene. One is to introduce REIT legislation designed to increase the liquidity of the property investment market, and the other is to lift restrictions on foreign ownership.
Previously, foreign investors could only buy in a ‘Special Enterprise Zone’ or invest via development, so this is a significant change that vastly increases the opportunity and should, in time, allow for a far more efficient market.
The opportunities for international investors in India are quite specific and need careful analysis. Don’t touch mid-market residential – there is a large oversupply. Be wary of retail – India’s shopping dynamics are different. Choose local partners carefully – it is not by coincidence that the baddies in Bollywood films are usually property developers.
In certain locations, however, a smart investor can buy well-situated, good quality offices, let to first-class tenants, providing a yield of 9%-10% with strong demand, little supply and rising rents – plus the prospect of yields falling over time as the reforms result in a more liquid, international-style market.
There is an old adage about not doing not what advisers say but what they do. We at JLL have invested heavily in India and now employ 10,000 professionals in the country and it is one of our fastest growing businesses. We are not alone. Blackstone over the past years has become one of India’s largest owners of office space with a portfolio of over 31m sq ft let to companies such as IBM, Citi, Wells Fargo, Microsoft and JP Morgan, and it has another 14m sq ft under construction.
I could tell many a story about doing business in India – it is an experience like no other. For now I will conclude: by definition it is difficult to make money in a “perfect market”. India is imperfect but very, very tempting.
Alastair Hughes is chief executive, Asia-Pacific, JLL
