Small cities ripe for realty alliances

Though the Indian realty market lacks transparency and liquidity of the more mature western markets, it is changing fast in response to demands of multinationals, according to a report by consultants, Jones lang Lasalle.

The report, Emerging City Winners IV, notes that India has achieved one of the most significant improvements in real estate transparency over the past three years.

It says that increasing participation of cross-border investors and the emergence of Real Estate Investment Trusts will continue to force the pace of change.

The report, which looks at opportunities in smaller cities, said there are fewer partnering opportunities for entrants in metros such as Mumbai and Delhi, but cities such as Hyderabad, Chennai and Pune offer good opportunities.

It says that while yield gap in tier 1 cities has narrowed significantly to 9.5 to 10 per cent, in tier 2 cities, it is 10.5 to 11.5 per cent, while tier 3 cities such as Kolkata and Ahmedabad offer even greater yields of up to 12 per cent.

Among smaller but more profitable tier 3 destinations, the reports lists Goa, Bhubaneshwar, Chandigarh, Kochi, Mangalore, Mysore, Thiruvananthapuram and Jaipur.

"While these cities are attracting increasing occupier interest, the investment market is likely to lack liquidity," the report adds.

The report, however, states that though FDI from the US opportunity funds and Singapore developers are chasing Indian real estate, there has been a dearth of quality properties.

According to Mridul Upreti, head of corporate finance and investment at JLL, the proposed REITs will actually lead to an increase in investment by local developers leading to more quality properties becoming available in which the REITs can then invest. This, in turn, will increase the liquidity in the property market, as well as create a secondary market in property once the REITs list.

Upreti said REITs will also improve market efficiency and allow price discovery mechanism. It will allow the entry of retail investors into this market, which till date has been dominated by HNIs and institutional investors.

The report points out that in the short term it is suburban offices and residential sectors that will offer big opportunities, while retail is expected to fuel growth in the medium term.

It says that occupier demand will be supported by over 30 per cent demand forecast from the IT/ITES sector. Demand from telecom, pharma, financial services and biotech will also boost growth and help broaden occupier base.

The country has a huge potential for retail expansion with the sector growing at 10 per cent and is undergoing structural changes with major organised retailers showing rapid growth.

The report adds that SEZs are to be particularly attractive to cross-border players owing to tax concessions and one-stop development approval mechanisms.