The biggest casualty of the global financial meltdown was real estate. Banks became wary of lending. Home buyers postponed purchases out of fears of joblessness. Companies put their real estate plans on hold or simply dumped them. Of late, things have begun to look up.
Takers for reasonably-priced real estate are back. Large buyers of office space, especially the information technology companies, have started to return to the market place.
On a short trip in Mumbai for a board meeting, Nick Thomlinson, chairman of Knight Frank, the global residential and commercial property consultancy, shares his insights and forecasts with Byravee Iyer.
The uncertainty seems to be behind us. Prime indices are up and the sale of residential units has picked up. What are your thoughts?
It is difficult to describe the globe as one single market place because various markets have seen slightly different rates of recovery. But I think it's fair to say that almost without exception all markets are now in recovery mode, albeit at different speeds.
What are the trends that you see in the real estate market?
You have to slightly separate the residential from the commercial market. In the residential market, post Lehman and till May of this year, nothing happened.
The market literally came to a standstill. So what you are seeing now is the pent up demand from those six to nine months, plus the ordinary demand that comes day to day.
The big question is if the surge in demand is sustainable at this rate? Is it going to continue but at a slower rate? Or is it, as the doomsayers say, a temporary blip and we're all going to go into decline again? So you've got three options. My prognosis is that it is more likely to be the second.
We've seen a burst of activity but it will probably fall back to slightly lower over the next six months and then probably carry on in a sustained way.
On the commercial side, companies are using this time as an opportunity to consolidate into single buildings at good rents. So there is activity but probably more about consolidating or moving to a better building rather than growth of numbers.
Realistically, that will be the case for the next 12 months or so till the world goes back to real growth. Another thing that's driving growth is the fact that people want to invest in an asset class that gives a better return.
Is that the case in India as well?
Yes, the part of pent up demand is true for India as well. If you look at the commercial market space, people were holding back on leasing and buying in anticipation of a fall in prices.
Now that prices in the retail and commercial space have corrected quite substantially, companies have begun to realise that it is better to lock in good prices rather than wait to scrape the bottom. So we do see a revival in leasing and buying of corporate property.
The same phenomenon is seen in retail where prices have dropped dramatically. Thus, retailers are locking in their contracts at these low rates either on a fixed-terms basis or revenue-sharing basis.
As for the residential space, at the lower end there is buoyancy because of the tax advantage given by the government. Certain markets like Mumbai have seen an improvement in demand even at the higher end of the market. Perhaps it is a situation of investors coming back by wanting to monetise some of their gains in the stock market.
What are the global standards that need to be implemented here to exploit the opportunity?
The main thing that most businesses want is clarity. People want to know that they have got the rule of law behind them. If they invest in a property, people need to know that they can access their money.
Or if there is a legal problem, it can be resolved with a sense of fairness. If you want to attract multinationals, these are the prerequisites. People have to feel comfortable doing business.
Is the current policy good enough to generate global interest?
Well it's certainly far more conducive than it used to be. But there are areas that call for some clarity in terms of attracting more capital into the country. Also, people who have already brought their money in should be able to take it out.
Essentially, there is the need for taking a longer term perspective so that people don't have to worry about year-end losses. The good thing is that the government is talking about tax reforms in the form of unification of tax, which is hopefully going to happen.
These are some of the things that will go a long way. Look at countries that were initially fearful of foreign companies coming in to do business out of fear of local job losses.
Time and time again it has shown that by opening up the economy to competition and capital, a country will flourish more in the medium term than another country that keeps everyone out. India is a text book case where you opened up your economy to the outside world.
Malls are a growing phenomenon in India. What's their future?
I think they are fantastic, when you think ten years ago there were none. I remember back then saying that what this country really needs are shopping malls.
But like everything else in life, the pendulum swings too far the other way. I suspect now in some areas you have too many shopping malls and not enough shops to fill them.
Shopping malls need to be full to thrive. There are certain malls that are consistently doing well and many others that don't do well.
Most developers have gone through the herd mentality and in doing this they have not paid attention to what the market needs, how to sustain consumer interest, nor have they gathered insights into the consumer mindset.
Neither have they considered economic factors.
Jumping into the bandwagon without doing appropriate diagnostics has led to a situation where people have developed the malls and now want to change the end use into a commercial or residential property.
Hopefully, they have learned their lesson and they will do their homework well during the next set of developments.
In fact, we have advised some of the large mall developers not to undertake development, as we could not justify its viability. At the end of the day, a mall also should have a unique selling proposition and sustain that with marketing activities.
Another new trend is low-cost housing.
Well, it works in different ways in different countries. The idea of low-cost housing, which is a great idea, is that unless you can provide low-cost housing to the key workers, typically comprising of teachers and policemen, the whole city is not going to function properly.
The days of governments or local authorities building houses are gone. It's very much now up to the developers -- in exchange for getting permission to build luxury housing you also have to build a certain amount of low-cost houses. However, they must keep in mind that low-cost doesn't mean low quality.
What are your expectations from the Indian market?
I think probably similar to many of the other markets across the world. We have reached the bottom and it is at that point that activity picks up. So I think the prognosis looking forward is cautious optimism.
Image: Nick Thomlinson
