The recent announcement by the RBI of strong growth in the service sector in 2011-12 has brought cheer to the real estate developers, as it may sustain the present high demand of commercial real estate in the near future.

The projected slowdown in overall economic growth globally, and particularly in India, to 6.5% in 2011-12 , as against 8.4% in 2010-11 , has affected the sentiment in the market place.

The recent decision of the government to allow foreign direct investment (FDI) in the multi-brand retail sector will also help the real estate sector in the country. This will also increase the demand for commercial space in the market.

At the same time, as the demand for office space will continue to be strong, fresh jobs creation in the country will also see a strong growth.

Normally, when a company takes 1,000 sq feet of office space on rent, it employs around seven people to fully utilize that space. That means, at least seven new people will enter the job market and, on average , five out them will buy residential apartments.

Therefore, a consultant said that according to the thumb rule, the requirement of residential space increases five times that of the commercial space used. Therefore, if the demand for the commercial space remains strong, it will also continue to give a fillip to the residential real estate.

Pankaj Renjhen, the managing director (retail services) of Jones Lang LaSalle, says: "The real estate retail industry will benefit immensely due to increase in demand and increased investor confidence. We can also expect increased transparency in the retail real estate sector.

Additionally, the country will flourish in terms of quality standards and consumer expectations, since the inflow of FDI into the retail sector is bound to pull up the quality standards and costcompetitiveness of Indian producers in all the segments."

The government has taken an important step with this decision , Renjhen says. From a retail real estate point of view, this decision will open up immense opportunities in the medium and long term, as the demand for quality real estate will rise. Currently, some retailers are cash-strapped and this will provide a sort of bailout option to them, he says.

Overall, the investment by local and new international retailers that are likely to come into the sector will definitely also take the form of investments into real estate at the front end in terms of retail store spaces and of the back end, in terms of better quality warehouses.

The new international entrants will be willing to take longer-term bets and invest in stores which will be sustainable over the long haul. Competition will increase as Indian retailers shape up and intensify their expansion plans, which had been fairly low over the past few years.

Also, it will increase the interest and confidence level of real estate developers to set up quality shopping centres. They now have reason to set behind them their experiences post-2008 , and can once again consider investing in this asset class with a clear vision on long-term profit, Renjhen says.

Subash Bhola of Jones Lang LaSalle India, the global consultant in real estate sector, says: "The economy's service sector has experienced strong growth and is advancing at a rate of 8.5% in financial year 2012. This indicates that a major slowdown in office real estate demand is not likely to occur — the service sector generates the highest demand for office space in the country."

Bhola says that recently, the annual GDP of 6.5% growth during April 2011-March 2012 released by the Reserve Bank of India resulted in a negative sentiment throughout the real estate industry . Consistent with this, in the first half of 2012, the demand for commercial real estate moderated on the back of office occupiers that remained cautious about their expansion plans.

However, over the years, the service sector has been the growth engine of the Indian economy. Its growth rate has outperformed the overall growth rate of the country's GDP, which includes the service, agricultural and industrial sectors — the three major sectors of the economy.

In a report, Bhola says the slowdown in GDP growth in 2011-12 can mainly be attributed to high interest rates, inflation and a significant contraction in industrial production. However, the growth in the service industry , at 8.5%, has been robust enough to support overall GDP and the sector itself.

The IT-ITeS sector, which is one of the major constituents of the service industry, recorded a growth rate of 13% in 2011-12 and is expected to grow at a similar rate during the next financial year.

Additionally, the banking, financial services and insurance industries (BFSI) registered a robust growth rate of 10% in 2011-12 . Although the manufacturing and industrial sector is performing poorly now, the continued health of the service sector is likely to compensate for it by contributing a larger share.

The RBI projected that the Indian economy would grow at 6.5% in financial year 2013. Compared to many major world economies, this growth rate is fairly healthy; in addition, an established service sector should help India resist any slowdown in office real estate demand.

The service sector comprising BFSI, information technology, consulting , trade, and communication is the major driver of demand for commercial real estate in the country.

The service sector has also been one of the country's core sectors over the past decade, as its contribution to GDP has significantly increased from 50% in financial year 1996, to 63% in financial year 2012. In financial year 2012, when all the other sectors, including industrial and agricultural, performed very poorly, at an average of 3.1%, the service sector recorded a healthy growth rate of 8.5%.

It is estimated that in 2011, the service sector accounted for about 70% of the demand for commercial office space in seven major Indian cities — Mumbai, the Delhi-NCR , Bangalore, Chennai, Hyderabad, Pune and Kolkata — with the remaining 30% coming from manufacturing and other industries. In the service sector, the IT-ITeS and BFSI industries contributed the most, at 35% and 16% respectively.

However, another global consultancy firm Cushman and Wakefield says that given the current global economic uncertainty, IT-ITeS companies have been somewhat conservative in their expansion plans and are focussing more on consolidation.

As a result, companies from other sectors like consulting, BFSI, manufacturing, etc, seem to have been garnering more shares in the fresh absorption pie for commercial office spaces this year.

BFSI companies are most active in Mumbai and Pune, compared to other cities. The share of the BFSI sector in the total absorption for Mumbai has increased to 55% in the third quarter, up from the 22% in the previous quarter, while the share has been around 15% in Pune; the same has been around 3-5 % in other cities.

Bhola says consulting services have shown strong office space demand over the years, which has grown from nearly 3.8% of the total demand in 2009 to 13% in 2011. Therefore, the growth of commercial real estate demand depends principally on the growth of the service sector. Cushman and Wakefield also feel similarly.

How FDI in multi-brand retail will open up opportunities for real estate sector - The Economic Times
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