Project report

On
INVESTMENT OPPORTUNITIES IN MAJOR CITIES IN
INDIA AND USA
Mumbai University
In practical fulfilment for the degree
Of
Bachelor of management studies
By
Chippa Navinkumar Satyanarayan
ROLL NUMBER: 88
Under the guidance of Prof. Aswad Saudagar
Swayam Siddhi Degree College
BHIWANDI
2022-2023

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 Certificate
SWAYAM SIDDHI DEGREE
COLLEGE
BHIWANDI

This is to certify that Mr Chippa Navinkumar Satyanarayan

has contributed in successfully completing the project
entitled INVESTMENT OPPORTUNITIES IN MAJOR CITIES IN
INDIA AND USA
In satisfactory manner as a partial fulfilment for the course of
B.M.S for the session 2022-2023 of the Mumbai university.

Project guide head of department

External examiner principal

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List of contents

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 pg. 4
 Chapter 1: Introduction

Globalization and India In 1981, the Noble Prize winner James Tobin was asked
to explain the benefits of diversification in simple language. In response, he
stated “Don’t put all your eggs in one basket.” Institutional investors cite
diversification as one of the main reasons for globalizing their real estate
portfolios. The key benefits of a well-diversified portfolio are: reduction of
unsystematic risk, enhancement of returns and a hedge against losses. Modern
portfolio theory has had a marked impact on how investors perceive risk,
return and portfolio management. Since the advent of the Modern Portfolio
Theory, Real Estate has played an important role in investment portfolios
worldwide. Real estate has a stabilizing effect on a portfolio of stocks because
it does not fluctuate with the stock market as compared to other asset classes.
Many global institutions have been investing in the emerging markets as part
of the opportunistic component of their overall portfolio allocation strategy.
The emerging market trend has accelerated in recent years in part due to the
yield compression in the developed markets. Prudent allocation strategies that
include emerging markets in a well-balanced global portfolio can enhance
returns, improve diversification and decrease risk by providing exposure to
growing economies not directly tied to the cyclicality of the western real estate
markets. Various studies have shown that the share of inflows to emerging
markets real estate still represents only a small percentage of global capital
flows. However, given the growth potential and favourable demographics of
emerging market countries, these countries are likely to play an increasingly
important role in the global real estate context. With a population of over 1
billion and forecasted GDP growth rate of 7.7% India has been a major
beneficiary of the “Globalization of Real Estate” (Pramerica, 2009). The Indian
real estate market has experienced a dramatic surge in the past five to seven
years, with growth rates estimated at close to 30% per annum. India’s real
estate boom owes as much to its booming economy and supportive
demographic profile as it does to a greatly liberalized Foreign Direct
Investment (FDI) regime. Real estate in India remained a restricted sector until
2005, when liberalization measures came into full force. In 2005, the

 pg. 5
Government of India issued a landmark policy document titled “Press Note 2 of
2005”. This policy document considerably eased the restrictions on foreign
investments in Indian real estate. Since 2005 however, restrictions have been
progressively lifted or minimized. FDI in Indian real estate is now encouraged
and this has gone a long way in further enhancing the accessibility of foreign
investment into Indian real estate, compared with the far more restrictive
environment just a few years prior. Data from India’s Department for Industrial
Policy and Promotion (DIPP) and Security and Exchange Board of India (SEBI)
estimates that over $15 billion was invested by foreign investors in Indian Real
Estate from 2005 till date. In the same period, total institutional investment
into the Indian real estate market has exceeded $25 billion. (Jones Lang LaSalle
Meghraj, 2008) A study carried out by Ernst and Young, has analysed the
various factors driving real estate in India. (Ernst and Young, 2005) The study
concludes that India’s macroeconomic fundamentals are strong and the
changing economic profile and demographics augur well for all segments of
the industry. Some of the broad themes for each real estate sector are:
 Residential – changing demographics and access to cheap credit;
 Office Space – information Technology and business process outsourcing;
 Retail – new retail formats and entry of global retail brands;
 Hotels – domestic business travel and domestic tourism; and
 Industrial Warehouses- organized retail and organized logistical services

1.1 Research Outline

The published academic literature focuses on “international diversification”
and “Indian real estate opportunities” in isolation. This thesis addresses the
above issues in conjunction by examining the central question “What
opportunities in India have caused global capital to flow into Indian real
estate?” The research seeks to understand the drivers behind recent capital
flows into Indian real estate. Following from the main question, the thesis
addresses the following related issues:
 What is driving Indian real estate? Is it primarily driven by global capital
flows or are local investments the major driver?

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  With respect to geography and property sectors, what were the
opportunities and expectations that led people to invest in India from 2005-
2008? Have the expectations been realized?
 What future advice can be provided to prospective investors in terms of
investment sectors, investment structures and partnership formats?

Identifying the drivers behind real estate investments in India has huge
implications for the future. These drivers might help dictate and direct, future
investment flows into the different real estate sectors 10 in India. This
information would be very useful for:
 Foreign and domestic institutional investors, who can use this information
to formulate their future strategies for direct and indirect investment into
Indian real estate; and
 Real estate developers in India who want to understand what kind of
investment the “money” is chasing.

1.2 Research Framework and Thesis Flow

When analysing opportunities in emerging markets, decision makers need to
consider a variety of macroeconomic variables in addition to the
microeconomics of individual deals. Global factors, as well as local factors, are
relevant whilst providing context to an investment opportunity in an emerging
market. The research framework used by the author of this paper revolves
around three major topics

 Globalization of real estate and implications for India as an emerging

market;
 India economic analysis; and
 The Indian real estate opportunity.

Global Capital Drivers, India Country Drivers and India Real Estate Drivers form
three broad groups of external variables that combine to determine the
attractiveness of the Indian real estate to foreign investors. These external

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variables are typically external variables that cannot be controlled by an
investor. By combining all these variables, an investor can determine the risk
profile of the investment and hence take appropriate steps to mitigate those
risks.

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 Chapter 2: Globalization of Real Estate

In terms of global real estate investment, the world is indeed becoming “flat”
(Friedman, 2005). Barriers to international real estate investment continue to
come down. Investors around the world are thinking globally and have become
more willing and even eager to own foreign assets. Real estate best practices
in various countries are being transferred strategically to other countries by
global managers. However, many aspects of real estate remain local, as
significant differences exist in local conditions. Prior to analysing the drivers of
global capital, it is important to understand the recent trends in global real
estate capital flows. Capital flows have been steadily on the rise in the recent
past (Jones Lang LaSalle, 2008). Cross-border investment as share of the total
investment in global private commercial real estate has been increasing since
2003

Chart Title

800

700

600

500

400

300

200

100

0
2003 2004 2005 2006 2007 h 2008

domestic intra-regional inter-regional

Source: jones Lang LaSalle

Global direct commercial real estate investment totalled a record USD 759
billion in 2007, an 8% rise on volumes in the same period last year. For the full
year 2006, this figure was USD 699 billion. In terms of recipients of this flow,
Asia Pacific real estate markets in particular witnessed a significant increase in

 pg. 9
Cross-border interest. According to the latest available data, cross-border
investment activity continued to account for almost 30% of total transaction
volumes as of early 2008.
The economic growth of emerging markets is one of the prime causes for these
increased capital flows. In recent years, while the developed economies of the
U.S., Europe and Japan have grown in the range of 2-3 percent, the emerging
economies has grown at a far faster pace with China and India growing close to
10%. (Deloitte, 2008).
2.1 Higher Returns
Investment opportunities in developed countries in the world are subject to
different economic conditions than those prevalent in developing countries,
leading to different returns by country. The degree of correlation of these
returns has major implications for portfolio diversification. There is potential to
seek higher average returns and lower volatility. Further, emerging countries
provide capital growth opportunities rather than pure income generating
opportunities. In faster growing economies, the demand for real estate rapidly
expands, leading to significant unfulfilled demand in several sectors. This
demand-supply mismatch causes properties to appreciate in value. In many
emerging countries, the capital markets are typically underdeveloped. An
investor with access to capital markets can make investments that a domestic
investor with no, or limited, access to capital markets would be unable to
undertake. Such opportunities typically offer very high returns due to lack of
available market players to correctly price the given real estate opportunity.
2.2 Inflation
An inflation hedge is a protection against the loss of purchasing power as
inflation occurs. A hedge is effective when the real return of the asset is
independent of the rate of inflation. Real estate appears to provide a good
long term hedge against inflation. (ING Clarion, 2008 and Prof. Dr. Klaus
Spremann, 2003). It is natural to conclude that domestic real estate is a better
hedge against domestic inflation than international real estate. However,
considering international asset classes, private real estate is a superior inflation
hedge to other asset choices such as stocks and bonds (ING Clarion, 2008).

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2.3 Expanded Real Estate Universe
Every investor seeks to maximize return over the long term. ING Clarion (2008)
points out that sometimes domestic investors will be constrained by the size of
their domestic markets. By consideration of international real estate, investors
greatly increase their opportunity to maximize alpha. The pie of global real
estate is continually expanding

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 Chapter 3: India Country Analysis

India occupies 3,287,263 Sq km of land area (57% is agricultural and 16%

forest). It is strategically located at the head of the Indian Ocean dominating
the South Asian subcontinent. Its unique location places it at the heart of
important Indian Ocean trade routes
This chapter focuses on India as a destination for investment. The analysis in
this chapter forms the second part of this paper’s research framework
India is known for the diversity of its culture, for the inclusiveness of its people
and for the convenience of its geography. Today, the world’s largest
democracy has come to the forefront as a global resource for industry in
manufacturing and services. Its pool of technical skills, its base of an English-
speaking populace with an increasing disposable income and its burgeoning
market have all combined to enable India emerge as a viable partner to global
industry. India is a fast-growing economy with a robust financial system and
stable policy environment. India’s independent institutions guarantee the rule
of law. (Investment Commission of India, 2008)
The main strengths of Indian economy are (Jones Lang LaSalle, August 2008):
 7th largest country by area;
 Largest democracy in the world;
 Economy is worth approximately US$ 3.4 trillion pa, 4th largest in the world
on a PPP basis;
 Agriculture represents 18% of national GDP, industry 29% and services 53%;
 GDP per capita is circa $ 3,000 pa, significantly below the UK at $35,000 PA
and US at $47000 pa
 GDP accounts for 4.6% of global GDP;
 2nd most populous nation in the world with 17% of world population, 32% of
the population is under 15 years of age, 60% are less than 30 years with just
25% older than 40 years;
 Density of 329 people per Sq km, significantly above the US at 31 people per
Sq km;

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 Labour force of 516 million, second highest in world; and
 60% of workforce employed in agriculture, 12% in industry and 28% in
services.
3.1 Economic Growth
In the early 1990s, India undertook a major a round of liberalization reforms.
Prior to these reforms, socialist-oriented policies confined India's economy to
the so-called Hindu rate of growth of about 3%. As a direct outcome of these
reforms, India has been growing at nearly 8% every year since 2003/04,
reaching a peak of 9.7% in 2006/07
Although the initial reform process clearly propelled the economy to a stronger
growth trajectory, further reforms have been carried out at an inconsistent
pace due to the nature of India’s coalition governments. Despite these
limitations, strong domestic demand and increasing levels of domestic and
foreign investment have ensured that the economy continues to perform well
despite inevitable cyclical downturns. (Economist Intelligence Unit, 2008).
According to the IMF, India is the world’s 4th largest economy when measured
on a purchasing power parity (PPP) basis. In 1992 India accounted for 2.9% of
global GDP, by 2007 this had risen to 4.6%. (IMF, 2009). Post-liberalization,
India’s credit score has also dramatically improved
EIU forecasts India’s GDP growth rate to come down to a modest pace of
around 5-7%, compared with the 8.9% average recorded between 2003 and
2007. By 2013, India is expected to contribute around 5.6% of global GDP.
Research by Goldman Sachs (2006) suggests that India will become the world’s
third largest economy behind the US and China by 2035 (in PPP-adjusted
terms), based on an assumed growth trajectory of 5.3-6.1% per annum. India
will overtake France and Italy by 2020, Germany, UK and Russia by 2025, and
Japan by 2035. India is viewed as a key element in the ‘‘BRIC’’ (Brazil Russia
India China) economies, which are seen as key emerging markets playing an
expanding role in the global markets. By 2050 India is predicted to be the most
populous in the world with 1.6 billion people, overtaking China’s 1.4 billion.
The number of cities with a population over 1 million is expected to double to
70 by 2025 (Jones Lang LaSalle Meghraj, 2008).
3.2 Growth Drivers

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The key drivers of the Indian economy that are relevant from a real estate
viewpoint are:
 Rising consumption;
 Knowledge and service economy;
 Demographic dividend;
 Urbanization and household formation;
 Large foreign capital inflows
In comparison, manufacturing and agricultural output are relatively small
contributors at under 20% each. Within the services sector, the Financial,
Insurance, Real Estate and Business (FIREB) sectors are clearly the main
contributors. (Pacific Star Group, 2008). FIREB’s contribution to GDP growth
has grown steadily, in part reflecting a surge in the entry of global financial
institutions. The knowledge-intensive Information Technology (IT) and
Information Technology enabled services (ITes) industries are also a growing
contributor to India’s economic growth. India has an impressive track record in
the knowledge based IT industries. One-fifth of Fortune 500 companies have
set up R&D centres in India. 220 of the Fortune 500 companies source software
from India. The Indian IT industry is expected to grow to US$77 billion by 2010
(Investment Commission of India, 2008).
India's young work force is expected to peak in 2040. India will need to find
jobs for its young people and these jobs will be an important economic driver
for the next 40 years. The largely English-speaking population is also an
advantage for India over China, as both India and China continue to engage the
developed world for increased foreign capital injections and international
trade
Urbanization: In India, urbanization adds about 1 percentage point to growth
each year simply from productivity gains from the movement of rural workers
to urban areas. The number of cities with populations above 1 million in size
will nearly double by 2020, and may increase four-fold by 2050.
3.2 Capital Flows
Reflecting the potential for India’s growth, the world has woken up to the
power of India. Lately, the country has seen large investment flows and
increasing foreign trade. Roughly a third of Fortune 500 CEOs are coming to

 pg. 14
India every year to explore business opportunities. India is benefitting from
globalization, (more trade, more capital imports and significant knowledge
transfers) which has been pushing up growth rates. (Investment Commission of
India, 2008)

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 Chapter 4: Real Estate in India

As discussed in chapter 2, investors are increasingly looking to the emerging

markets as alternate global avenues for real estate investments. Chapter 3
described why India has emerged as a favourable investment destination.
India’s favourable demography and strong economic impetus have made the
country an attractive place for property investors. This does not mean,
however, that investment in Indian real estate is risk-free. In light of the overall
economic picture and the rapid escalation in prices in real estate over the last
few years, many real estate markets in India are currently undergoing a price
correction. However, there still exists a fundamental demand-supply
imbalance and real estate remains an attractive longer- term investment
prospect. Now that India is on the radar of global investors, it is important to
understand the opportunities and challenges of Indian real estate investments.
India has been attracting global real estate investors primarily on account of
the following:
 Long term demand drivers in all real estate sectors;
 Improving market transparency;
 Attractive risk – return trade-off;
 Liberalized government regulations.

This leads us to the third part of this paper’s research framework as shown in
diagram

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 India Real Estate Attractiveness

India Real Estate

Market
Attractiveness to
Foreign
Investors

India Real Estate Drivers

Sector and Risks / Regulations

Geographic Transparency Returns
Drivers

This chapter provides an overview of real estate market in India in the context
of this paper’s research framework.
4.1 Sector and Geographic Drivers
Cities form the hub of all development in India. According to the last official
estimate by the Census of India, there were a total of 27 cities with more than
one million inhabitants in 2001, in which nearly 75 million people lived. By
2005 this had risen to 35 cities with a population of more than one million and
almost 500 cities with at least 100,000 inhabitants. The Mumbai and Delhi
regions alone are home to almost 20 million people each. But these staggering
figures must not be allowed to detract from two facts. First, India is still a
predominantly rural society. While more than 300 million Indians now live in
an urban environment, this means that nearly 800 million people are still at
home in rural areas. The United Nations Population Division (UNDP) expects
the degree of urbanization to grow over 40% by 2030, implying that urban
population will grow by 2.5% per annum in the next 25 years. Hence, while the
rural population increases only marginally, urban population will double by
2030 to around 600 million people. Land is a scarce resource in India – driven
by very high population density. India’s population density more than 10 times

 pg. 17
that of U.S. and more than twice that of China. Projected population growth of
54% in next 43 years (CAGR. 1%) and growing urbanization are expected to
continue to drive the property price increases in India.

country Population(mn) Area of Population Urbanization

country Density
2000 2050 Square Per sq km.
km.
China ex 1318 1437 9571785 138 44%
HK
India 1132 1747 3287576 344 28%
Indonesia 232 297 1904561 122 42%
United 302 420 9629047 31 79%
states
France 62 70 551497 112 77%
United 61 69 244878 251 90%
kingdom

For the purposed of this discussion, it is important to understand how Indian

cities are categorized. Based on the maturity of the different sub-markets,
cities are divided into 3 tiers

 pg. 18
 Category cities Characteristics

Tier1 Bangalore, Mumbai and Fairly well established

NCR real estate market
Demand drivers quite
pronounced
Tier2 Hyderabad, Chennai, Growing ral estate
Pune and Kolkata markets experiencing
heightened demand
and investments
Tier3 Chandigarh, Ludhiana, Real estate markets yet
Lucknow, Guwahati, to establish perceived
Bhubaneswar, Jaipur, to have substantial
Ahmedabad, Surat, potential demand
Nagpur, Indore, Goa,
Visakhapatnam,
Mysore, Coimbatore,
Kochi, Vijayawada,
Mangalore, Trivandrum
and baroda

India’s macroeconomic fundamentals are strong. The changing economic

profile augurs well for all segments of the industry. The various factors driving
Real Estate in India are (Ernst and Young, 2005 and Cushman Wakefield, 2008):
 Residential –changing demographics and access to cheap credit;
 Office Space – information technology and business process outsourcing;
 Retail – new retail formats and entry of global brands;
 Hotels – domestic business travel and domestic tourism; and
 Industrial Warehouses – organized retails and organized logistical services.

The pan-India demand projection for 2008-2012 across various segments

(excluding industrial) is expected to be approximately 1,098 million sf. The
residential segment continues to drive real estate demand with 687 million sf,
contributing 63% throughout the term under consideration. Despite the
expected slowdown in the office market, the demand for commercial office
space is projected to be 243 million sf, which is around 22% of the total

 pg. 19
demand projection for the next five years. The retail and hospitality segments
are expected to constitute 95 million sf (9%) and 73 million sf (6%) of this total
demand, respectively, driven by an increase in income levels as well as by
accelerated travel in the domestic and international sectors. It could be
inferred that since housing has a high certainty of exit and high latent demand,
this sector will be in high demand by foreign investors. The top seven cities in
India account for nearly 80% of the pan-India demand with a projected
demand of around 877 million sf. (Cushman and Wakefield, 2008). For further
details of this demand forecast
Residential Office Retail Hospitality

rank Estimated rank Estimated rank Estimated rank Estimated

Demand Demand Demand Demand
(mln sf) (mln sf) (mln sf) (mln sf)
Bangalore 3 107 1 51 3 11 2 14
NCR 1 114 2 48 1 19 1 17
Chennai 2 108 3 33 5 6 4 8
Mumbai 5 41 4 23 2 15 3 12
Pune 4 67 5 21 7 8 6 4
Hyderabad 7 61 6 21 6 10 4 8
kolkata 6 30 7 7 4 10 6 4

It is important to understand the demand drivers for each real estate sector in
further detail (Cushman and Wakefield, 2008).
Residential: The total demand estimated for the residential segment is
approximately 687 million sf across India, of which nearly 77% is accounted for
by the top seven cities. NCR, Bangalore and Chennai are expected to make up
the three largest markets for generating this demand. The growth drivers in
the residential market are clear:
 Shortage of affordable housing supply;
 Reduction in household sizes as result of a structural shift from the joint
family system to a nuclear family system;
 Improved affordability and availability of housing finance (See Exhibit25); and
 Enhanced urban infrastructure.
Commercial: The demand for commercial office space is estimated to be
approximately 243 million sf. Commercial real estate demand is essentially
driven by the IT industry and other general economic factors such as growth,
 pg. 20
infrastructure developments, availability of human resources and state level
incentives to encourage investment. Bangalore, NCR (Delhi) and Chennai are
expected to make up the three largest markets for generating this demand.
Some of the key drivers for future office space demand are:
 Growth of IT and service sectors;
 Emergence of secondary growth centres/ integrated townships;
 Micro-pockets of undersupply; and
 Emergence of special export zones (SEZ).
Retail: The projected retail demand figures (essentially representing shopping
mall development) depict a large variation in demand among the Tier I, II and
III cities. India’s retail sector is worth $350bln is growing 30%-40% per year.
With the share of organized retailers is expected to jump from current share of
4% to around 10% by 2010, there exists immense opportunity for retailers to
consider expansion plans in this sector. (Jones Lang LaSalle Meghraj, 2009).
NCR, Mumbai and Bangalore are expected to make up the three largest
markets for generating this demand. However, in the short term, many newly
developed malls are likely to lie vacant due to an oversupply, critical lack of
mall expertise and supporting infrastructure (Pacific Star, 2008). India’s mass
consumer population is still overwhelmingly steeped in more traditional retail
formats, including high street and other more localized shopping. The Indian
retail sector is in its early infancy. The potential is huge, but unleashing it will
be a mammoth challenge. The risk factors surrounding the retail investment
decision in India are manifold. Hospitality: The demand for the sector
continues to be fuelled by the rising number of business and leisure travellers
within the country as well as by a significant increase in foreign travellers
coming to India. The major cities are likely to generate demand of more than
60 million sf over the next 5 years. Bangalore, NCR and Mumbai are expected
to generate majority of the demand in this sector. Other cities, such as
Ahmedabad, Kochi and Goa, too are expected to add a significant share with
approximately 6 million sf of upcoming hospitality space in the rest of the
country. This is largely due to the government's initiatives to promote tourism
in the Tier II and Tier III cities of India. The total expected supply of hotel rooms
in the country is estimated to be 52,000 for the top cities by 2011, while the
existing stock stands at 64,000 rooms. Industrial Warehouses: Demand for
warehousing activities is driven by the demand for logistics activities. India’s

 pg. 21
logistics sector is worth $100 billion and is expected to be worth $385 billion by
2015, growing at a rate of approximately 20 per cent per annum. Warehousing
account for about 20 per cent of the Indian logistics industry and is growing
rapidly at the rate of 35 to 40 per cent per annum. This market segment is
estimated to grow from $20 billion in 2007-08 to about $55 billion by 2010-11.
Over the next five years, approximately 110 logistics parks and 45 million
square feet of warehousing space is expected to be developed across the
country. Majority of these logistics parks are expected to be developed in close
proximity to state capitals, with Mumbai, Kolkata and Chennai garnering the
major share of these developments. The key growth drivers in the sector are
(Cushman and Wakefield, 2008):
 Increased foreign trade and domestic manufacturing;
 Growth in organized retail;
 Increased outsourcing to organized logistical services by the way of Third
Party Logistics (3PL); and
 Reduction in logistics costs by way of improvements in transport
infrastructure and introduction of a simplified taxation regime.

4.2 Transparency
The results of Jones Lang LaSalle’s 2008 global real estate transparency survey
highlight India’s gradual improvement over the last six years. India has shown
steady improvement from being classified a “low transparent” market in 2004
to being a “semi-transparent” in 2008. The improvements are closely linked to
the forces of globalization, with foreign investors requiring much greater
transparency. India scores highest with regard to the presence of listed
vehicles. Its greatest challenges lie in the limited provision of high quality
market information and investment performance indicators. However, this lack
of reliable market information is not a feature of all sectors and cities. Reliable
market data is available for the office and hotel sectors in India’s primary and
secondary cities, compared to limited data availability for other sectors and
across tertiary cities. India is currently ranked in 50th position out of 82
markets globally with a ranking similar to China’s ranking

 pg. 22
4.3 Risk / Returns
A majority of the institutional funds seek IRR’s in 20–25% range given the
present market conditions and the future risk expectations

potential expected IRR

less then-20% 20-25% 25-30% 4th Qtr

Prior to 2005, new project developments were typically funded by Indian

developers’ own equity, some institutional debt funding and pre-sales. Exit
from these assets was almost inevitably through sale of the product on a
strata-titled basis to high net-worth Indian investors, Indian financial
institutions and corporations. Some funds have created exit options by putting
in place a “put option” on the local partner. On exercise of the “put option”,
the local partner is obligated to buy the equity stake of the fund for a given
price that effectively gives the fund a 20-25% IRR on its investment. However,
as the size of investments has grown significantly on the back of FDI inflows,
more exit options have emerged, such as in the form of public listings on
Indian or overseas stock exchanges such as Singapore and London AIM. In the
future, it is possible that other exit routes might emerge such as secondary
market sales to investors —like Real Estate Investment Trusts (REITs) or Real
Estate Mutual Funds (REMFs) or Foreign Institutional Investors. There has
already been considerable discussion regarding allowing REITs and REMFs in
India, although regulations are yet to be formalized. Judging from the
experience of other countries that have introduced REITs and REMFs, such a
move helps in the development of a strong and liquid secondary market for

 pg. 23
real estate assets. A strong secondary market creates exit options for private
equity funds as well increases the depth of the real estate market and its
conjoint securities market. Until the time these new routes are allowed,
institutions would have to be content with the existing options of exit from
their respective investments. (Jones Lang LaSalle Meghraj, 2008). Although
Indian real estate investments provide attractive returns, investors have to live
with some significant risk. The main risks are (Ernst and Young 2005, Jones
Lang LaSalle Meghraj 2008 and Deutsche Bank 2006):
4.4 Regulations
Government regulations have had a tremendous influence on the real estate
investment opportunity in India. The current regulatory regime restricts
investments in certain sectors and in certain financial instruments. It is critical
to understand the intention and spirit of the present regulations so that
investments can be structured appropriately
FDI Regulations: 100% Foreign Direct Investment (“FDI”) is allowed under the
automatic route to develop townships, built-up infrastructure and
construction-development projects, including, without restriction, housing,
commercial premises, hotels, resorts, hospitals, educational institutions,
recreational facilities, and city and regional level infrastructure. A foreign
investor must develop a minimum of 10 hectares for serviced housing plots
and 50,000 sq. meters for construction-development projects.
The regulation prohibits repatriation of the original investment for a period of
three years after capitalization. However, the foreign investor may apply to the
Foreign Investment Promotion Board (“FIPB”) for a waiver of this condition.
The regulation mandates that 50% of the project must be developed within
five years from the date all statutory clearances are obtained. The regulation
also retains the condition of minimum capitalization of $10 mln for wholly
owned subsidiaries and $5 mln for joint ventures with Indian partners.
However, these funds must be brought in within six months of commencement
of business.
Regulations have been established for hotel, industrial and special economic
zones (SEZ) projects, wherein FDI up to 100% is permitted under the automatic
route without the restrictions as stated above i.e. investors can invest in ready
assets in these sectors.

 pg. 24
Pricing: The price at which a foreign investor invests into an Indian company is
regulated. Accordingly, shares in an unlisted Indian company may be freely
issued to a foreign investor, subject to the following conditions being satisfied:
 The foreign investor subscribes to the Indian company's shares at a price that
is not lower than the floor price computed on the basis of the "ex-CCI"
(Controller of Capital Issues) formula which is the equivalent to the average of
Net Asset Value per share and Profits Earnings Capacity Value per share;
 The consideration for the subscription is brought into India prior to or at the
time of the allotment of shares to the foreign investor.
If any of the above conditions are not complied with, then the prior approval of
the Foreign Investment Promotion Board (FIPB) and/or the Reserve Bank of
India (RBI) is required. However, if the foreign investor is a Foreign Venture
Capital Investor registered with the Securities Exchange Board of India (SEBI),
then the above pricing restrictions do not apply.
Debt – External Commercial Borrowings: Leveraging is a critical component in
structuring of real estate investments into India. Foreign debt structuring
would especially trigger certain additional compliances under the Indian
exchange control regime. Any debt to be taken by an Indian company from
foreign sources has to comply with the External Commercial Borrowing
Guidelines ("ECB Guidelines ") issued by the RBI. Currently ECB can be brought
in under the automatic route only in case of infrastructure projects, industrial
parks and hotels. In case of integrated townships, ECB’s can be brought in
using the approval route. Hence for practical purposes, external foreign debt is
inaccessible for most real estate projects.
Financial Instruments: FDI can be routed into Indian investee companies by
using fully and compulsorily convertible preference shares or fully and
compulsorily convertible debentures. Non-convertible, partially convertible or
optionally convertible preference shares and/or debentures shall be
considered to be ECB and therefore, be subject to the aforesaid ECB
Guidelines. These pseudo-equity instruments must be converted to equity
prior to repatriation.
Venture Capital Regime: In April 2004, SEBI opened a small window for real
estate investments under the Venture Capital Fund (VCF) and Foreign Venture
Capital Investor (FVCI) regime. However, it is pertinent to note that since the
last 2 years, the Securities and Exchange Board of India (SEBI) has not granted

 pg. 25
any FVCI approval to any of the foreign investors for investing in real estate
sector in India. Also “Real Estate” is presently not included in the activities
eligible to receive the much-coveted “pass-through” tax status. FVCIs benefit
from free entry and exit pricing. SEBI has also exempted transfer of shares
from FVCIs to the promoters from the public offer provisions under the
Takeover Code. FVCIs registered with SEBI have been accorded "Qualified
Institutional Buyer" status and would accordingly be eligible for subscribing to
securities at the initial public offering of a Venture Capital Undertaking through
the book-building route. Structuring: Some of the jurisdictions commonly used
for investment into India are Mauritius, Cyprus and the Netherlands. Singapore
and the United Arab Emirates also have favourable treaties with India, but are
less popular. The India-Mauritius tax treaty can be used to maximize the
capital gains tax exemption benefits arising from exit by the Mauritius Fund.
The Mauritius route is by most investors to purchase equity shares and/or fully
and compulsorily convertible preference shares (FCCPS) in the local investee
company. This structure, besides being legally compliant, is also tax-efficient
because, at the time of exit of the Investor, the capital gains tax as arising out
of the transfer of the equity shares and/or FCCPS by the investor is exempt
from tax on account of the India-Mauritius tax treaty. The India-Cyprus tax
treaty can be used by an investor to purchase hybrid debt-equity instruments
in the form of fully and compulsorily convertible debentures (FCCDs). This
structure complies with the law and at the same time enjoys the tax deduction
benefits available to debt instruments. As per the India-Cyprus tax treaty, the
withholding tax rate on the interest paid on the FCCDs by the Indian company
is reduced to 10% as against the standard domestic rate of 20%. By using the
various tax-friendly jurisdictions, the following structure as shown in is one of
the most popular legal, tax and exchange-control efficient structures for
routing investments into India
The previous sections have described the opportunities available in various
sectors, the improving transparency levels, the risk/return trade-off and the
enabling regulations. It is pertinent to also understand the flow of capital since
2005 and the present state of investment environment
4.5 Real Estate Capital Flows
Pramerica Real Estate Investors estimates the total size of Indian real estate
market at $182 bln (Pramerica, 2009). The European Public Real Estate
Association estimates the size at $157 bln (EPRA, 2009). Institutional funds

 pg. 26
have come in through various routes, including private equity, public equity
and private debt offerings.
Private Equity Capital and Foreign Direct Investment:
Since the liberalization of FDI in Indian Real Estate increased from $0 bln per
year to approximately $4.5 bln in the year 2009. In spite of the worldwide
credit crisis, the investment for the current financial year will be higher than
the previous 2008 financial year. As per DIPP, the total cumulative FDI in real
estate and construction since 2005 is $11.1 bln (See Exhibit 31). Total
cumulative FDI in hotels, which is classified separately, is $1.3 bln The
estimated number of private equity funds that are operational in India exceeds
150, with around two-thirds being in the ‘active category’. A majority of global
real estate investors including foreign pension funds and endowment funds
have been investing through real estate funds rather than taking direct
exposure in deals. Investors have invested using the following vehicles:
 Global Real estate Funds without specific India allocations (e.g. Merrill Lynch,
Morgan Stanley)
 International India -specific Real Estate Funds (e.g. J P Morgan, AIG)
 Domestic Real Estate Funds (e.g. HDFC, ICICI, Kotak, IL&FS)
 Direct Investments in partnership with a local partner (e.g. Hines, Tishman
Speyer)
Domestic and international private equity funds in India have been very active
with a number of transactions taking place in the past three years at entity,
portfolio and special purpose vehicle (SPV) level. However, most of the deals
are still being done at the SPV level, as these investments are essentially
individual projects. SPV level deals cater to a more focused investment
approach apart from giving investors more control over the investment
Venture Capital Funds: As per SEBI data available as of December 2008, the total real estate investment by
foreign venture capital funds (FVCI) in India and domestic venture capital funds (VCF) was Rs 4,887 Cr and Rs
1,424 Cr respectively totalling Rs 6311 Cr or approx. $1.35 bln.

Bank Debt: As on March’08, the outstanding gross bank credit (GBC) by

scheduled commercial banks to the real estate sector stood at approx. $12.5
bln, rising 40% from $9 bln in the previous year. In the financial year 2009, the
GBC increased by 46% to $18bln. The total real estate exposure of banks also
increased from 2.8% to 3.3% of gross bank credit in March ’09 as the RBI

 pg. 27
relaxed certain norms for realty companies towards the end of the financial
year 2009
4.6 Current Environment India’s growth rate is expected to slow to 7% from
9% levels in previous years. There is a decline in foreign direct investment
flows and bank credit in line with global trends. As a result of the slowdown,
there currently exists an oversupply situation in almost all sectors. This has
caused the markets to downward correct to the tune of 20-30%. Supply
overhangs have been accumulating in some cities, although this appears to be
most pronounced outside the key metros. This oversupply is most pronounced
in the commercial and retail sectors. In the residential sector, there is a
temporary loss of demand in the premium-housing segment but demand for
affordable housing is stable. The hospitality sector is presently undersupplied.
However, at present the market is in recovery
Some developers and fund principals are facing an uncomfortable situation
due of reasons such as (Deutsche Bank, 2009):
 Valuation of Land Banks: Many joint venture deals were done, based an
assumed land bank valuation at the peak of the market cycle. Subsequently,
prices have corrected significantly. Funds and developers will jointly need to
address this issue going forward.
 Leverage Covenants: In many cities, the demand for real estate has
drastically reduced and asset prices have fallen. This has led to delays in
absorption, along with developers being in default of their debt to value
covenants. Funds that have committed to a drawdown schedule are in a
difficult situation whether to continue funding to the project.
 Asset Liability Mismatch: While inflows are now falling with demand, cash
outflows are ballooning with a spike in costs, area under construction and
payables to banks.

 pg. 28
 Chapter 5: Data Analysis

The following sections summarize interviewee responses to the questions

listed in the previous section. Identities of the interviewees have not been
disclosed; however, a tabulation of the responses of each participant is
provided in Appendix B. Frequency of responses is denoted in brackets
throughout the analysis
5.1 Global Capital Drivers and India Country Drivers
5.1.1 Reasons for investing in India
There seems to be a couple of key factors that influenced institutions to invest
into India. Many (21 of the 27) institutions mentioned that global capital
drivers were influential. On a macro level, global institutions increasingly made
investments in the emerging markets to diversify risks. The BRIC report
(Goldman Sachs, 2003) was an important catalyst.
A vice president of a leading global real estate fund explained,
“The investment bank had been actively investing in emerging markets. We
were looking to invest in Indian real estate prior to 2004 in hospitality and IT
Parks. The 2005 regulations were key to opening up India to global investors.
As a global fund, we have a mandate to deploy growth capital where we
deem fit.”
A director of global real estate platform rationalized the decision to enter India
very succinctly,
“We are a global real estate platform. We had no presence in India. We were
approach by an Indian industrialist to join hands to create an Indian real
estate investment platform. At that time, the global situation was extremely
conducive to raising money for India. The BRIC story was oversold. Many of
our global competitors were also raising money to invest into India.”
A vice president for global real estate private equity firm explained,
“There was excess liquidity in the world in 2005. We had successfully
invested in China and the strategy was to replicate the same model in India.”
A chief financial officer of one of India’s largest real estate funds stated,

 pg. 29
“The main driver was global investors wanted India on their global footprint.
Regulatory changes in India enabled these investors to invest in the Indian
real estate opportunity.”
The interviewees’ main considerations echo the analysis presented in chapter
3 and 4:
 High rate of economic growth;
 High proportion of economic growth due to internal demand and
consumption;
 Young population demographic;
 Increasing urbanization trend;
 Easing of regulations; and
 High returns.
A chief financial officer of a UK based private equity fund explained,
“We believe in the BRIC story. India has great drivers for residential – young
demography, middle class, availability of housing finance, demand-supply
mismatch. Also our promoter has India links. So it was great investment
proposition for our investors.”
A fund manager for an emerging market private equity fund explained,
“We had already been in PE business in India for past 10 years. We have a
deep understanding of the Indian markets. Our fund buys the India demand
theory of housing shortage, per capital office space, GDP growth.
Diversification of returns is an important reason for foreign investors to want
to invest into Indian real estate.”
A managing director of US based family office real estate organization stated,
“We have an emerging market focus. We didn’t like China due to political
risk, currency risk and unfriendly policies. India was a far more attractive
proposition.”
On a micro level, the long- term real estate opportunity was compelling. There
existed a demand-supply mismatch in all sectors of real estate. Coupled with
the inherent demand, there was a 10% spread between ex-ante returns in
Indian real estate and ex-ante returns in western developed real estate
markets. In India, institutions were able to target deals with a pre-tax 20-25%

 pg. 30
IRR in local Indian currency. On the regulatory side, press note 2 of 2005 provided
institutions the required access by the easing the restrictions on foreign
investments in Indian real estate. Simultaneously, the Reserve Bank of India
also restricted commercial bank lending for the acquisition of land. These
factors created the perfect environment for channelling public equity and
private equity into real estate projects.
Country manager for a global alternative investment management firm stated,
“India offered high returns with manageable risks. There was a wide spread
between Indian real estate returns and US real estate returns.”
A CEO of a global real estate investment and development firm stated,
“Our objective was to seek pure alpha.”
A majority (13 out of 21) of foreign institutions interviewed, already had other
business interests in India before expanding into real estate. Utilizing their
local linkages, these institutions were able to rapidly deploy their funds.
Institutions without prior linkages have adopted a more conservative approach
and as a result made fewer investments. All the domestic institutions
interviewed, by virtue of having strong local connections, have been far more
optimistic and made a larger number of investments. To illustrate the point,
the domestic institutions on average have done 10 transactions, foreign
institutions with prior India business interests have on average done 4
transactions, and foreign institutions without prior India linkages have on
average done 1 transaction.
5.2 India Real Estate Drivers
5.2.1 Investment Strategy
Initially, investors (17 of 27 interviewed) started out with an asset neutral
strategy and intended to invest primarily in the Tier 1 and Tier 2 cities of
Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Pune. Institutions
(11 of 27 interviewed explicitly mentioned it) have preferred Special Purpose
Vehicle (project) level transactions rather than entity level transactions. Those
institutions that invested in developer entities said that they were essentially
looking at these entities as a portfolio of assets.
A chief financial officer of one of India’s largest real estate funds explained,

 pg. 31
 “We leverage our existing lending relationship with developers to fund new
projects. We were looking to invest in all asset classes in the top 7 major
cities of India. However given today’s environment, we are looking to only
invest in residential projects in Mumbai and Delhi. Our strategy is to use
existing knowledge of cost structures to ensure that our fund gets the best
deal.”
A vice president with one of the world’s leading real estate private equity firms
explained,
“We are not interested in 100 acre township projects. We prefer to invest in
projects with a 3-4 years manageable timeframe to exit. We don’t like to
invest in minority positions. Our preferred sectors are hotels and office
because of global synergies we have in those sectors. Presently we are averse
to retail. Geographically we are focused on city centre locations in the big 5-6
cities. We would like to invest in built and ready assets.”
An executive vice president of a global private equity firm specializing in real
estate investment explained,
“We have an asset agnostic strategy. We believe that all sectors have
lifecycles. We like to enter specific sectors when the sector is near the trough
in the cycle. In India, we prefer investing in cities with a population of 3
million or greater. We prefer co-investment with other funds. Co-investing
helps in dividing the risks.”
In some cases, entity level transactions were strategic transactions, intended
to gain a first mover advantage in acquiring a sizable stake in well-known
developer brands.
A vice president of a leading global real estate fund explained,
“It was our intention to do 10 large ticket deals. Given the size of the
commitment, entity level deals were a natural extension of this strategy. It
was a strategic board level decision that we should invest in strong brands
and management. At the time, when the opportunity in FDI opened up, SPV
level ticket sizes were not attractive. Our focus was Tier 1 city developers.
Sector wise we like residential depending on the product and pricing. In the
commercial sector, it is important to conduct micro market studies regarding
IT sector demand, supply and stabilized absorption pattern. In retail, we feel

 pg. 32
that there are issues with tenant mix, retailer maturity, demand projections,
asset complexity
The market correction in 2009 has been an opportune time for investors to
rethink their investment strategies. Post the market correction, institutions are
underwriting transactions to stricter investment criteria. Whilst geographically,
the target cities still remains tier 1 cities, the residential sector is clearly the
most preferred sector (15 of 27 interviewed). In the commercial sector,
oversupply and lack of exit options are cited as the primary reasons for
deferring new investments. Presently, investors are also largely negative on
retail (10 of 27 interviewed were explicitly negative). The most frequently cited
reasons for this are inadequate number of retail anchors, maturity of retailers,
exit options and oversupply.
A managing director of a US based private equity real estate investment firm
explained,
“We are currently focused on residential development in the affordable
segment. We aim to build projects where the equated monthly instalment
(EMI) is 40% of the local household income of the area. Our target cities are
Tier 1 and Tier 2 cities with well-connected airports. We aim to diversify our
investments across various cities.”
A vice president with one of world’s leading financial management and
advisory firms explained,
“We will not invest in retail because of regulatory restrictions governing the
project size. Plus there is an issue with oversupply, maturity of tenants, and
number of available anchors. We are targeting warehousing projects in Tier
1, 2, 3 cities, hotels and commercial projects in Tier 1 cities, and residential
opportunities in Tier 1, 2 cities. Presently, asset management is also a big
focus.”
A chief investment officer of a global investment bank promoted fund
articulated their strategy,
“Our strategy is to invest into residential, office, IT SEZ, and hotel projects
promoted by Tier 1 large developers. We aren’t interested in retail projects
because the mall format in India is not fully developed. Retail malls are
plagued by strata-titles, inadequate parking and loading bays, inadequate
anchor tenants, and lack of transparency in reporting of retail sales. One

 pg. 33
change from the time we started the fund is that black box investing is gone.
Our investors want information about each deal that the fund is investing
in”.
In hospitality, investors generally prefer a portfolio rather than in just a single
asset due to the significant marketing advantage enjoyed by hotel chains.
Recent terrorism events have prompted investors to defer hospitality
investments
5.2.2 Legal Structure
For equity investments, Mauritius is most preferred route (26 of 27
interviewed) for routing foreign investments into India. Presently, investors do
not consider the Mauritius route to be risky. The fact almost all foreign
investments into India has been routed via Mauritius along with fact that there
are supreme court judgments in favour of the treaty, leads people to believe
that the government will not disturb the Mauritius treaty.
A country manager for a global alternative investment management firm
stated,
“Mauritius is the preferred route for routing equity investments. The risk
doesn’t seem high given the quantum of investment that has flowed into the
country through this route.”
A director for one of India’s largest private equity funds stated,
“There isn’t much risk with Mauritius. The India government is forward
looking. India requires $500 bln to its upgrade infrastructure. India is reliant
on external capital. One needs to ensure that cash flows are genuine i.e. no
round tripping of money from India.”
Some private equity funds interviewed mentioned that had successfully exited
investments in other industry sectors using the Mauritius route and hence
considered this route as a tried and test tax efficient route.
5.2.3 Partnering Issues
Beyond doubt, partnering with local developers is the most important issue
that funds need to pay attention to, whilst investing in India. For most of the
respondents, partner selection is more important than the financial returns on
the project.

 pg. 34
The criteria that funds consider most relevant whilst evaluating a developer
are:
 Execution track record capability (17 of 27 institutions explicitly mentioned
this), and
 Reputation and transparency (10 of 27 institutions explicitly mentioned this).
A director of global real estate platform elucidated about partners,
“First you need to ensure that the he is not a crook. Most developers have
bad reputations. He needs to have knowledge and operating experience in
the local markets. Lastly, the partner needs to be transparent in all his
dealings.”
A managing director of a global real estate private equity fund contended that
3P’s for partnering in India are,
”Project - should be in accordance with the market demand, developer
capability, Promoter – should have the requisite execution capability, and
Proposal – promote structure should be lucrative to all players”
A country manager for a global alternative investment management firm listed,
“A partner needs to have credibility, reputation, execution capability. Land
should have crystal clear title.”
A vice president for global real estate private equity firm explained,
“Our philosophy is that a good developer will be able to attract premium
prices. We seek comfort factor, personal track record, and a clean reputation.
We like to support young people with desire to succeed. At an organizational
level, we assess local knowledge, delivery capability, management and
branding.”
Funds want to ensure that their interests are aligned with that of the
developers. Funds try to ensure that partner developers have enough “skin in
the game” in the partnership structure.
A chief investment officer of a global investment bank promoted fund was
unambiguous as to what the most important criteria in partnering,
“Skin in the game is key. We don’t invest in projects to cash out developers.
Our interests need to be aligned.”

 pg. 35
The other qualities that funds consider most relevant whilst evaluation a
developer are:
 Past fiduciary experience;
 Local market skills including ability to access deals, aggregate land parcels
and ability to deal with local government authorities; and
 Experience in developing specific product types such as hotels, retail malls,
etc.
5.2.4 Risk Perceptions
The following were the most frequently cited risks affecting investments:
Execution Risk (9 out 27 interviewed explicitly mentioned this): Project
completion within specified timelines is the biggest risk facing existing
investments. Given the lack of experienced and organized building contractors,
this is a factor than lends a lot of unpredictability to the schedule of the
project. Most funds expect that their existing projects will not be completed
within the original timelines thereby affecting the IRR of their investments.
A managing director of a US based private equity real estate investment firm
explained,
“The execution ability of local construction companies is a huge concern.
Delays in execution will affect the timeliness of the project returns. There are
very few construction companies that have delivered 1mln sf in a year in the
past. Hence projects exceeding 1 mln sf need to be scheduled and phasing
carefully.”
Market Risk (9 out 27 interviewed explicitly mentioned this): The 2008
slowdown in the economy has affected the absorption schedules of many
projects especially in the commercial and retail sector. Coupled with the
slowdown, the recent downward revision in prices, has accentuated the
potential problems being faced by developers. If the markets don’t improve,
there is the distinct possibility that investors will end up losing up to 50% of
their investments.
A chief financial officer of one of India’s largest real estate funds explained,
“The main risk is market risk. Slow absorption and oversupply affects our
time period to exit.”
An executive vice president of a US based real estate organization explained,

 pg. 36
 “Most importantly, there is presently a lack of market depth to scale our
investments. It is difficult to deploy $1 bln in just development projects. The
market depth will improve once foreign institutions are allowed to buy ready
assets.”
Liquidity/Exit Risk (9 out 27 interviewed explicitly mentioned this): Residential
condominiums are self-liquidating; hence liquidity risk is not a concern in this
case. In the case of commercial and retail property, liquidity risk is a real
concern. As per current regulations, foreign investors are not permitted to
invest and trade in ready real estate assets in these sectors. Also, since real
estate mutual funds (REMF) and real estate investment trust (REIT) are not yet
operational, potential targets for these assets are domestic funds, non-resident
Indians (NRI) and domestic high net worth individuals (HNI). Since the target
universe is restricted, it poses a serious concern for holders of these assets to
sell these assets in a timely fashion.
A country manager for a global alternative investment management firm
stated,
“Exit risk is our biggest concern – Our returns will be affected if we can’t exit
in a timely manner. The second is currency risk. Given the recent volatility in
the rupee, we could make a 25% IRR, but with a 10% negative currency
devaluation we won’t be able to provide the desired return to our investors.
Honestly in today’s time, we’d be happy if we are able to just return capital
back to our investors.”
A CEO of a global real estate investment and development firm expressed
caution,
“Without liquidity for investment grade property, it will be difficult to exit
investments at the opportune time.”
Regulatory Risk (9 out 27 interviewed explicitly mentioned this): Many funds
have partnered with developers at the land acquisition stage. Some projects
require regulatory approvals for changing the use of the land. Funds believe
these approvals are taking longer than originally expected. Lack of timely
regulatory approvals for a project inevitably means that project will be
delayed, thereby affecting the overall returns on the project. Enforcing legal
obligations remains a very time consuming process in the country.

 pg. 37
Transparency Risk: The absence of timely information regarding supply,
absorption, prices and rents creates inefficiencies in the market. Absence of
accurate market information makes decision making very difficult. There is also
a shortage of professional due diligence and valuation institutions .

 pg. 38
 Chapter 6: Taking the long view

● Some property sectors may cool, including residential and industrial, while
others may heat up to historical average levels, such as hotels and retail.
● Returns and prices of most assets are declining as cap rates rise and
transaction volumes fall from record levels, while rent gains for others are
merely moderating as demand returns to a more sustainable pace.
Defying just about every prediction voiced during the terrifying and uncertain
days of the COVID lockdown that began in March 2020, U.S. commercial
property markets actually embarked on a remarkable run, with some of the
strongest returns, rent growth, and price appreciation rates ever recorded.
Not every property type, however: hotels endured their worst and most
sustained downturn in memory, while offices suffered an unprecedented and
significant cut in usage of space. And not every market: some of the nation’s
strongest gateway markets, like New York City and San Francisco, experienced
sharp outflows of residents, businesses, and tenants of all types. But overall
and across much of the United States, property markets far outperformed
expectations and historical norms.
And now, more than two years on, property investors and managers are
learning anew that whopping growth and profits eventually fall back to earth—
a “reversion to the mean,” to use finance jargon, or simply “normalizing,” as
numerous industry experts we interviewed put it. Some looming market
adjustments will be cyclical due to the weakening economic conditions that
most economists and real estate professionals expect, while others represent
more of a return to normalcy after all the pandemic-fuelled market distortions.
These market reversions will take several forms: prices of most assets are
declining as cap rates rise and transaction volumes fall from record levels,
while rent gains for others are merely moderating as demand returns to more
sustainable levels. Perhaps the biggest surprise is that these reversals of
fortune are hitting favoured property sectors like multifamily and industrial.
That does not necessarily mean the market corrections will be painful. In many
cases, recent losses in property value will only trim already healthy gains. But

 pg. 39
many indicators suggest that the (really) good times may be over, at least for a
while.

Importance of Issues for Real Estate in 2023

6.1 Housing Set to Cool

A finance executive with one national homebuilder told us, “We’re still selling.
It’s just not at the pace that it was selling before [the last two years], which
was a pace that you don’t typically see. So, the markets are more normalizing.”
Indeed, home rising sharply—a topic we explore in “Too Much for Too Many,”
our trend on housing affordability rising sharply—a topic we explore in “Too
Much for Too Many,” our trend on housing affordability sales—both new and
 pg. 40
existing—had an extraordinary 12-year run since bottoming out in the summer
of 2010 until the Fed started hiking interest rates in the spring of 2022.
But it’s not just home sales that are slowing. Virtually all aspects of the
housing market—both for-sale and rental—have been decelerating. New home
prices peaked in April 2022, while prices of existing homes likely peaked in
June after appreciation started to slow with the rise in mortgage rates.
Meanwhile, apartment rents have continued to push ever higher, but the pace
has been moderating in recent months. Construction starts also have slowed.
The National Association of Home Builders housing market index has fallen for
eight straight months through August 2022 to its lowest level since May 2020.
Emerging Trends Barometer 2023

This is not to say that we’re in a housing recession—far from it. Homes are still
selling at a healthy rate by historical levels, and home prices remain near
record levels. And while multifamily vacancies are at their lowest level in four
decades and rents continue to log new records every month, the rates of
increase have been slowing and are expected to decelerate further, according
to many experts we interviewed. “Maybe you don’t see the 10 percent–plus
rent growth in multifamily markets,” says the head of one institutional
investment advisory firm. “They should come back to more of a long-term
historical average of 3 percent to 4 percent, and maybe offset some of the
unaffordability in the country.”

 pg. 41
Indeed, housing markets may be partly victims of their own success as record
prices and rents mean fewer households can afford to buy homes or rent
apartments, particularly with mortgage interest rates and housing-related
expenses like utilities rising sharply—a topic we explore in “Too Much for Too
Many,” our trend on housing affordability.
6.2 The “Amazon Pause”
The white-hot industrial market also seems set to cool after several years of
unprecedented demand growth and rent gains that have pushed rents far
above prior records. Growth in e-commerce is slowing and giving back some of
the market share it captured from physical retailers during the pandemic.
Amazon, the largest warehouse user in the United States, has delayed
occupying numerous completed projects, trying to sublet many, as it slows its
physical growth—what some are calling the “Amazon pause.” Other major
retailers also have been cutting back their distribution expansion plans.
To be sure, the industrial sector still enjoys record-low vacancy rates, as
demand for high-quality, well-located logistics facilities has been running
ahead of the market’s ability to supply them. And investors are not ready to
abandon industrial or multifamily, both of which still reign at the top of the
heap in the Emerging Trends survey. Still, the ratings are a bit less exuberant
than last year, and these high-riding sectors do not look quite as invulnerable
as they had in recent years.
But even recognizing that industrial demand could ease at all from its torrid
growth is a change—still robust, but a bit closer to historical patterns. The
head of one investment management firm says, “While we still believe in the
fundamentals over the long term, there’s still cycles within the business and
therefore you could potentially see some oversupply in the industrial market
over a short period of time.”
6.3 Reversion UP to the Mean, Too
While some sectors will be trending down in some fashion, others will be
reverting up to more normal levels. Property fundamentals have been
improving for the battered hotel sector, especially hotels serving leisure
travellers, and there seems to be a growing consensus that the beleaguered
retail sector has been oversold in recent years. Says the head of advisory
services for a real estate firm, “I think we’ve had a little bit of a reset now

 pg. 42
where if you survived to this point in retail, the future probably looks pretty
good for you.”
6.4 The “Sugar Rush” Is Over
Property investment returns are primed for a reset. Earnings have been
unusually robust during the two years since COVID19 hit, driven by strong
property fundamentals and intense investor demand—as well as ultra-cheap
debt and the federal government’s three rounds of stimulus spending. Total
returns for the institutional-quality real estate in the NCREIF Property Index
(NPI) soared to over 20 percent in the four quarters through mid-2022, almost
three times the 20-year average
But returns will be coming down. The 43 economists and analysts surveyed in
October 2022 by ULI’s Centre for Real Estate Economics and Capital Markets
expect total returns to drop to 3.8 percent in 2023, and recover to a moderate
7 percent in 2024. That is to say, more normal returns.
That outlook tracks with the collective wisdom of respondents to this year’s
Emerging Trends survey. More than half believe that capitalization rates are
heading up next year and returns are coming down, primarily due to rising
“interest rates and cost of capital,” which was the top economic concern
voiced in our survey. After more than a decade of “lower for longer,” the Fed is
finally normalizing interest rates closer to historical levels. Those rising interest
rates are already driving up debt costs and thus the costs to acquire and
develop property, reducing leveraged returns.
At the same time, the federal government is done with providing stimulus,
indirectly reducing tenant demand for space. Unlike in the Global Financial
Crisis (GFC) and during the pandemic, “nobody’s coming to the rescue, and
now we got to take our medicine, and here it comes,” says the head of
research for an investment management firm. Thus, the government is turning
off both the monetary and fiscal spigots that had been supporting commercial
real estate and the economy overall.
The head of a development company summarized it like this: “I feel like we’ve
been on a little bit of a sugar high with this stimulus and cheap debt. There’s
going to be a slowdown. There’s got to be this normalization. So, what does
that mean? I think it’s going to be a little bouncy; it’s going to be a little bit
turbulent. But then we bottom out, and we start back into growth.”

 pg. 43
 Chapter 7: Still, We’ve Changed Some

● The pandemic forced structural shifts in how and where we live, work, and
recreate in ways that seem designated to endure.
● Online spending is receding from its pandemic peaks but is not likely to
revert to pre-pandemic levels. Business travel is unlikely to recover to pre-
COVID levels for at least several years, meaning business hotels, fine dining,
and conference facilities will continue to face challenges
● The greatest changes may be in how and where we work. The impact on
office use and leasing is still evolving, and a significant share of the existing
stock may need to be repositioned to remain competitive.
Even as property markets begin to “normalize” in many ways after some of the
disruptions of the past few years, we won’t be resuming our former lives in
some key respects. The pandemic forced structural shifts in how and where we
live, work, and recreate in ways that seem designated to endure at least at
some level, even if less extreme than our behaviours during the peak of COVID
Many activities have already returned to pre-pandemic levels, of course,
especially those involving socializing. Americans are back to attending concerts
and sporting events, and leisure travellers, at least, have returned to the
nation’s roads and airways. Meanwhile, we are obviously tired of exercising
and cooking alone at home, so gym memberships have returned to historical
levels while restaurant sales are back above groceries, as they had been since
2015 until COVID shut down dining establishments
Yet many other activities—and how we use space—seem unlikely to return to
the old ways. The pandemic changed us. Says a director of an investment
management firm, “People are looking to achieve their lifestyle choices more
quickly. They’re less focused on their employer and more focused on their
personal lifestyle. And that is changing how apartments are being viewed, how
single-family residential is being viewed, how office is being utilized, and where
corporations are heading.”
7.1 In-Store versus Online Shopping

 pg. 44
Much of our spending shifted online during the pandemic. The e-commerce
share of retail sales (excluding auto-related sales) shot up from 13 percent in
2019 to a peak of 20 percent during the initial national lockdown. That drained
a lot of spending from physical retailers and squeezed the nation’s shopping
centres
The online share inevitably waned as the economy reopened and more
consumers felt comfortable shopping in stores again. But don’t expect online
spending to drop down to pre-pandemic levels, say many experts we
interviewed. While shoppers initially resorted to e-commerce due to safety
concerns or simply because the stores were not even open—did we really live
through that?—they still shop online today because of its other benefits,
including greater convenience, selection, and price advantages. Thus, the share
we spend online remains highly elevated at just under 18 percent, nearly five
percentage points above the rate before COVID.
Where will it go from here? The fate of shopping centres and physical retailers
hangs on the answer, with downstream impacts on warehouses and logistics.
The retail property sector fared far better during and since the pandemic than
anyone could have expected, benefiting from both direct government
assistance to retailers and the stimulus payments to households, who could
keep spending, even if out of work.
Those gains could moderate or even reverse if the online shopping share
endures, however, as consumers shift some spending back from goods to
nonretail services they avoided during the pandemic, like travel and
entertainment. As one real estate investment trust (REIT) analyst notes,
“There’s still very healthy growth in e-commerce, but it’s no longer the lofty
expectations we used to have at the height of the pandemic.”
With growth in online spending slowing, physical retailers will have an
opportunity to regain some lost market share, especially those that can “bridge
the gap between e-commerce and bricks and sticks. They survived very well in
the pandemic and will probably continue to do well,” says one investment
consultant. Other winners will be the resourceful retailers that can provide
consumers with compelling shopping experiences. But the permanent shift to
greater online spending ultimately means that fewer shopping centres and
retail space can survive.
7.2 Business Travel versus Video Meetings

 pg. 45
The old Buggles song has it that “Video Killed the Radio Star.” And indeed,
radio began to fade as television ascended in popularity. Now, in a different
era, video meetings just might kill—or at least greatly reduce—overnight
business travel. According to the U.S. Travel Association (USTA), domestic
business travel spending was 56 percent lower in 2021 than in 2019, while
leisure travel was actually up modestly. Excluding the impact of inflation on
spending shows that travel trips fell even more, since the number of meetings
and events dropped by almost 80 percent.
A summer 2022 study conducted by Tourism Economics for USTA forecasts
that U.S. business travel in 2022 will get back to only 73 percent of 2019 levels
and will not return to pre-pandemic levels through at least 2026. Firms are
restricting travel to save on costs, and employees are reluctant to travel
anyway. Of greater importance, they have less need to travel since clients are
often unwilling to interact in person, and many industry conferences have
either been cancelled or moved online. But perhaps the core issue is that after
working from home for so long, we have learned to conduct business
remotely, facilitated by improved meeting technology
Business travel will continue to recover over time, but few expect levels to
attain prior levels soon. The USTA study shows business travel flattening in
2023 short of pre-COVID levels. The greatest real estate impacts will be on
business hotels, fine dining, and conference facilities. But office demand also
could suffer as firms have less need to lease space to accommodate client
visits.
7.3 Work from Home versus Return to the Office
No dynamic touches more property sectors and markets than how many of us
will finally relocate from our home office back to the company workplace and
how often. Two-plus years after the onset of COVID, most of us are still not
back in the office nearly as often as in the “before times.” Various sources
suggest that less than half of office workers actually come into an office on a
given day, at least in major markets.
That level may finally increase meaningfully this fall, as some leading tech firms
and investment banks issued ultimatums for their employees to return to the
office more often after Labour Day. As this publication goes to press in late
September 2022, it is too soon to know whether this time will prove more
successful than similar prior deadlines that passed with little apparent impact.

 pg. 46
But will workers return? As the senior leader of a development company said,
“Everyone’s still in a fact-finding mode.” The contours of the decision are by
now familiar: employer demands for control and building culture, the need for
mentoring and collaboration, and workers’ “fear of missing out” will translate
into more in-office work over time. But those factors will be weighed against
the potential to save on occupancy costs and especially worker demands for
more locational flexibility. As we continue to hear, “There’s just been a shift in
consumer behaviour. Most people don’t want to commute into the office five
days a week,” in the words of one senior investment adviser.
For now, tight labour markets ensure that employees have the upper hand in
these negotiations and will resist employer desires to have workers return to
the office. But that could change if unemployment rises in a downturn. Says
the head of real estate at one investment bank, “I don’t think we’ll know the
outcome of office until we’re through a recession and the power dynamics
between employee and employer change. But we do know there’s definitely
going to be less office demand.”
One guess, which seems to reflect the collective wisdom of experts we
interviewed, is that “probably somewhere between 10 and 20 percent of the
stock needs to be removed or repurposed, leaving the 80 percent that really
does a better job of delivering what tenants want,” according to the head of
research at one asset management firm. But there is still considerable
difference of opinion: a “jump ball—everybody’s just guessing,” says one
investor. Whatever the ultimate figure, there is little doubt that a meaningful
portion of today’s office stock will be rendered redundant and available to be
redeveloped—a topic we discuss in the “Finding a Higher Purpose” trend.
Also uncertain is how to design the space to best facilitate the kinds of
collaborative work expected to dominate office work in the future, which likely
will vary across firms and industries and take years to define. Another critical
challenge is accommodating worker preferences for individual workspaces if
most people come into the office on the same three days to be with their
colleagues. Flex space might be the answer for many companies as they try to
figure out their space needs.
So far, the impacts on office markets have been relatively muted during this
prolonged discovery period. Firms have held onto their offices either as a
precaution in case they need the space in the future or because they could not

 pg. 47
break their lease. Thus, the level of physical office occupancy (i.e., the share of
workers actually coming into the office) is considerably less than standard
economic occupancy metrics (the percentage of office space that is leased) as
firms figure out what to do.
Tenants cannot afford to keep that empty space indefinitely, however, so
office landlords should not be lulled into complacency by the relatively benign
vacancy levels. More firms are downsizing or not renewing their expiring
leases, so vacancy rates are still slowly rising, in contrast to every other major
property sector. Plus, tenants are dumping unused offices by trying to sublet
the space until their leases expire. Brokers report that a record level of office
space is available for sublease, and more is hitting the market every quarter.
Much of this space will eventually turn into outright vacancies as leases turn,
unless firms eventually reverse course.
But no one we interviewed expects a mass departure from office buildings.
Even under the most pessimistic scenarios, most knowledge work will occur in
company offices, which, after all, were designed to facilitate this high-value
work. But it will take more time for firms to figure out how much space they
will need, how it should be configured, and where it should be located. As
summarized by one economist, “Mixing Greek mythology and biblical
references, it’s probably really more of an Odyssey as opposed to an Exodus.”
The search for a post-pandemic “new normal” will continue.

 pg. 48
 Chapter 8: Smarter, Fairer Cities through Infrastructure Spending

● Infrastructure spending is back among the top trends in Emerging Trends,

but this time on a more hopeful note.
● New federal infrastructure spending provides the opportunity to replace and
expand critical urban infrastructure to rebuild cities and spur new
development—and address historical inequities
● After years of uncoordinated local efforts, the new national programs may
provide the leadership needed to transform the built environment.
The title of the final trend in the 2020 edition of Emerging Trends captured the
sorry record of federal leadership in funding critically needed infrastructure:
“Washington Fumbles; States and Cities Pick up the Ball.” Noting that
“decaying infrastructure is a national problem needing a national solution,” our
report predicted that progress “will likely be more influenced by action at the
state and local levels.”
At least seven “infrastructure weeks” came and went between 2017 and 2019
without any tangible movement in Washington, after which infrastructure
completely fell off the agenda. In the meantime, state and local governments
took the initiative with efforts destined to be more piecemeal and less
coordinated than a comprehensive national program.
Three years later, the federal government finally stepped up with the
Bipartisan Infrastructure Law enacted in November 2021. This $1 trillion bill
provides $550 billion in new spending over five years and eclipses the $305
billion infrastructure bill that President Obama signed into law at the end of
2015. This program will be supplemented by additional infrastructure
programs in the Inflation Reduction Act of 2022, as discussed in the following
“Climate Change’s Growing Impact on Real Estate” trend on resilience
The main infrastructure bill encompasses a broad range of activities focused
chiefly on transportation—including bridges and roads, rail and transit, ports
and airports—but also provides funding for broadband internet, power,
environmental remediation, and resilience, among other programs. The

 pg. 49
Inflation Reduction Act adds spending for combating climate change and
building energy security.
While every program promises to touch some part of the built environment,
several stand out as having especially significant impacts for cities and the
potential to advance economic and environmental justice by investing in
traditionally underserved communities.
8.1 Reconnecting Communities by Capping Divisive Highways
Of particular note is the “Reconnecting Communities Pilot,” which provides $1
billion “for projects that remove barriers to opportunity caused by legacy
infrastructure.” Many highway projects (and urban renewal programs) of the
1950s and 1960s bulldozed through Black neighbourhoods and other
communities of colour, dividing previously thriving places, displacing
thousands, and destroying generational wealth. The Reconnecting
Communities Pilot program will provide “dedicated funding for planning,
design, demolition, and reconstruction of street grids, parks, or other
infrastructure” to reconnect these bifurcated communities. An additional $3
billion was included within the Inflation Reduction Act of 2022 furthering this
initiative.
A growing “cap-and-cover” movement is already underway, but work by ULI
and others show that there is a lot of work to be done and injustices to
reverse. The Rondo neighbourhood of St. Paul, Minnesota, is one glaring
example. As explained in ULI’s Restorative Development: Infrastructure and
Land Use Exchange forum held in February 2022, Rondo was a vibrant African
American community with a thriving business district before Interstate 94 was
constructed through the heart of the neighbourhood. According to a leader of
the reconnect effort, the community then lost 61 percent of its population and
almost half of its homeownership between 1950 and 1980. As he concludes:
“That’s a pretty devastating gutting of a community.”
Minnesota plans to cover part of the highway and build a new 24-acre
neighbourhood on top of it, including parks and other cultural amenities, in
addition to affordable housing and a new business corridor. St. Paul already
has received a $1.4 million grant to “develop a comprehensive transportation
plan for the Rondo neighbourhood to address safety, equity, and quality of life
concerns.”

 pg. 50
The Reconnecting Communities Pilot program may help this project and other
similar ones move forward:
● The Texas Department of Transportation is building a deck above a sunken
portion of I-10 separating downtown and uptown El Paso to create, as
described in the federal grant application, “amenities such as green space,
public gathering space, and entertainment venues.”
● A community group called Loving the Bronx supports capping the Cross-
Bronx Expressway, which runs through dense neighbourhoods in the South
Bronx, with the goals of improving local air quality and providing new land for
development projects.
● In Seattle, Lid-5 activists are advocating for the city government to cover and
add green space over 1-5
● Reconnect Austin is pushing the city of Austin to bury I-35 through the urban
core of Austin and dedicate the new land as public space and developable
land.
● Many projects of note are either in the works or being actively discussed,
including those in Syracuse, New York; Richmond, Virginia; and Houston
8.2 Expanding Broadband Access
Another program from the Bipartisan Infrastructure Law with significant
potential impact on communities and the CRE industry is the $65 billion to
expand broadband access to the 30 million Americans living in areas without
broadband infrastructure. Recognizing the relatively high cost of service in the
United States, the program also seeks to “lower prices for internet service and
help close the digital divide, so that more Americans can afford internet
access.”
The importance of this initiative was anticipated in ULI’s 2021 report
Broadband and Real Estate: Understanding the Opportunity: “Availability of
widespread, high-speed broadband networks already has a wide variety of
benefits to the real estate industry, communities, and individuals. . . .
Increasing mobility opportunities can present potential value that real estate
owners and managers can harness for their buildings. Such opportunities
include repurposed or reduced parking facilities, denser projects, and higher
rates of return.”

 pg. 51
Expanding broadband access to underserved communities is also critical to
increasing opportunities for employees in more communities to work from
home, as we discussed in our “… Still, We’ve Changed Some” trend above.
8.3 Transportation Infrastructure
We noted in a prior trend that many hyper growth markets have been unable
to keep up with building critical infrastructure, particularly that which is related
to transportation. The infrastructure funding bill will provide almost $600
billion in transportation funding. More than half of that will be allocated to the
highway system, the largest such investment since the Interstate Highway
System began construction in the 1950s.
The Institute’s 2021 report Prioritizing Effective Infrastructure-Led
Development: A ULI Infrastructure Framework highlighted the need to invest in
public transportation: “Increasing access to jobs, economic opportunities,
social interactions, and mobility is essential. Public transportation provides the
regional framework for compact, people-centric urban development, enables
significant real estate and value creation opportunities, and mitigates climate
change.” The new infrastructure funds more than $90 billion to modernize
transit, improve accessibility, and continue existing transit programs.
Finally, the infrastructure bill provides critical funding for building
environmental resilience and expanding water availability, as will be discussed
in the following trend.

 pg. 52
 Chapter 9: Property Type Outlook

We don’t see significant sales of assets taking place, but we do see a lot more
choosiness, pickiness, selectivity when it comes to new opportunities.”
Real estate capital markets are still open for business. Investors are still buying,
lenders are still lending, and no one seems to be panicking just yet. But
everyone is being more careful about which deals they do until there is more
market clarity
Reflecting the more cautious mood, the average rating for all property types
together in our Emerging Trends survey fell more this year than in any year
since the GFC. But that overall trend masks diverse underlying dynamics.
Though the rating fell for 15 of the 25 property subsectors, they rose for the
other 10, so sectorial preferences are moving in different directions, even if the
general mood is less exuberant this year.
In this environment of economic and market uncertainty, investors seek
properties with the strongest operating performance while shunning weaker
sectors viewed as riskier. This flight to safety is shown in the nearby graph, as
“investment prospact” ratings for the top two major property sectors have
been separating from those for the bottom two sectors, meaning that
investors are more selective. The trend for “development prospects” shows a
comparable widening spread. In fact, the gap between the preferred sectors
and shunned sectors is wider now than it has been for at least 15 years, which
suggests that investors perceive a narrowing range of compelling market
opportunities.
The industrial/distribution sector has again come out on top of the major
property types this year, followed closely by multi-family housing. These two
property sectors have ranked at or near the top of the Emerging Trends
surveys almost every year going back to before the global financial crisis of
2008–2009, but the margin of preference for them over other property sectors
has been increasing steadily for six straight years

 pg. 53
On the other hand, office and retail remain out of favour with survey
respondents. Office actually displaced retail as the lowest-ranked property
sector this year. Retail had registered the lowest ranking of any property type
for over a decade but seems to have at least stabilized, while the future for the
office sector is uncertain at best.
In between these two extremes are the hotel and single-family housing sectors
in a virtual tie, though their fortunes have reversed in the last year. Interest in
hotels rose more over the last year than any other major property type as
tourists—if not business travellers—returned to the roads and airways. By
contrast, prospects fell for housing as rising mortgage rates have cooled buyer
interest in new homes
Beyond the major property types, 2023 may be known as the year that “niche”
property types came into their own. Five of the six highest-rated property
subtypes would be considered niche, led by workforce housing and data
centres, as well as life-sciences facilities, medical office, and single-family
rental housing. These sectors generally command greater returns than
traditional product types due to higher cap rates. But investors also value the
strong demographic tailwinds supporting these niche sectors at a time of
expectations of cyclical market challenges

 pg. 54
Prospects for Major Commercial Property Types, 2019–2023
Investment prospects

 pg. 55
 Chapter 10: Emerging Trends in Senior Housing

Major factors influencing senior housing continue to evolve. Some trends are
well known while others are developing. In 2022 and into 2023, senior housing
trends include the following
1. The growth of the sector into new product type’s differentiated by rate and
service offerings as the sector continues to mature and evolve.
2. The articulation of a new value proposition for senior housing as the
proverbial “fountain of youth” for future baby boomer residents who seek a
high quality of life, wellness, longevity, and a sense of purpose
3. The recognition that senior housing is truly part of the health care
continuum.
4. The gradual recovery of occupancy from the nadir reached during COVID-19,
boosted by a recent slowdown in inventory growth and strong post-pandemic
demand patterns.
5. Outside exogenous factors including the national and global economies,
inflation, and rising interest rates, which present new challenges for senior
housing.
6. Staff recruitment and retention as well as rising expenses associated with
labour shortages, insurance, food, energy, and other goods and services.
Collectively, these are squeezing operator margins, investment returns, and
debt issuance.
7. And, of course, U.S. demographic patterns, which are pushing greater
numbers of individuals into the 75-plus cohort, creating a captive pool of
potential new residents for senior housing.
10.1 Sector maturation.
It is an exciting time in the senior living industry as the sector matures and
product offerings become increasingly differentiated. Much like the hotel
industry, with offerings from Motel 6 to the Ritz-Carlton, operators,
developers, and capital providers are increasingly segmenting the senior
housing market by both price point and service offerings. “Active adult” offers
amenities rental housing for the “younger old” cohort seeking community
involvement, lifestyle, purpose, and connection. The “Forgotten Middle,” a

 pg. 56
term coined by the National Investment Centre for Seniors Housing & Care
(NIC) in its 2019 seminal study that assessed and quantified the need for more
affordable housing and care options for middle-income seniors, offers care and
housing options for the value-minded older adult consumer. And “ultra-luxury
retirement communities” offer older adults highend concierge lifestyle living
options with wellness centres, five-star culinary options, entertainment, and A-
list cultural events. And, of course, the traditional senior housing product
remains, with a price point that falls between the two and offers a value
proposition of security, socialization, engagement, room and board, care
coordination, and lifestyle.
10.2 Wellness value proposition.
Many operators increasingly recognize that senior housing provides an
environment that can promote and support health and wellness, enticements
to the baby boomers as they age and seek the aforementioned proverbial
fountain of youth. Furthermore, the movement of many operators to
incorporate wellness programs into their offerings has the ability to be a
significant competitive advantage as potential residents seek communities that
hold promise to improve the quality of their life through programs focused on
the intellectual, physical, social, spiritual, vocational, emotional, and
environmental dimensions of wellness as defined by the International Council
on Active Aging.
10.3 Senior housing as part of the continuum of care.
Simply stated, senior housing operators influence social determinants of health
for hundreds of thousands of older Americans. Operators can help manage
chronic illness and keep older adults healthy—they have 24/7 eyes on
residents and can systematically monitor changes in conditions. Properly
managed, this can result in fewer resident hospitalizations, reduce federal and
state-level health care spending, and act as a catalyst for future business
opportunities and collaborations. Further, thoughtful care intervention can
provide support to the overall health care ecosystem through the support and
creation of conscientious awareness and follow-through. And, once senior
housing is fully recognized as part of the health care continuum, senior housing
operators will be able to participate in the revenue streams associated with a
capitated risk-sharing model of care.

 pg. 57
10.4 Tailwinds for occupancy recovery.
Two tailwinds support an ongoing occupancy recovery for senior housing. First,
on the supply side, the number of senior housing units under construction in
the second quarter of 2022 for the 31 NIC MAP Primary Markets was the
fewest since 2015. And that pattern may remain in place—at least in the near
term— because senior housing starts continue to linger at moderate levels and
remain well below their peaks seen in the 2016– 2018 period. This is because
rising prices for materials and inflation, labour shortages in the building trade
industries, and the change in Fed policy of higher interest rates are collectively
affecting plans for new development; many projects increasingly do not pencil
out for reasonable returns.

Second, demand is also a tailwind for an ongoing improvement in occupancy.

Indeed, demand, as measured by the change in occupied inventory or net
absorption, was robust in the second quarter of 2022, increasing at its
strongest pace ever recorded by NIC MAP Vision except for the post pandemic
boost in demand in the last half of 2021. Since the recovery began in the
second quarter of 2021, 78 percent of the units placed back on the market
have been reoccupied

 pg. 58
As a result of these conditions, the occupancy rate for senior housing—where
senior housing is defined as the combination of the majority independent living
and assisted living properties—rose 0.9 percentage point during the second
quarter of 2022 to 81.4 percent for the 31 NIC MAP Primary Markets. This
marked the fifth consecutive quarter in which occupancy did not decline. At
81.4 percent in the second quarter, occupancy was 3.4 percentage points
above its pandemic-related low of 78.0 percent recorded in the second quarter
of 2021 but was 5.8 percentage points below its pre-pandemic level of 87.2
percent in the first quarter of 2020.
10.5 Outside influencing factors.
Looking ahead, several exogenous factors will influence the strength of net
move –ins and demand. These include demographics (as discussed further
below) as well as the following:
● The broad performance of the U.S. economy,
● Consumer confidence (which is very low, according to a University of
Michigan survey),
● The rate of inflation (the Consumer Price Index increased by 9.1 percent
from year-earlier levels in June 2022, resulting in the largest increase since
1981),
● Interest rates (rising as the Fed tightens monetary policy and increases the
Fed funds rate),
● The pace of sales for residential housing (slowing from higher mortgage
interest rates),
● The stock market (considered in a bear market),
● Pent-up demand for senior living settings (strong through the second half of
2022),
● Development currently underway (moderately paced compared with
history),
● New competition in the form of recently opened properties since the
pandemic began, and
● Local market area demand and supply pressures.

 pg. 59
10.6 Staffing challenges.
Of importance, labour also is a key consideration, with an increasing number of
operators citing labour shortages as a potential limiting constraint on growth.
In the WMRE/NIC Investor Sentiment Survey conducted in June 2022, just
under half of respondents (41 percent) reported that labour shortages have
caused a reduction in the number of operating units/beds in their portfolios.
This is presenting challenges for operators seeking to maintain census, much
less grow and expand.
Indeed, the U.S. jobless rate was low at 3.6 percent in June 2022 and was only
0.1 percentage point above the pre-pandemic level of 3.5 percent seen in
February 2020. Furthermore, tight labour market conditions are pressuring
wage rates up quickly, especially for workers in skilled nursing and assisted
living properties
While good for employees, low jobless rates present challenges to employers
who must staff their businesses. Surveys conducted by the NIC among C-suite
operators of senior housing and care properties highlight strategies to combat
labour shortages and include raising wages, offering flexible work hours, higher
pay frequency, improving the work environment and culture, recruitment
programs comparable with those used to market to new residents, and
collaboration with educational institutions.

 pg. 60
 Chapter 11: Student Housing: Improvement in Fundamentals

For those active in the student housing sector, fall 2022’s massively improved
performance has shaped up to be essentially a best-case scenario. At a
minimum, it has been the rebound that many had hoped for. At best, it has
been something of a renaissance after two very challenging years due to the
COVID-19 pandemic.
11.1 Rent Growth and Occupancy Levels Not Seen in at Least a Decade
Heading into the final month of the fall 2022 leasing season, both rent growth
and occupancy sit at all-time highs. The former sits right at 6 percent—almost
three times greater than the 2010s’ decade norm—while the latter clocks in
above 90 percent–plus. That is the earliest the sector has ever crested above
that 90 percent threshold on record. By the semester’s start, it is almost a
foregone conclusion that the year will kick off with never-before-seen
occupancy rates. With student competitive housing (in other words, nearby
conventional multifamily housing properties that compete with purpose built
assets) also seeing record rent growth and occupancy rates as well, there is
less pressure on purpose-built offcampus housing space than in years past
11.2 Investment from Institutional Players Solidifies Student Housing as a CRE
Sector
Back in 2018, there was a big splash in the student housing space when
Greystar completed its acquisition of EDR. At the time of acquisition that left
only one publicly traded real estate investment trust (REIT) in the student
housing space. Yet another massive announcement followed in 2022 with
Blackstone’s acquisition of American Campus Communities, which closed in
early August. Although the acquisition leaves no publicly traded REITs in the
sector—a development that lends itself to some challenges in terms of
reporting and benchmarking—the more important takeaway is that
institutional capital continues to flow into the sector
11.3 Will fall 2022 Be a Flash-in-the-Pan Rebound, or a Positive Shift in Long-
Term Expectations?
While somewhat more difficult to measure, the return to a more normal
campus life for students, university employees, and industry professionals alike
has been widely welcomed. After all, record leasing activity and record rent

 pg. 61
growth indirectly point to improved qualitative aspects of student life such as
on-campus activities and in-person classes. Only time will tell whether the
2022 rebound is a short-lived bounce back or a resetting of baseline
expectations for the coming few years. Though with supply easing and
students who elected to take a gap year being reintroduced to the pipeline of
prospective student renters, it is reasonable to suggest that the coming few
years could see sustained performance readings.

11.4 Construction Levels at Decade Lows

In recent years, one of the more remarkable trends in the student housing
space has been the sheer consistency of national supply totals. Although
campus-level construction figures are often capricious—it is not uncommon to
see a huge wave of deliveries followed by years with no construction—the
United States averaged roughly 50,000 new beds per year over the past few
years, with relatively little deviation from year to year. But the pandemic bred
a lot of uncertainty. And, as a result, fall 2022’s expected delivery total (fewer
than 30,000 new beds) will easily be the lowest figure in at least a decade. Not
much is expected to change in 2023 either

 pg. 62