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Indian real estate sector at crossroads


Gulf Property Exclusive

By Anita Joseph

 

India’s real estate market is at a critically ‘interesting’ juncture at the moment, treading the fine line between a slump and a revival. While at the moment its fortunes seem bleak and sluggish, experts predict that it will soar and grow at a phenomenal rate in no time.

It is the second largest employer after agriculture, in the country, and is slated to grow by 30 per cent in the next decade. So great is its future, that the market is expected to reach $180 billion by 2020.

The outlook for the realty sector in India is bright and loaded with promise for the future. The sector has always been fuelled by an ever-growing corporate environment and the rising demand for office space, coupled with the pan-Indian dream of owning a home. Its rise and fall have been primarily dependent on the progress reports of these two elements.

Despite the fact that the realty sector has had rough patches, often burning investors in realty stocks badly and contributing to a pessimistic outlook, there is no better time than the present, to buy homes. The market has undergone a very steep downward correction, with prices falling by almost 20 to 30 percent even prior to demonetisation, and even more so, after it. For the buyer, his cost of loans has also come down, with an almost 200% point drop in home loan rates since 2013-14, according to unofficial estimates.

The Indian economy is opening up and attracting considerable foreign investment. With the projected GDP growth of 7 per cent, the potential for growth in the sector is considerable.  According to the World Investment Report 2016 by the United Nations Conference for Trade and Development (UNCTAD), India ranked fourth in ‘Developing Asia’ for FDI. 

Yet another UNCTAD survey titled World Investment Prospects Survey 2016-2018, ranks India third after the United States and China, as a prospective FDI host country. With steps in the direction of bettering business climate for ease for doing business and further policy relaxations in FDI norms for sectors like media, e-commerce and defence, along with a host of upcoming Free Trade Agreements, it is certain that India is on the brink of an unprecedented economic boom, which will create more demand for commercial as well as residential spaces.

Prior to economic liberalisation in 1991, India’s realty sector was disorganized and nascent at best. Centred around the four metros (Delhi, Mumbai, Kolkata and Chennai), it started booming with the economic reforms and the consequent investments in housing and commercial space. This led to the development of satellite cities and a city-specific focus on industrial and technological development. Post 1991, India began to welcome major multinational corporates seeking permission to set up local operations. Today, in 2017, the sector is expanding into more areas with urban and sub-urban space expanding fast and realty players eyeing new projects, despite the challenges faced. With a shift in stakeholders’ preference for living in ‘green’ and ‘eco-friendly’ surroundings within a smart ecosystem, focus is being given to the adoption of technologies and amenities in almost all upcoming projects.    

“India’s economy exhibited healthy growth rates in the last decade, with the exception of 2012. The average growth rate registered over the period 2000–2012 was approximately 7.2 per cent. The growth has been achieved on account of increased consumption, increased investment activity as well as productivity gains,” says  a  report by Ernst and Young titled Indian Real Estate: The year Gone by and Outlook.

The property market since 2011-2012 was characterized by a particularly stubborn lull. In fact, there was a time when there was not even an enquiry for sales for month on end, says Raj Kumar Sharma, Chief Executive Officer of Earth Builders, Noida, near Delhi.  He says there are no buyers for ready to move segment while there could be still buyers for long term investment, not as much as that it was prior to 2011. But he says it’s a buyers’ market.

In August 2015, the government approved 100 Smart City Projects in India. It also raised FDI limits for townships and settlements development projects, to 100%. Real estate projects within the Special Economic Zone (SEZ) were allowed to go in for 100 per cent FDI.

Between April and June 2016, India's office space absorption grew 46 per cent year-on-year to over 10.2 million square feet, with the Delhi National Capital Region (NCR) and Bangalore, accounting for almost 50 per cent of the total space take-up, leading the way. As far as supply goes, over 7 million square feet of fresh office space was added during April-June 2016, which was led by Hyderabad and Mumbai, accounting for more than 65 per cent of the total supply of fresh office space.

The year 2016 laid the foundation for the strong future of the real estate industry. It was the year that important policies like the Smart Cities Concept, Housing for all by 2022, GST, RERA implementation, Demonetisation and Benami Transaction Act, all shaped up, to sanitise India’s realty sector. It was supposed to be the year of revival, when the sector’s sluggish fortunes were supposed to make a turn for the better. There was a revival of momentum this year, improved sales and a fall in unsold inventory levels. Reforms to FDI norms, robust demand and better agricultural output (triggered by a good monsoon season), that were slowly but surely catapulting the realty sector to a comfortable position.

 

Demonetisation

Then came the big blow. Prime Minister Narendra Modi announced on November 8 that currency notes of Rs 500 and Rs1,000 would be devalued and cease to be legal tender by the end of the day.

This dealt a hard blow to the already sluggish market. Unofficial estimates say prices crashed by as much as 40%, overnight.  For a sector where as much as 30 % of the transactions were in black money, the sudden drop in demand dented its prospects.

With the sector slowing down, the realty index too felt the heat, with some stocks going down substantially. The realty index crashed and investors began to lose money.  Roy from Technopark in Trivandrum, a city in the southern part of India, lost considerably when his DLF stocks fell from Rs. 500 to Rs.145 over this period. He was not alone.

Demand for commercial space from TIER-1 companies in IT parks also came down, says Mathew Koshy, an IT consultant, working in Technopark. Now, however, there is considerable demand from startups, which gives hope, he adds.

The demonetisation exercise clearly split the sector into two time divided halves-pre and post demonetization. Real estate agents said the situation went from bad to worse after the currency devaluation. “If before demonetization, the demand for property was sluggish, after demonetization, people stopped enquiring for houses altogether and didn’t want to see and explore anymore,” says Balu Mehta, a New Delhi- based realtor and owner of Sriram properties in Dhaula Kuan. “Earlier, I used to get at least 5 enquiries a day, but in the last two months, I’ve had only one enquiry which led nowhere.”

Sahil Mukherjee, owner of Modern Builders, a real estate house with pan-India presence, says that post demonetization, the realty sector went into correction mode. In his opinion, the general public became more aware of the malpractices prevalent in the system. “They realized, for instance, that there was a lot of speculation about the prices of homes, and also the fact that realtors deliberately created an artificial demand for properties and made overbookings with a view to inflate the prices,” he adds. “Demonetization opened the public’s eyes.”

Mehta adds that demonetization reduced the sector’s dependence on cash, a lot of which was under the table, and thrust digital payment modes into the limelight. “With digital payments, the possibility of malpractice is substantially reduced,” he adds.

Confederation of Real Estate Developers' Associations of India (CREDAI), denies any adverse impact on the primary real estate market, arising out of demonetization. In a report available on its website, it says the primary segment is expected to gain at the expense of the secondary segment of the market with its compulsive cash component. In fact, it added, that in the aftermath of demonetization, banks were going to be flush with additional funds upward of Rs. 10 lakh crore. Hence, a fall in interest rates up to 200 basis points is imminent of which SBI cutting its deposit rates by 1.75 per cent is an early sign.

“Eventually, we see home loan rates coming down from the present level of 9.25% to less than 7% in less than one year from now. This would bring down the EMI for the ultimate consumers,” it states.

CREDAI also says it expects the mop up of black money to also lead to higher tax collection and a lower rate of personal and corporate income tax from the next financial year onwards.

“In other words, the demonetization would put more money into the pocket of home purchasers through lower tax burden and incentives for home ownership. The tendency towards lower rate of interest is also going to be strengthened by a low rate of inflation. Real Estate (Regulation and Development) Act, 2016 would become operational during the year which would further boost consumer confidence in the primary segment.”

Real Estate (Development and Regulation) Act, 2016

The sector’s biggest challenge in 2016 was the huge inventory pile-up, especially in the metros. Homebuyers would make massive investments in property, only to be told that the project was delayed. In some cases, the developers would even escape with the loot amassed. If that did not happen, the contracts drawn up would often be one-sided, favouring the developer. For instance, there would be a heavy penalty, as much as 21% of the total cost, if the buyer delayed payment by even a day.

This scenario is set to change when the RERA Act, 2016 is in place.

The RERA Act was passed in March 2016 by the Parliament and promises to bring justice to a home buyer by formulating strict policies that developers have fulfill, in order to sell projects. RERA is expected to bring in a high level of transparency and discipline among builders. In particular, RERA will keep tabs on all under-construction projects, since maximum swindling happens in this phase.

“RERA will bring down new launches for the next couple of years, thus helping to pick up the sale of current inventory,” says Manish Mahajan of Blue Star properties.

“Demonetization, combined with RERA, will lead to decreased supply, bring down interest rates, weed out unorganized developers and help clean up the sector,” he adds.

“The mechanism of RERA will be made such that it provides a common ground for both the buyers as well as the developers. Transparency is the key point regarding the rules under RERA, as the government wants that every aspect of information that the general public should know should be made available on an informational portal. The regulatory risk will also be laid upon the developer as he will have to pay compensation if any mishaps happen while giving the possession of a unit. All the builders will have to register themselves under RERA which will see a low risk in the property business,” say experts at merarera.com.

 

Future Perfect

Real estate experts predict that in the year 2017, the market will experience a period of ‘consolidation’.

“The industry will witness better consumer sentiment and confidence, greater transparency and accountability, increased foreign fund inflows and a spurt in cashless transactions,” says Aditya Daftar, Director, Global Homes, Ghaziabad.

While confusion still prevails among homebuyers and real estate stakeholders following demonetization, activity in the market is slowly picking up, say realtors. While most homebuyers have kept investments on hold till more clarity emerges on demonetization, organized developers are hoping to benefit from the move, since they will now be able to buy land at ‘real’ prices and not have to compete with cut-throat, unorganized dealers dealing rampantly in black money.

Some developers are cashing in on the reviving buyer interest by offering discounts on home loans or introducing ‘buy now, pay later’ methods. Others are quick to assure buyers that any further fall in property prices will be compensated/adjusted. Therefore, ready-to-move in properties and projects nearing completion are attracting a lot of prospective buyers.

Then again, interest rates on housing loans are expected to dip further. “The current interest rates being charged by the various lenders vary between 8.5-10 per cent.Considering

the falling rate of inflation (CPI (Consumer Price Inflation) 3.17 per cent for January 2017, the deposit rates are likely to fall and therefore there is scope for further fall in interest for the housing sector,” says George Joseph, former Assistant General Manager with Federal Bank.

“The dynamics of realty market is in transition in India. Central government policies that aimed at bringing in transparency and cutting down the influence of black money, will bring in a positive impact. Regulatory interventions and policy initiatives like the Real Estate Regulatory Act and the Goods and Services Tax( GST)  will  restore investor confidence at all levels,” says Vinayak M, a Bangalore-based entrepreneur. 

 

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