Real estate sector was, perhaps, the most affected sector of the Indian economy last year, but the story is far from over.
It is a fact that the demonetisation in November 2016 had hit the realty segment where it hurts. For a sector that largely depends on contract workers, cash was the biggest casualty. That said, demonetisation did bring in some stability to land prices, making the end products more affordable to consumers.
Still, by April 2017, when the markets were looking to stabilise, RERA — Real Estate Regulatory Authority (RERA) Act, 2016 — and GST were announced in succession which, again, caused some inertia due to confusion among buyers and developers, with both awaiting the final set of RERA notifications/legislation from their respective state regulatory bodies.
Signs of recovery
While business cycles have been affected due to buyers holding back purchases in anticipation of regulatory changes, and sales are still witnessing a slowdown, we are observing signs of recovery as the triple effects of demonetisation, RERA and GST have begun to shape up the sector with new standards of delivery, accountability and transparency.
After these reforms have been implemented, there has been a steady demand for mid-sized apartments, preference towards ready-to-move-in properties that take the hassle out of any compliance issues and the willingness to pay a premium for long-standing reputed developers.
RERA and GST are propelling global cash flows and boosting endorsements, ranking India fourth among the Asian countries for FDIs. In the coming years, investors and buyers will see multiple opportunities — in residential housing through incentives for affordable housing and transformation of the office sector through Real Estate Investment Trusts (REITs).
With close to 1.73 billion sq ft of commercial real estate across office, retail and warehouse segments, 2018 is set to experience more REITable listings in India coupled with more investments in REITs thanks to a steady return of 9-12 per cent, or more, annually. The tax incentives, options of diversified investments across real estate asset classes and hence lower risk of investment, more liquidity — all these could attract more REITs in the residential space.
Building blocks
Year 2018 is expected to be a year of consolidation of products and services in real estate — with the impacts of all policy initiatives taken in the 2016-17 beginning to take effect. We will see more joint ventures / joint developments with larger players taking over financially distressed developers and presenting the industry with a fresh line up of competitors. Completion of existing projects will be prioritised over launching new ones, hence, 2018 looks promising for a good supply of houses across major Indian markets.
To achieve this, developers will be remodelling business processes to streamline delivery and allied services, without stretching themselves too much in terms of debt or scope of work.
The Government’s efforts to boost “affordable housing” by conferring “infrastructure status” to this segment, announcing various tax incentives and increasing the carpet area of houses to include more projects within its ambit, will continue to attract more prominent developers to realign their products to compete in this category.
Drawing from the policy, it can be said that builders stand to gain in terms of incentives from the Government and the customer will equally benefit from the interest-rate subsidy. Both buyers and sellers will benefit as options increase for the former and inventories are cleared for the latter. Such measures of the Centre have also resulted in the availability of more funding options for developers such as external commercial borrowing (ECB), foreign direct investment (FDI) and debt financing from national financial institutions at highly competitive rates.
Although challenges remain in Tier 1 cities, where land costs and availability within established locations is difficult, affordable housing is turning into a promising sector and a possible game changer for the real estate industry. In 2018, it will definitely become an important segment in every developer’s portfolio.
New avenues
Developers could also be focusing on their niche expertise in the new year, specialising in the various segments of real estate, e.g., plotted developments, residential projects, retail, townships, and commercial spaces; and hence, specialist service providers could be emerging in each of these categories. Market forces will lead to specialists emerging in each individual segment of real estate, hence verticalisation of the sector could be setting in with 2-3 players topping each segment.
Today, India has some 350 co-working space operators running over 800 co-working spaces, thanks to the general drive for entrepreneurship that allows budding entrepreneurs start a business economically through flexible working hours, and varied desk options; and also provides them a platform for networking, collaboration and increased productivity along with ease of scaling. Research predicts that by 2025, 42 per cent of India’s population will be living and working in its urban centres.
With this growth in the urban population, there will be a far greater demand for shared workspaces in less than a decade. The segment is expected to receive $400 million in investments by 2018 and is set to grow by 40-50 per cent to reach over 1 million sq. ft. of leased ‘alternative’ workspaces by the end of the next fiscal year.
I am also hopeful of more spends towards digitisation of land/property records in the coming year, which is in tune with the Digital India mission. This will considerably reduce litigation, free up more land in cities to make it more affordable and reduce project timelines, which will directly translate to lower costs for the end consumer.
Also, taking from the Maharashtra RERA ruling, other State RERA bodies could be widening the RERA laws in their respective States to include other stakeholders like various government approval bodies in a bid to ensure speedy approvals, one of the main reasons for construction delays, to spread accountability and ultimately benefit the end user.
(The writer is MD, Century Real Estate Holdings, Bengaluru. The article first appeared in The Hindu BusinessLine.)