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Will the real estate sector sink or sail?

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A mixed bonanza greeted India’s realty sector with anomalies that were plaguing it for some years now still at play, but a stable government under Prime Minister Narendra Modi, with promises of reforms, gives rise to much hope among stakeholders.

Factors like low demand and slow sales due to a struggling economy coupled with a huge debt, high interest rates and liquidity crunch continued to exacerbate the industry. Yet, a friendly budget and a series of reforms and policy initiatives boosted confidence and laid a strong foundation for revival.

It was a year of abysmally-weak sales due also to high home loan rates and property prices. One also saw large- scale delivery defaults and low buying sentiment, resulting in the piling up of inventory. So much so that even the festive season could not lift the industry’s fortunes.

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This despite real estate companies going to the extent of luring buyers with marketing schemes of booking property with just 10 percent down payment and no pay-outs till possession. This was evident from the fact that festive bonanza was extended into the new year. It also explained why there was a significant drop in the number of new launches, especially during festive time.

On the commercial real estate front, too, it was a weak year. But compared to 2013, the office space absorption considerably improved. According to global realty research firm CBRE, leasing business touched 23 million sq ft in the first nine months of the year, while another such firm, Cushman and Wakefield, expects rentals to go up by 20-25 percent in the next one year.

Data put out by Jones Lang Lasalle pointed to improved demand with the expected completion of 30.7 million sq ft of good quality office space in 2014.

On the retail front, it was a subdued year with weak demand especially as online retail gave a tough time to brick and mortar retail. However, amid signs of growing demand, commercial real estate, including office and mall developments, is expected to get a further boost with real estate investment trusts (REITs) likely to get operational next year.

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Further on the positive side, this fiscal year’s budget reflected the government’s clear vision to improve the investment climate so as to stimulate growth — and was regarded as one of the best in many years. Fully recognising the need for speedy urbanisation, huge funds to the tune of Rs.51,000 crore were allocated for urban infrastructure besides additional Rs.7,060 crore for building 100 smart cities.

Fund crunch has been the bane of the realty sector. Against this backdrop, the government took a major policy initiative to meet the long pending demand of liberalising foreign equity norms by relaxing the capital requirement and construction area regulations along with making investors’ exit easier.

The foreign equity reform was a major boost for small and medium real estate companies to have access to foreign funding, giving a boost to affordable housing. Measures like the allocation of Rs.4,000 crore to the National Housing Bank and bringing the economically-weaker sections and slum redevelopment under corporate social responsibility were aimed at giving a leg up to affordable housing.

Together with this, the decision to open real estate investment trusts with a potential of $15-20 billion inflows over the next three years was quite promising to provide a lifeline to the fund-starved sector.

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That the foreign equity reform had a salutary effect is evident from the fact that in less than six months of the installation of the Modi government, inflows registered more than 33 percent rise, while private equity funding saw over one-fourth hike — an indication of changing perception of global investors.

Equally promising was the impressive rise in non-resident enquiries. This apart, global pension funds like those from Canada directly deploying their assets in real estate companies, as opposed to the earlier policy of making investments through private equities, also cheered sentiments. Not just that, following the opening of realty trusts, global private equity funds firmed up their plans to launch schemes in India.

Clearly, the foreign investors put their faith in an action-oriented and stable government. They increasingly realised that the reform-friendly government was committed to improving investor sentiment through measures on transparency and investment climate. It was a “catch the bull by horn” policy that set an ambitious agenda of “Housing for All by 2022” and building 100 smart cities with proactive measures for its execution.

Notwithstanding all this, challenges remain. The sector needs Rs.132,00,000 crore of investment over the next eight years to achieve the government’s ambitious target of housing for all. Most of this funding is required in affordable, low-cost housing and those targeting the economically weaker sections.

The sections above form almost 90 percent of the overall shortage of 19 million dwelling units today, which is expected to touch 30 million by 2022. The biggest challenge is to take policy initiatives to boost funding and take to related reforms to make homes affordable.

There is also a clear case for putting in place inclusive financing mechanism to bring the disadvantaged sections under home loan net and providing incentives for property developers and home buyers for loans. In this year’s budget, the government had taken twin measures of increasing the home loan interest exemption limit and raising the income tax limit by Rs.50,000.

Now, with the next budget a couple of months away, one looks forward to the government’s proposed policy to introduce an interest subvention scheme and a credit rating model for residential real estate projects to channelize investments in housing and an escrow account model through levies on cement and steel to boost low-cost affordable housing.

In the new year, one expects the government to ensure a greater credit flow to the sector at reasonable rates by opening new credit windows like external commercial borrowings. There is also an urgent need to amend the Land Acquisition Act.

Other areas that demand attention include creating a mechanism for faster clearance of projects, including the removal of environmental hurdles, boosting skilled workforce, tax rationalization, promoting newer technologies and building materials, besides bringing in transparency and fair practices in real estate transactions through real estate regulation.

These are the key measures that the government needs to take to make real estate affordable in order to realize its mission and to make real estate an attractive asset class for end-buyers and investors — and in the process ensuring faster and sustainable growth of real estate sector.

Highlights of realty sector:

    • Launch of real estate investment trusts
    • Norms for foreign equity in real estate liberalised
    • Policy decision to develop 100 smart cities and allocation of funds in the budget
    • Mission of “Housing for All by 2022” announced
    • Home loan entitlement raised from 80 percent to 90 percent of the cost of property
    • Home loan interest exemption limit raised by Rs.50,000.
    • First-ever Japanese real estate company, Tama Homes, enters India
    • For the first time a global pension fund invests directly in Indian real estate firms
    • Real estate regulatory bill deferred
    • Low demand for newly launched projects and under-construction projects
    • High demand for ready-to-move homes
    • Rise of transactional realty portals. (IANS)
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Vinod Behl
Vinod Behl
Editor , PropTOQ , a real estate monthly. Have been writing extensively on real estate and infrastructure issues.


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