Published on: Jan 27, 2019 @ 04:15
Real estate has a major impact on any country’s economic growth. In India, the real estate sector is the second largest employer after agriculture and accounts for nearly 10 percent of India’s GDP. The year 2018 has been a rewarding and an eventful one for the Indian real estate industry which brought back positive sentiments and its return to stability marked by the improvement in sales.
The real estate industry started to show recovery sign following the introduction of the key policy reforms such as the RERA, Demonetization, and GST in the year 2016-17. Besides, it was a year of stabilization of reforms after the turbulent two-year period when these reforms implemented in the residential sector. In fact, the industry had remained cautious in adopting these reforms.
Showing signs of recovery, the real estate sector saw almost 50 per cent surge in housing sales in 2018 across major cities and demand for affordable homes, but year-end liquidity crisis negated the gains of strong growth made during the year.
The stability of India’s financial institutions are a worry as the major liquidity crunch came to light in September last year with the near-collapse of a non-bank lender called Infrastructure Leasing and Financial Services (IL & FS).
The liquidity crunch has led to a slowdown and has hit both developers and home buyers. However, developers can’t afford delays in their projects as they have to meet the RERA timeline under the new real estate regulatory act.
In fact, the liquidity crunch, the weakening of rupee to its record low and changes in the Credit-Linked Subsidy Scheme (CLSS) were the major events during the year. Moreover, in a major policy move of government, the Parliament amended the Insolvency and Bankruptcy Code (IBC) in July allowing home buyers to be treated at par with lenders.
Housing sales in 2018 witnessed improvement over 2017. Data provided by JLL India estimates sales in the previous year to have risen 47 per cent in seven cities, while ANAROCK data showed a 16 per cent rise in 7 cities. Prop Tiger reported 3.1 lakh units sold as compared to 2.5 lakh units during last year in India’s nine major cities, around 25 per cent higher than previous year. According to a report, the number of new projects launch, however, declined this year, with around 1.9 lakh units being launched.
Non-resident Indian (NRI) investments in the realty sector got a boost this year on the back of a weak rupee. The Rupee in October touched its lowest-ever level of 74.47 per dollar. According to a report, investments by NRIs in Indian real estate crossed $10 billion in the current financial year, up from $8.9 billion invested in fiscal 2017-18. The NRI investments earlier were about 8-10 per cent of the total inventory, but in the current scenario it may rise up to 15 per cent.
Narendra Modi government has initiated some landmark reforms such as The Real Estate (Regulation and Development) Act (RERA), Demonetization, and Goods and Services Tax (GST) in the last two years to transform the unregulated and opaque real estate sector into a regulated, transparent, accountable and consumer-centric industry. Earlier, the sector was plaguing with some fundamental issues such as lack of regulation and transparency. Delayed or unfinished housing projects have been a major part of buyers’ worry. Moreover, there were inflated property prices due to the foul play by some unscrupulous realtors. Therefore, the government undertook several wide-ranging policy reforms to resolve these issues to enhance consumer confidence.
All these key policy reforms initiatives of the government have been directed towards bringing homes within the reach of the common people and replacing the investor-driven model with consumer-centric model to ensure that residential property becomes affordable. Though the short-term adverse effects of interruption caused by these reforms may have shocked the real estate market initially, but now they have been largely redressed and the sector is on the revival path with an increase in investments due to the new compliance law.
The RERA was implemented in May 2016 to bring accountability and transparency into the sector to protect home-buyers and ensure developers complete housing projects on time.
The RERA has put an end to the exploitation by unscrupulous developers by making transactions fair, transparent and secure with its preventive and punitive provisions. Developers can no longer afford laxity when it comes to the matter of project completion on time. They have to disclose all project-related information and any modification in project plans to RERA.
The implementation of RERA was lackluster across the country during the initial period, although most of the states have notified the rules. According to a report, currently 28 states and union territories have notified rules under RERA and now more than 20 tribunals are operational and about 35,000 real estate projects have been registered so far.
The second challenge was the massive confusion created in the real estate sector due to the rollout of GST last year in July. With the government’s recent proposal to rationalize GST in housing, it is expected that the GST on under construction properties can be brought down to 12 percent slab and increase land abatement up to 50 percent. This will reduce the GST rate effectively to 6 percent even without Input Tax Credit. It is also recommended that stamp duty is brought under the GST purview to reduce the total tax burden on consumers.
The launch of REITs (Real Estate Investment Trusts) adds more transparency to real estate transactions. REITs will enable significant growth in India’s commercial sector as it can help in the higher inflow of capital from global investors. For a long time, India’s office space sector received most of its funding from private equity funds.
A large number of housing projects across India are stalled due to a shortage of funds, especially as bank funding has been difficult to come. But the reformed and regulated real estate has led to the inflow of huge foreign investment. A report by the United Nations Conference for Trade and Development stated that India ranked 4th in terms of FDI inflow. In 2016, FDI in India’s real estate market was US$ 34 million and this number is expected to have significantly increased since then.
Private equity investments into the real estate sector is a best sign of the confidence of the investor community. This confidence is closely linked with the transparency of the property markets. Private equity rescued the Indian Real Estate sector and infused funds into it. According to a report, private Equity interest in Indian retail realty is at its high with the sector witnessing an investment of INR 950 Cr in 2018.
There has been some improvement in the Indian residential real estate market in the year 2018. However, recent RBI rate hikes have increased borrowing costs. The average home-buyer could feel the pinch from higher interest rates. That would impact home buyers mostly in the mid-to-lower tier market since their home purchases are mostly financed through bank loans.
India’s housing market has struggled for growth in recent years. The demand in the housing sector has slowed down over the past few years. However, the demand for lower-priced residential properties have showed an increase than luxury or premium housing in the recent couple of years.
In fact, affordable housing has taken the center-stage in the Indian real estate market. It has helped residential segment to slightly recover from its lows in 2017 when it was hit hard by the demonetization, RERA and, the GST in the year 2016-2017. In fact, growth and demand in the affordable housing segment outgrew the overall demand in Indian real estate in 2018.
In 2019 also, affordable housing will remain the main segment driven by government initiatives like the Pradhan Mantri Awas Yojana and the Housing For All agenda.
The government provides interest subsidy of 6.5 percent (up to Rs 2.67 lakh) to home buyers belonging to the Low Income Group (LIG) and Middle Income Group (MIG) categories under the Credit-Linked Subsidy Scheme of the Pradhan Mantri Awas Yojana (PMAY).
The government has increased the carpet area of houses eligible for the interest subsidy by 33 per cent, broadening the ambit of the scheme. The change is effective from January 1, 2019. In the new guidelines, the carpet area of a house for Middle Income Group-I (MIG-I) was raised to 160 square meters (sq mt) from 120 sq mt, while it has been increased to 200 sq mt from 150 sq mt in the case of MIG -II.
According to a report, launches within the INR 40 lacs pricing bracket were the highest during 2017 and 2018. Bengaluru & Mumbai remain the major contributors to new residential launches.
Unlike the housing segment, the commercial real estate sector has already witnessed a surge in demand and continued to perform better even during 2018. With the fast and ever-evolving work culture in India, office spaces have seen phenomenal growth from both, the demand & supply side. This trend is likely to spread to Tier II and other cities.
As per JLL India, net leasing of office space rose 16 per cent to 33.3 million sq ft in 2018 while a CBRE report pointing to an all-time high absorption of 11 msf during the first quarter of the year, 25 percent up from last year.
Student Housing, a new emerging sector presents a tremendous opportunity for the market. Student Housing has the potential to yield more than 12 percent returns vis-a-vis the core commercial sector in which returns remain range bound between 7 percent & 10 percent. However, the sector is still at a nascent stage.
India has shown incredible improvement in the latest global real estate transparency index and has registered maximum improvement in transparency in real estate over the last two years. It has improved its rankings by one notch to 35th in the latest bi-annual survey. India was ranked 36th in the index during the last survey conducted in 2016 and 40th in 2014.
In fact, better market fundamentals, policy reforms, liberalization of FDI into real estate sector and giving ‘industry status’ to affordable housing also helped in achieving higher ranking. It is expected to become more transparent and the ratings are further going to improve on the back of comprehensive implementation of many key policy reforms undertaken by the government. A transparent real estate market will certainly bring more investment and also boost buyers’ confidence.
Housing sales to remain subdued in the first half of 2019 due to the continuing NBFC liquidity crisis and upcoming general elections. However, sales may surge in the second half with the arrival of a stable government. The alternative funding solutions need to be discovered to relieve liquidity choked sector.
If a proposal to cut GST rate from the current 12 per cent gets approved and liquidity situation improves among non-banking finance companies (NBFCs), the year 2019 would see better investment and demand. The key regulatory reforms have given a new lease to the sector, and investors and end users are regaining confidence in the industry.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.