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2014 Could Be Better

Monday, December 16, 2013

The real estate sector through 2013 was plagued with numerous troubles. The overall economic climate, coupled with inflation and high interest rates, kept buyers at bay. But, if one is to believe the current trend in the economy, there is hope that year 2014 would bring in some good news for the sector. Overall, there were some policy decisions in favour and some not in favour of the sector in 2013. Mayura Shanbaug takes stock of the situation and events that have impacted the sector and how they would continue to do so in 2014 as well.   

While the real estate market witnessed a drastic fall in sales across regions, property prices in some established markets dropped on account of an oversupply situation. However, in most regions, especially in emerging areas having ongoing projects, developers continued to hold on to their prices making some locations unaffordable. While the office space segment witnessed improved transactions through the first half of the year, the retail segment continued to face challenges such as supply of quality spaces affecting overall absorption. The residential demand improved during 2013; however, developers continued to struggle with unsold inventories and reduced cash flows for construction.

Major events in the last one year which impacted the sector were: a) RBI scrapping 80:20 housing loan schemes b) 1 % TDS on immovable property over Rs 50 lakh in the Budget c) Rs 1 lakh tax incentive for first time home buyer this too in the Budget and d) Introduction of real estate investment trusts (Reits) in the country.

“The Reserve Bank of India (RBI) asked banks to call off the dubious 80:20 and 75:25 schemes, as the banking regulator felt that such products increase the risk for both banks and borrowers especially if there is a dispute between the buyer and the builder or the project is not delivered on time,” says Sachin Sandhir, MD, RICS (Royal Institute of Chartered Surveyors) South Asia. 

The RBI advised banks to closely link home loan disbursal with the stages of construction of a housing project. “The move puts a check on price escalation, as it will dissuade investors or short-term buyers from investing in the otherwise popular under-construction projects,” he says.

“Several viewpoints have been floated since the RBI announced this ban, largely speculating on a fall in real estate prices as a consequence,” says Ashutosh Limaye, Head – Research & REIS, Jones Lang LaSalle India. “It has been opined that developers’ holding power will be significantly reduce, forcing them to reduce prices. This analysis of the situation is based on the currently high levels of inventory that developers are saddled with, especially in larger cities like Mumbai, Bangalore and Delhi,” he says.

“Despite the RBI’s edict, it is important to note that there are other dynamics at play in some of these larger cities which could result in developers resisting price cuts. In the first place, the cost of land in these cities is already at astronomic levels. Secondly, the recent amendment to the Land Acquisition and R&R Bill will raise land owners’ expectations, which means that developers will have to negotiate harder for available land. As a result, developers in these cities will now operate from the standpoint that overall real estate prices will, in fact, rise going forward,” explains Limaye.

At a time when the real estate sector is reeling under a liquidity crunch and poor sales, the Securities and Exchange Board of India (Sebi) has re-initiated the process of introducing real estate investment trusts (REITs) in the country.

“The decision to allow listing of Reits in India as an investment product has the potential to boost the liquidity situation of cash-starved developers, who are struggling to find funds for their construction activities. This will also boost the subdued investor sentiment in the country,” says Sachin Sandhir.

 “Reits will provide an investment avenue which is less risky than under-construction properties, as well as offer easier exit routes along with regular income,” he says.

“Allowing Reits is a sign of the maturity of the Indian real estate market. Reits reduce individual speculation in real estate assets and allow for more professional investment and management in the sector,” says Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, a real estate consultancy.

According to Cushman & Wakefield, around 57 million square feet of office space is vacant in India and over 200 million square feet of investable ‘Grade A’ leased offices are unsold. These properties can be used by Reits to generate rental incomes. The residential segment, where annual rental yield is low (2-5%), will be better suited for capital appreciation.

Another affecting factor is that, amidst the global economic uncertainty, fiscal consolidation; the prevailing local market conditions have affected investor sentiments. According to the Department of Industrial Policy & Promotion (DIPP), the Construction Development sector received a total Foreign Direct Investment (FDI) equity inflow of INR 1,052 bn (USD 22.8 bn) during April 2000 to September 2013. These amounts to an 11.1% share of the total FDI equity inflow and are the second highest amongst all sectors, outlining the importance of the sector in attracting valuable foreign capital to the country.

From 2005, the DIPP allowed 100% FDI through automatic route in townships, housing and built-up infrastructure and construction developments, which drove up the FDI inflows in FY2008 and FY2009. However, post the global economic recession in 2008, which mainly affected real estate markets globally, FDI commitments to the sector were low. Hence, since 2010 onwards the sector has been attracting lesser FDI equity with its share falling to as low as 1% in 2011 and increasing up to only 6% in 2012.

“In the past few years, FDI investors were stuck in complicated approval processes, which made the time lines of projects they invested in uncertain and their financial planning estimates went wrong. Apart from cost overruns due to inflationary pressure on materials etc, the investors are worried about their timelines for exit which has been elongated and had adversely affected their returns on investments. Hence, the lack of certainty with regards to the time lines in the country risk compounded by the bureaucratic hurdles and corruption is further shaking the confidence of the investors,” said Lalit Kumar Jain, Chairman of Confederation of Real Estate Developers’ Associations of India (CREDAI) in a recently published white paper on the housing sector. 

According to the CREDAI white paper, India is rated as one of the lowest destinations for attracting cross border investments in real estate globally. In fact it is the lowest even amongst the BRIC countries. Other Asian countries markets such as China, Singapore, Hong Kong, Malaysia, are ahead of India.

Given that the first six months of the current financial year have recorded FDI equity inflows into the sector at INR 41.6 bn (USD 685 mn), there are indications that the rest of the year could record FDI equity inflows at par with the figures observed last year.

“Hence, the Government needs to take some concrete steps to create international investor interest in order to attract more foreign equity capital into the country and cross the previous thresholds,” says Jain.

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