Real Estate headed for slow and prolonged revival

The hopes of an early turnaround of the beleaguered real estate sector, kindled by the installation of a stable, reform-oriented government, headed by Narendra Modi, were belied this year. The fund- starved sector continues to be bogged down by weak demand and muted sales. And though there are signs of revival, yet in the wake of delayed reforms taking toll of the business sentiment, it may take long before the sector gets stabilised with healthy long-term sustainable growth.

The realty sector continues to reel under a crunch for funds which has proved to be its biggest bane over the last few years. According to Crisil, India’s top 25 developers, making up for 95 percent of the sector’s capitalisation, face the risk of refinancing Rs 3000 crores of debt. These fund woes, besides delayed regulatory permissions, were responsible for large-scale project delays and resultant cost escalations, badly affecting the sentiment of property buyers/investors. According to Liases Foras, out of the total space of 3.2bsf under construction across 25 cities, about 34 percent (1.1bsf) of space valued at 165064 crores (1.32 percent of GDP) was delayed by over a year.

In this grim backdrop, the year saw the rise of a cautious and discerning buyer taking a backseat in the property market, largely concerned about the safety of his investment. The investors are disillusioned and dejected by the stuck investments and falling returns withdrew from the market. So much so that even the luring marketing schemes like subsidised home loans, EMI waiver till possession, and other waivers on registration, car parking, and club fee offered throughout the year, failed to entice buyers. The demand-supply mismatch further gave an upper hand to buyers and investors.

On the investment front, it was a year of record FDI and PE investments, especially PE investments touching a record high of $14 billion till October, 2015, with funding to income yielding office real estate surpassing residential real estate. In 2016, too, commercial and residential property in top 7 cities, will continue to get major PE funding while retail will gain traction.

Amid large-scale delivery defaults, slow sales and huge unsold inventory, residential real estate, like last year, remained in the slow lane. The luxury real estate was badly hit though affordable housing segment attained some traction. There were, however, some green shoots especially in cities like Mumbai, Bengaluru, and Hyderabad. The year 2016 may see some revival, with greater impetus to low-cost housing. 

On the retail real estate front, it was a no-show with hardly any quality retail space added to the stock. Though no significant quality mall space is expected to be added next year, yet we may see the positive trend of emerging tier 2-3 markets. There was a big boost to office space absorption of 3.5msf, second highest after 2011, with the rise in rents across cities, especially in SBDs and PBDs in tier-1 cities. The year 2016 will see a consistent increase in demand driven by IT/ITES like this year.

It was a year of mixed fortunes for realty reforms. For the fund-starved sector, there was FDI bonanza, waiving off entry and exit barriers, raising FIPB approval limit from 3000 to 5000 crores and doing away with area restriction of 20000 sq mts and capitalisation of $5 million, besides allowing investment repatriation before project completion with a 3-year lock-in. The government also fast-tracked environmental clearances. However, key reforms like real estate regulator, GST and Arbitration bills, and policy measures like single window clearance to check delays and price escalation, ensuring ease of doing business, got stalled, leading to a dip in business sentiment. The first full- fledged budget of Modi government also failed to provide a necessary fillip. Except for a couple of good initiatives like making REITs viable with a provision of pass-through tax for investments and rationalisation of tax gains, and allowing foreign investments in Alternate Investment Funds, it failed to address the core issue of increasing affordability and supply of low-cost housing. In a further setback, the budget, instead of removing service tax on affordable housing, hiked it from 12.36 percent to 14 percent, besides marginally raising excise duty.

As property buyers increasingly demand  value housing, timely project execution and right quality with the right pricing, hold the key to the revival of real estate. With the government focusing on reforms like Real Estate Regulation, GST and Arbitration Acts, aimed at strengthening sector  fundamentals instead of offering sops, the new year will provide the much-needed push to reality. 

A series of policy measures for catalysing business/investments like progressive and predictable tax regime, rationalisation of labour laws and single window clearance for ease of doing business are underway. And with a further drop in interest rates and rise in office rentals in the coming months, the year 2016 may herald a new era for retail investors. On the mortgage reforms front, apart from further cuts in interest rates, RBI’s proposed reduction in minimum risk weightage on individual housing loans for low-cost homes, will boost affordable housing which is key to real estate revival. And with commercial real estate set to gain further momentum, real estate sector is headed for a well-regulated, transparent and consolidation phase with healthy and sustained growth over medium to long term.