Realty sector headed for consolidation

The real estate sector, which faced turbulent times in 2016, is staring at another challenging year ahead, following disruption caused by reforms like the Real Estate Regulation Act (RERA) and demonetisation. But all this may augur well for the sector in the coming times. Amidst prevailing uncertainty, the new year may well see real estate firmly put on the path of transformation and consolidation, towards more stability and healthy growth.

The year started on a promising note. But, much against the expected revival, real estate, especially residential real estate, faced headwinds in terms of weak demand and muted sales in the backdrop of large-scale delivery defaults, developer-buyer face-offs, unaffordable prices and high-interest rates. The introduction of RERA added further confusion to the general chaos and finally, towards the end of the year, demonetisation badly hit the struggling sector, making for a bumpy end.

It was a gloomy year for the housing market. The ever-widening trust deficit between developers and home buyers added to the woes of residential real estate, especially because of a vast number of developers not delivering on time. The top seven cities in the country have over 1.5 million units delayed between 14-30 months, with a fourth of them in the NCR. And, due to buyers' lack of trust, home selling became tough. Even those who took a buying decision preferred ready-to-move homes to secure their investments. By the end of Q1, 6.6 lakh units across the top 8 cities remained unsold, with the NCR topping with 2 lakh units. Even the festive season couldn't be of much help as hardly did the sales start picking up that demonetisation struck its blow.

Demonetisation will adversely impact those real estate developers who follow a business model with a significant cash component. There will be likely downward pressure on prices as these cash-strapped developers will be compelled to liquidate their inventory at discounted rates to generate cash flows. However, it will have a positive impact on home buyers, especially buyers of affordable homes who invest through home mortgage and transact through cheque. Going forward, demonetisation will bring in more transparency in real estate transactions and bridge the gap between primary and secondary market prices.

While residential real estate was found struggling, commercial real estate saw healthy demand (26.4 msf by 3Q 2016), with the total yearly pan-India demand expected to touch 34.2 million mark, driven by sectors such as manufacturing, logistics and FMCG. Gaining further strength, commercial realty is likely to see a higher demand of 38-40 msf in 2017, with cities like Chennai, Hyderabad and Pune driving the growth.

The theme song of the year was affordability, with such properties clearly dominating the landscape across cities. With developers increasingly taking to affordable housing given rising demand, about 59 per cent of the projects were launched in this segment. The developers also resorted to developing compact-sized homes to make them more affordable. And, considering that residential real estate was still facing a lot of stress, the government, in line with its Housing for All mission, also put its entire focus on affordable housing. 

In this year's budget, developers were incentivised by way of 100 per cent service tax waiver for affordable homes of sizes up to 30 sq mts in the metros and 60 sq mts in the non-metros. To promote timely delivery, the tax benefit was linked to completing construction within three years. There was a rebate of Rs 50,000 p.a on housing loans not exceeding Rs 35 lakh and property value not exceeding 50 lakh. The rental housing also got a boost with HRA hike from Rs 24,000 to Rs 60,000.

There were many positives in the otherwise dull and challenging year. It was a watershed year in that it was a year of reformed, regulated and reoriented realty. It was a year that provided a protective shield to home buyers by way of the passing of RERA, promising a transformed and transparent realty with fair transactions. The passage of Goods and Sevices Tax (GST) Act, was a positive move towards simplifying the tax system and making it more predictable for investors. The year saw putting in place disclosure norms for Real Estate Investment Trusts (REITs) along with specific norms for their public issuance. The abolition of Dividend Distribution Tax paved the way for making REITs financially viable for retail investors. 

And, to help the ailing construction sector tide over the crisis, reforms were introduced to speed up the resolution of disputes and ensure that construction companies investments are not stuck in arbitration. Further, amendments to the Benami Transaction (Prohibition) Act were made to introduce stringent rules and penalties for such transactions. All these reforms and policy initiatives will go a long way in regulating the sector and making it more attractive for domestic and foreign investors.

Notwithstanding the bumps faced by real estate this year, the positive measures have put the sector firmly on the path of long-term sustainable growth. Though 2017 may well start on a tepid note due to the massive disruption caused by demonetisation, yet a tax-friendly budget, coupled with rationalisation of property prices, lower home loan rates and implementation of RERA, GST, and Benami Act, may improve demand and significantly push up sales, paving the way for a more organised, regulated, reliable, and investor- friendly real estate.