The year 2016 has been an eventful one for India’s real estate sector. The first half of the year witnessed early signs of a revival in momentum, as reflected in improved sales and a drop in unsold inventory levels across the top residential markets in India (as compared to
H1, calendar year 2015). As the world’s fastest-growing large economy, India’s progress in the year has been supported by FDI reforms, healthy consumer demand and improved agricultural output driven by a good monsoon. The broad consensus was that India’s real estate sector appeared to be reaching an inflection point, with time correction in prices, the implementation of the Real Estate Act 2016, low interest rates and an overall supportive policy/regulatory environment all serving to contribute to a revival in consumer sentiments.
2016 has also been the year of strategic policy initiatives, the broader objective being the creation of a conducive economic system that would boost long-term industrial growth and improve ease of business. Specific to the sector, the Real Estate Act 2016, with its thrust on transparency, accountability and the protection of home buyer interests, seeks to empower all stakeholders engaged in the business and consumption of real estate. The Benami Transactions (Prohibition) Amendment Act, 2016, establishes a regulatory mechanism to further strengthen the fight against tax evasion and improve transparency. Yet other announcements, such as the exemption of Dividend Distribution Tax (DDT) for SPVs to REITs and relaxation of FDI norms, were aimed at improving financing to the sector.
As last year, affordable housing continued to attract significant attention, driven by continued and accelerating urbanisation, rising home ownership aspirations and an urban housing shortage estimated at 18.8 million units as per the ‘White Paper – Indian Housing Industry’ by research and consultancy firm RNCOS. 100 per cent deduction in profits for construction of affordable housing (upto 30 sq. mtr. in the four Indian metros and 60 sq. mtr. in other cities) and interest subsidy for first-time homebuyers, are some of the initiatives that were introduced to improve supply and spur construction activity in the segment.
In the month of November, 2016, the Indian economy witnessed a major shake-up, set in motion by the withdrawal of legal tender character of high-value currency notes. There has been much debate on the pros and cons of demonetisation and its comprehensive impact. The immediate impact continues to be felt across many industries and sectors, as manifest in a drop in consumption spends and growth rates in the near term. From a real estate perspective, the short-midterm impact of demonetisation is expected to vary across regions, as the sector is fairly localised in nature. With intending home buyers likely to adopt a ‘wait and watch’ approach, it appears as though we might witness a temporary slowdown in the sector till the economy adjusts to a new normal.
While the primary market in tier I cities is expected to remain largely unaffected, the tier-II and tier-III markets might be impacted to a higher degree, along with the luxury segment. However, demand for affordable housing is unlikely to be significantly impacted by demonetisation, since the cash component in the segment is typically minimal and transactions are primarily routed through bank borrowings. Though it’s difficult to predict the impact of demonetization at this stage on real estate sector including affordable housing segment.
2017: A year of Change
Growing cities – The fact remains that India’s cities are growing and will continue to do so, driven by urbanisation, rising disposable income and mounting consumption of goods and services. Demonetisation notwithstanding, therefore, the demand for quality housing that is strategically located and attractively priced will sustain. From the perspective of resultant pricing shifts, cities and micro-markets that are end user driven are likely to remain stable. For intending home buyers, the new year has already started on a positive note, with some banks lowering their lending rates and more borrowers now eligible for loans and reduction in home loan EMIs, in addition to reduced tenures for existing borrowers, wherever applicable. This softening of interest rates bodes well for the growth of the real estate sector.
The evolving home buyer – While it’s difficult to predict the sector’s journey through the new year in exacting detail at this point, home buyer preference for institutionalized developers with demonstrated track record and good governance framework will likely strengthen in 2017. This is especially relevant given the evolving customer profile, larger share of home loan customers and practices that are followed with respect to no undervaluation of properties or payments in cash (by such real estate developers). We believe real estate markets across India are maturing and will increasingly be end user driven, going forward. In fact, over the past two quarters or so, end users have been actively pursuing options, with closure rates improving for right-priced projects in good locations.
GST – An important and game-changing reform that merits special mention is GST or Goods and Services Tax, expected to be rolled out in 2017. When implemented, GST will subsume a series of central taxes and state-level levies, and could benefit the nation in the long term, by way of a wider tax base and greater participation in the formal economy.
Sustainable urban development – Green buildings, or developments that are resource-conscious, are increasingly finding flavour with consumers in India; this is on account of increasing awareness of both the long term benefits to the environment and demonstrated savings in operational (utilities) costs of such buildings. And yet, India’s cities have a far smaller proportion of green developments, when compared to other developed countries – the US or the UK, for instance. Incentives and tax benefits can contribute to stakeholder buy-in and improve the pace and scale of ‘green’ development. We believe that green and inclusive urbanisation that encompassed the entire lifecycle of buildings (from construction, to operations and end of use) can provide a new direction to India’s real estate/infrastructure sector.
On an overall basis, over time, the recent moves at regulating the economy are expected to increase transparency and the ability to attract institutional capital across industries and sectors, despite some initial short-term turmoil. Consequently, we believe that the Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth, provided adequate policy/regulatory support.