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Friday, December 26, 2014
Real Estate sector up for a positive transition in 2015
During the past few years, the Indian real estate sector had to confront tough times; difficult economic and business environment and high inflation affected all stakeholders such as occupiers, investors, developers and home buyers.
Candle Stick Chart of HDIL
Mumbai | December 24, 2014: The year 2014 brought in positive sentiment around Indian real estate and among Indian as well as international investors in recent times, mostly due to the formation of new government as it enthused the investor and business confidence in the Indian economy. There were numerous positive policy announcements which helped in generating a favourable mood for the real estate market. During the past few years, the Indian real estate sector had to confront tough times; difficult economic and business environment and high inflation affected all stakeholders such as occupiers, investors, developers and home buyers. As a result, significant unsold inventory and execution delays were prevalent in almost all real estate classes during the past couple of years. In the last few months, policy makers have taken several initiatives to revive the real estate sector and improve investor and buyer confidence.
The following are possible growth drivers which can help orchestrate a speedy revival of the sector in 2015.
Economic Growth Drivers: Real Estate is regarded as the backbone of the Indian economy as it contributes to about 5-6% of the nation’s GDP and is the 2nd highest employer in the country (after agriculture). Nowadays with the changing mindset of consumers and their shift of focus from living on rent towards owning their own property, the real estate sector has witnessed huge demand in the residential segment. The demand for commercial development is also growing at a fast pace due to a paradigm shift from unorganized towards organized retail coupled with increase in MNC’s interest in establishing offices here in India. The real estate and infrastructure sector may benefit a lot from the slide in oil prices which is up at almost 25 per cent over the past few months. Unlike many other Asian countries, India provides automotive fuel at fixed prices to the consumers, thus ushering some months of budgetary saving for the government exchequer. Add to that, the high possibility of interest rate reduction by RBI in the first quarter of 2015 will be a boost for the realty sector.
Government Policies/Regulations: Although real estate sector has been on top of the priority of the government but it still lacks clear laws to be guided, apart from various other challenges like lack of clear land titles, absence of industry status and rising manpower and material costs that have been restricting its growth. The Government of India has taken several initiatives to encourage the development in the sector. Some of them include relaxation of FDI rules, establishment of REIT, redefining affordable housing, Housing for all by 2022, tax incentive on home loans, Smart City projects and set up of National Industrial Corridor Authority. All these give a clear picture that 2015 can be a very positive year for the real estate sector as well as for Indian economy. It is also likely that the government will amend the Land Acquisition Act, which might give impetus to investment in infrastructure development.
A number of regulatory changes and policy measures have been initiated this year and are likely to bear a positive impact on the Indian real estate sector. Such policies will help reduce the risk perception associated with the sector and ensure greater transparency in transactions. This transformation is expected to attract larger global investments that will contribute to better real estate product offerings and a more vibrant, matured real estate sector.
Financial Growth: India has huge potential to attract large foreign investments into real estate and the global real estate players are looking at emerging economies such as India for tapping opportunities in real estate. Almost every investor today seeks to invest some part of his asset allocation in the real estate sector to safeguard against any financial market fluctuations. Investing in real estate through home loan route not only gives the convenience of investing, but also tax benefits for the amount repaid. With the Narendra Modi led NDA government announcing its plans to build over 100 smart cities, smart city development is the next big opportunity for builders and investors. Some of the existing smart city projects have been witnessing a growth prospect of 10- 15% annual increase with experts suggesting a much better long term investment prospective. For those seeking to invest with a long term prospective, investing in Smart cities can be the best investment decision in the coming year.
Investment Scenario: Private Equity (PE) funding has picked up in the last one year due to attractive valuations. It had been projected that private equity investments in India is touched a staggering $12 billion in 2014 primarily on account of reform measures taken by the government at the centre. Bangalore topped the PE transactions in the first half of the year with Rs. 2500 cr as against merely Rs.103 cr in the previous year. Mumbai also witnessed a good inflow of investments worth Rs. 1140 cr majorly in residential sector. The increase in PE investments in Indian real estate has been majorly due to increasing investments in leased office assets by both foreign and domestic funds, given the potential for stable yields and attractive capital value. Domestic companies are more inclined towards investing in real estate sector because of companies started to acquire land and spaces required to stimulate and execute growth strategies. The developers' community is upbeat about foreign investments and are optimistic for further investments in the coming year. There are reports that investments worth $4.5 billion were made into realty sector during the period of January-September 2014, which gives another clear indication of growing positive investment sentiments in the sector.
Technological Advancements: Technological advancements have played a major role in evolving of Indian real estate sector. Real estate developers are adopting advanced construction technologies for faster execution of housing projects. The new software solutions have been doing wonders for developers by bringing in accuracy, more accessibility and timely completion of projects. Adaption of advanced construction technologies is becoming increasingly imperative owing to rapid pace of infrastructure development, tighter project completion schedules and acute paucity of skilled workers. Moreover, this year we saw online Real Estate portals revolutionizing the way property is sold. Over 500 houses were sold online during Great Online Shopping Festival (GOSF) by giving buyers a 3D view, map based search, access to application based search, thus adding to value to the overall buying experience of the consumer and removing the broker system. The use of technology will continue to transform the field in the years ahead, enabling home buyers to research both properties and the areas in which they are located, including looking at pictures and finding out about the neighbourhood’s schools, crime rates and other statistics. Marketing over the internet with pictures of properties and virtual tours will be important for brokers as majority of people use the internet before purchasing real estate.
The road ahead: Overall, 2014 was very encouraging for real estate industry providing more hits than misses, compared to last few years. The first half witnessed a huge slowdown majorly due to political ambiguity and poor business confidence whereas the second half saw a sudden uplift in the sentiments of both buyers and developers. The formation of new stable government at the centre rehabilitated the dying economy and fuelled the growth but in terms of its impact on the realty sector, while it did have a positive effect but any significant impact can only be seen in the coming times. In 2015, overall property markets are expected to continue edge further into recovery. If all aforementioned factors continue boosting Indian Real Estate then we can surely witness a huge transformation in terms of investments coming in this sector. As of now, real estate being a capital intensive sector has been seen chasing for capital but putting all these reforms in place it won’t be surprising to see capital chasing the sector in the near future making it one of the most lucrative sectors for investment.
The author is Chairman & Managing Director, Posiview Consulting Pvt. Ltd.