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Saturday, June 25, 2016
Reforms making India real estate investments attractive
Jun 15, 2016: The real estate sector that suffered much pain in the past two years is moving towards a more rational regime where developers, having learnt from their mistakes, now focus on project execution and delivery. This year is expected to gradually move towards better home sales and see a spurt in launches in some locations. The year will also see the sector moving from an investor-driven to an end-user driven cycle.
The recent reforms in the real estate sector have made investments into this sector even more lucrative. The recent passage of the real estate bill wherein the investors can look forward to far higher transparency and ease of doing business with developers, has led to a lot of warming up of NRIs and other FDI money towards Indian real estate. Also, now with the government permitting NRI investments into domestic AIF (Alternate Investment Funds), the availability of foreign capital will naturally increase. Coupled with the DTAA benefits available to the offshore investors, especially NRIs, it is a very lucrative time to invest in Indian real estate.
Last year India saw around $35 billion in private equity of which around $5 billion was into the real estate sector. This year, realty funds in India have already raised $470 million since January 2016 as compared to $520 million raised in the entire last year. It is possible that just real estate itself will see over $1 billion in inflows in the residential segment itself.
Affordable housing, for sure, will continue to remain at the center of these funds inflow activity.
There is a huge demand in affordable housing in most parts of the country and it’s the only option available for a common man to buy a house. This segment is backed by the initiatives announced by the government in this year’s union budget like additional exemption of Rs 50,000 for first time home buyers and 100% income and service tax exemption for construction of houses up to 30 sq meters in fourmetro cities and 60 sq meters for other cities have been allowed. Both these measures will spur affordable housing and help increasing supply in peripheral areas of cities. Real estate funds like ours will target on lending to developers with focus on affordable housing. Foreign financial institutions have also started investing into affordable housing projects as well as developers who are focused on this area, thus aiding the funding scenario as well.
Affordable housing will continue to get high traction in markets like Mumbai, Thane, Pune, NCR, Bangalore, Hyderabad, Chennai, Kolkata and Ahmedabad. While the launches and demand are going to be range bound, the product and positioning will be aligned to end users segment. The average sizes of units are going to reduce further; though marginally. Certain micro-markets within these cities are witnessing rapid infrastructural development, leading to higher influx of the educated middle class home seeker in these markets. These markets observe a more realistic capital rate assumption than the highly developed zones, and thus receive higher attention from home seekers. The developers will focus more towards bringing back the confidence of the consumer by being more transparent and focusing on constructing as per the commitments. While the long term story for residential market remains strong the short term turbulence is expected to remain.
This a right time to invest in affordable housing segment as the projects are available at attractive valuations and demand is expected to boost in 2-3 years. India is a shining economy and with the favorable investment climate and correct steps at policy level will make it more attractive not only to onshore investors but also for offshore investors.