Indian real estate: 2014
year in review and forecast for 2015!
[Editor:
In an article on Oct 30, 2014 in First Post, the author, Sunainaa Chadha argued
that India's relaxed rules for foreign direct investment (FDI) in
construction will fuel higher property prices, through simple
demand-supply logic. Under the new rules, the minimum built area for
projects in which foreign investment is allowed will be reduced to 20,000
square metres from 50,000. For "serviced plots", there is no minimum
land requirement now, compared to 10 hectares earlier, while the minimum
capital investment by foreign companies has been cut to $5 million from $10
million. She further reasoned that the reduction of minimum requirements for
built areas and capital will now allow investment to flow into South Mumbai or
central Delhi. Till now investment was going to the outskirts because it was
tough to find large areas to develop or construct 50,000 square metres. So the
new rules will encourage the development of smaller projects, especially in
urban areas, where the availability of land is limited. More construction in
prime areas does not imply that property prices here will come down. In fact,
buyers are most likely to see more Rs.60 crore prices for 2 BHK flats in tony
areas of south and central Mumbai areas like Worli or Peddar Road. This is
because demand for houses in posh areas far exceeds supply and builders will
cater to this snob requirement rather than construct 'affordable flats' in
south Bombay or south Delhi. Meanwhile, Anuj Puri, chairman and country
head at Jones Lang Lasalle India holds the view that: "The easier rules
will help faster completion of projects delayed by a squeeze on funds due to
elevated debt levels". There were also media reports few months back, that
a back-of-the-envelope calculation by Vallum Capital Advisors showed that it is
possible to fuel Real Estate Prices by creating a stock of inventory, diverting
money to other projects and investing to build land banks for future projects.
All these points that better days are ahead for the Real Estate sector. The
investors/traders are strongly suggested to buy the shares of good beaten-down
companies in this space]
New Delhi, 23 Dec 2014: The year 2014
has been quite fruitful for the real estate sector in terms of business
sentiment, although the real effect of many of the policies and amendments
announced in 2014 will take effect only in 2015. Starting from Union Budget FY
2014-15, where affordable housing was considered on par with infrastructure, to
relaxation of rigidities in the Land Acquisition and Real Estate Regulatory
Bill, India’s new Prime Minister has been offering the India real estate sector
consistent doses of energy.
The winds of change are now blowing more
perceptibly. Inflation, including the house price component, has now been
reduced to the lowest level in recallable history. Property buyers are back in
force in most cities as enquiries have rebounded, and developers are finally
reading the writing on the wall more accurately and coming in with the kind of
supply that is relevant to demand.
Meanwhile multinationals that were
hesitant to foray into the Indian market because of the uninspiring political
environment are now dusting off their plans for India and getting their entry
vehicles back in gear. Going by the recent reports of recruitment agencies,
many more jobs will be created in 2015 - especially in the IT/ITeS,
manufacturing and services sectors - and the demand for homes will increase
visibly. Also, REITs are hitting the market at long last, and only a few
details need to be sorted out before they get the funding wheels spinning.
2015 will definitely be
a good year for the real estate sector on three counts:
* The threat of inflation has completely
submerged, and borrowing rates are sure to go down from the current levels.
This will encourage potential buyers planning to avail of home loans to finally
take the plunge. Also, with property prices staying stable and good deals being
offered by developers in order to clear their inventory, fence-sitting buyers
be further encouraged to press the ‘buy’ button.
* Economic activity is gradually picking
up, and the Central Bank anticipates GDP growth to reach 6.5 per cent y/y in
the next financial year (FY2015-16). Corporate India has already made it clear
that there will be more hiring of talent to help tackle rising business
activity. Put together, this means a rise in jobs and incomes, which in turn is
very favourable for both residential and commercial real estate.
* The market has witnessed a
re-orientation and developers are now largely focusing on affordable homes.
This will go a long way, though definitely not all the way, in bridging the
existing wide gap between demand and supply of affordable homes.
During the year 2014, new launches of
residential units saw a consistent fall every quarter as a consequence of the
subdued demand and high prices. While this was largely the case with high-end
projects, the affordable housing segment definitely began to gain favour. This
segment was firmly lodged under the priority schemes of the government and
central bank, and buyers were seen finding comfort in investing in such
projects given the smaller ticket sizes and improving connectivity in the
suburbs of the major cities.
In the second half of 2014, many large
developers who in the recent past concentrated on the mid-to-high segment due
to better margins were seen eager to play the volume game and entering into
affordable-segment projects in the deeper suburbs. This heartening trend began
the ground work on bridging the wedge between demand and supply in our major
metropolitan cities.
Since developers are sitting on close to
30 months of unsold inventory in the mid-to-high-end segment, we also saw an
increase in cash flows because of this new focus.
Completions, net
absorption & unsold inventory – residential
In 2015, developers will become more
earnest about right-sizing and right-pricing their offerings. Smaller, yet
better-designed and more efficient homes will define the residential real
estate market in 2015, and selective corrections in some of the over-priced
cities will help bring about faster sales for stagnated supply of larger
configurations. Townships will become more prevalent, and the supply of luxury homes
will moderate to align with the slow demand dynamics for these offerings.
A large portion of the total unsold
residential inventory is in the under-construction projects, while completed
projects have only moderate vacancy. Home buyers looking for ready-possession
property will therefore find limited room for negotiations when compared to
buyers who can wait for some time to get possession. The attractive schemes
that were doled out by developers in under-construction projects during the
festive season of 2014 are likely to continue into 2015.
2015 will see home buyers benefiting
from reduced borrowing rates, increased developer-focus on affordable homes,
largely stable prices, and better job and income prospects.
Affordable housing will clearly be the
flavour of the season in 2015. While the ruling government at the Centre and
the Central Bank have clearly spelled out their intention to push for
affordable housing, it is the State governments which will need to take the
implementation initiative. The recently concluded elections have clearly
indicated that better governance, planning and good implementation are factors
on which performance will be evaluated, and affordable housing is an important
yardstick for sure.
While affordability will always be a
subjective term that assumes different meanings in different markets of India,
every city does have its own affordability threshold and benchmark. Developers
active in each of the primary cities are now fully aware that they must address
the demand for affordable housing in their cities, and stop focusing
excessively on high-end and luxury offerings.
Affordable housing is in itself not a
difficult format to deliver; the challenging part for many developers will be
to align this format with their existing brand image without impacting it.
Quite a few prominent developers already have a budget housing strategy, but
they have evolved this strategy over time and ensured that the creation of such
projects becomes a natural extension of their brands. For the newer entrants
who have so far focused exclusively on higher-end housing, the process will
begin only now – and for all but the die-hard firms that will not budge from
their ‘creamy layer’ orientation, the process is unavoidable.
Coming anywhere close to negating the
affordable housing gap altogether would take about two decades of focussed
supply – and going by previous market learnings, it is unlikely that developers
will retain their current focus on affordable housing once the economy picks up
sufficiently to make higher-end housing desirable once again. However, as long
as the current momentum and orientation prevails, we will at least see some
good headway being made on this front in 2015.
Over the past few years until 2014, the
supply of office real estate was higher than demand by 4 to 10 million sq ft.
Our reading is that developer had been too optimistic in their anticipation of
a revival in economic activity.
Though office real estate prices failed
to recover from the after-effects of the financial crisis up to late 2014, we
did see the beginning of a gradual turnaround.
This can be attributed to the fact that
commercial real estate developers began to strategically reduce the incoming
supply to a new-normal level of occupier demand in the range of 27 to 30
million sq. ft. each year. This helped bring down the vacancy rate to 17 per
cent from more than 18.5 per cent just a year ago.
In 2015, demand will remain in this
range, marginally improving from the level seen in 2014. However, with the
rupee weakening to below INR 62/USD at the current time and India’s GDP growth
likely to strengthen further, the positive risk to this forecast of a sharp
uptick in demand cannot be ruled out though.
Interestingly, while office real estate
have not recovered fully from the fall in prices post GFC (unlike residential)
there is significant room for upside in the event of a positive change in
business sentiment. In fact, such an improvement was already seen after the
general elections and is already reflecting in year-end office market leases.
The trend of moderate-to-healthy leasing activity will continue in 2015.
Pan-India new
completions, absorptions and vacancy – office
In 2014, the retail real estate sector was
one of the biggest casualties to market conditions that increasingly favoured
the online retail community, with the exclusion of well-managed and leasehold
organised retail malls. Strata-sold, poorly-managed, badly-located retail
properties lost lustre as more retailers chose to avoid them.
2014 also saw a few of these malls either
converting into Grade B office space or reeling under the compounding effect of
rising vacancy rates. Vacancy in poorly-built and operated malls was as high as
20 per cent, while good quality malls were relatively better off with about 10
per cent of vacant space. The ecommerce frenzy that has been taking India by
storm over the last two years was at its peak during 2014, and now poses a serious
challenge to physical retailers and mall developers. The situation is
compounded by the absence of adequate regulation on ecommerce in India
currently.
However, a handful of mall developers have
risen to this challenge by identifying key transitions that could help them
sail through. The measures they have undertaken include a revamped tenant mix,
adoption of the mixed-use format and delivering theme-based shopping
experiences. These practices are now common in overseas markets, and Indian
retail malls will be seen adapting to them more rapidly in 2015.
Pan-India new
completions, absorptions and vacancy – retail
Real estate capital
markets
2014 saw gradual growth in demand for
Indian real estate, particularly after the general elections in May.
Concurrently, fund raising activities picked up, and this momentum will
continue in 2015 as well. We will see less of one-way investments and more of
partnerships between investors and developers and other land owners.
Joint venture and club funding will become
the preferred mode as 2015 progresses. With the improvement of the economic
situation, Pune, Chennai, Hyderabad and Kolkata will start attracting sizeable
investments along with the top three metros of Mumbai, NCR and Bangalore. This
will be a notable change from dynamics seen in the past, wherein only these
three cities ruled the roost. In fact, we will see Grade A commercial
properties in tier 2 and tier 3 cities appear on the radar of investors, though
a full-on focus on these opportunities will probably not take place in 2015.
Attractively-placed office assets and
high-demand residential categories, especially well-located mid-income
projects, will continue seeing considerable investments in 2015.While investors
may continue to show limited interest in retail real estate, we will see
increased interest in the hospitality sector as compared to previous year.
REITs got a green signal from the
government in 2014, and this will help ease the pressure on the balance sheets
of cash-starved developers. However, the listing of new REITs will be slow and
steady. While REITs will succeed over the longer term, they need to pass
through the challenging phase ahead for them over the next two years.
On the regulatory front, Indian real
estate will continue to faces a fair share of problems in 2015.There are
currently still a number of vital regulations and initiatives related to real
estate that have been gathering dust on bureaucratic tables. These need to be
fast-tracked and implemented in 2015, because they are crucial for the real
estate sector's growth and graduation from opaqueness to transparency.
While many believe that there is little
done by the currently ruling government for the real estate sector, there is a
positive sentiment underway owing to small but significant steps taken in the
right direction by the new government.
In the recent past, two landmark policies
that were introduced by the central government were the Land Acquisition,
Redevelopment and Rehabilitation (LARR) Bill and the Real Estate Regulatory
Authority (RERA - yet to be ratified). However, after almost a year of these
two bills being introduced, there has not been much progress. This is largely
due to tough clauses included in both these bills, which were actively debated
throughout 2014. Some of those clauses were seen as limiting the ability
of the industry to function smoothly.
The newly-elected government has astutely
identified the limiting factors within the two bills and attempted to rectify them
rather than introduce new regulations that would merely add to the burden of
‘lip-service’ reforms. In that sense, the present government has done its
homework before taking up the task of resolving issues of the real estate
sector.
Once finalised, the revised bills will
appear more investor-friendly and create a favourable environment for
developers, buyers, and investors to operate in 2015as the key changes mooted
in the two bills are:
- Land Acquisition, Rehabilitation and
Resettlement Act (LARR)
The single-biggest hurdle that the entire
real estate sector will face in 2015 is related to land - the very foundation
stone of all real estate. The finite and all important commodity of land is
caught in a regulatory stranglehold that we hope to finally see loosened in
2015 – especially given the incumbent government’s vision of establishing 100
Smart Cities, which gives rise to serious questions about feasibility. The
creation of these 100 smart cities will entail significant volumes of land -
massive, contiguous land parcels.
In the manner that the new government has
envisaged, these smart cities will essentially be brand-new municipalities on
the peripheries of our major cities. With its avowed commitment of launching
100 smart cities, the government is de facto also making itself responsible for
making the required land available. How exactly will this happen?
The LARR (Land Acquisition, Rehabilitation
and Resettlement) Act was formulated and re-formulated to counter land-related
bureaucracy in India. On the ground, it has actually done quite the opposite ad
become a deterrent for developers as well as investors to operate in the Indian
real estate and infrastructure space.
The real estate sector is desperate to get
past this hurdle. It is not just a question of making land available for
primary real estate development; the government has correctly identified
infrastructure development as they key to accelerated economic growth, and
infrastructure is highly land-centric.
The modified LARR Act which was put into
effect last year by the UPA government attempted to reduce the bureaucracy
involved. However, it failed to achieve this purpose and in fact only increased
the existing complexities. Given the new government's sharp focus on 'housing
for all', fast-tracking of infrastructure and the creation of 100 smart cities
across the country, there is very clearly a pressing need to revisit this Act
in 2015. Provisions in the bill such as the significant rise in compensation to
original inhabitants, the tedious rehabilitation clauses and other norms need
to be relaxed if it is to serve its purpose of untangling complexities and
delivering a fair shake to all stakeholders.
* Consent clause: The current legislation
requires the acquisition process to go through mandatory consent of at least 70
per cent locals for PPP projects and 80 per cent consent for private projects.
This clause is difficult to implement, considering the large number of people
involved in the entire rehabilitation process. The fact that the government is
planning to renegotiate these clauses is in itself a big positive, as one tight
spot has been identified.
* Return of unutilised land: It has often
been seen that when land was acquired for a stated purpose and the land-losers
were promised employment opportunities and overall development of the region in
question, the project failed to take off for several years. This lacuna has
been identified, and the timeframe for return of unutilised land has been
proposed to be reduced to 5 years from the previous 10 years. This is a strong
deterrent for companies or developers who plan to acquire land without having a
clear roadmap for its usage.
* Clarity on end-usage: There is a need to
clearly identify the purpose of land acquisition so that intervention by the
government can be put to right use. For instance, critical projects involving
infrastructure and affordable housing require faster clearances and may
necessitate timely intervention.
* Expertise of State governments in
deciding area threshold: The amended Land Acquisition Act was to cover all
private land acquisitions if the minimum area to be acquired was 100 acres in
rural areas and 40 acres in urban areas. However, every city and village has
different dynamics, and these are best understood by the State government
rather than the Centre. Thus, the Act must consider giving States an upper hand
in deciding the coverage reveals pragmatism and flexibility.
* Smart Cities beyond PPP: In order to
meet the target of an annual outlay of INR 35,000 crores for development of 100
new smart cities, it was obvious that private funding was critical. The
government has invited full private funding of projects, with government
contribution largely limited to viability gap support.
- Real
Estate Regulatory Bill (RERA)
The still-pending Real Estate Regulatory
Bill has been hotly contested at every stage, and its approval has been
deferred once again only recently. There is no doubt that it must be enacted
sooner rather than later so that the Indian real estate market becomes
attractive for foreign investors. However, no version of this Bill that has
evolved from the various objections and arguments from the industry's
stakeholders has been universally acceptable so far. It will require a strong
and determined government to push it through.
Three recent revisions to the RERA could
conceivably lead to its unilateral acceptance and consequent ratification in
2015:
* Reduction of minimum balance to be
maintained in the escrow account of a project has been reduced from 70 per cent
to 50 per cent: This amount was from the monies collected from the buyers. This
will effectively allow developers to continue their practice of diverting funds
collected for a project towards land acquisition or other projects, and will
work in their favour by also allowing them to grow their land and/or project
portfolio. The 50 per cent mandate will still place enough restriction on
developers to divert funds elsewhere and ensure better completion records.
(However, for buyers, the concerns regarding funds diversion would be higher,
and the Bill would be slightly less protectionist towards buyers.)
* Coverage expanded to the commercial real
estate sector: While the previous version of the bill envisaged coverage of
only residential sector, the new government wants commercial real estate to
also fall under the ambit of the regulatory authority and its clauses. The
limited coverage was largely without any purpose and, therefore, it currently
stands rectified. Commercial projects under the purview of the bill would
provide protection to investors of commercial assets, as well.
* All projects which have not received
their completion certificates will also be now covered under the bill and hence
this allows larger umbrella coverage for buyers and investors.
Worryingly, while the RERA initially aimed
at providing an alternate redressal mechanism, the new provisions are talking
of no recourse to other consumer forums. This can lead to pressure on this
regulatory body in terms of increases log of cases, though it will reduce
instances of multiplicity of suits.
In any case, the recommendations have been
made by the ministry and sent to PMO for approval before the cabinet approves
it. Thereafter, it will be tabled in the Parliament for passing the bill and
making it an act. It is unclear whether the Real Estate Regulatory Authority
will finally be ratified as a law in 2015, but the fact that hard discussions
are happening is definitely positive, and indicative of the new government’s
determination to make it a reality.
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