Good Times Ahead For The Real Estate Sector?
In the last few years, the real estate sector in India has been ignored by investors due to lack of transparency and lack of strong regulatory environment. However, in year 2017, the sector witnessed various regulatory reforms such as RERA (Real Estate Regulatory Act) and GST. Also, the Benami Property Act and demonetisation had some impact on the real estate sector.
All these reforms have boosted confidence among the investing community within India and across the globe for investing in Indian real estate sector. Thus, with these reforms, the sector is likely to go under structural changes in years to come. The real estate sector is among the key sectors contributing to India’s GDP growth as it is the second largest employment generator in the country. Further, this sector contributes more than 5 per cent to India’s GDP. This significant fall in the BSE Realty Index was the worst performance in last 10-year period. However, there are few stocks in this sector which were exceptions to this and have delivered positive returns. Some of these stocks are:
Real estate sectorperformance
On the other hand, there were few stocks which destroyed investors’ wealth. These were as follows:
Residential Real Estate:-
Residential segment witnessed significant impact of government policy such as RERA on the new launches. However, housing price indices shows that cities such as Mumbai, Pune, Hyderabad and Chennai, witnessed an upward trend. On the other hand, the sentiment for Delhi remained subdued as seen in the chart below.
Residential segment to have more focus on affordable housing
According to IBEF, the residential market is expected to be almost 80 per cent of total real estate sector. Further, in major cities such as Mumbai, NCR, Bangalore and Hyderabad, new launches, sales and inventory levels have slowed down. The lower inventories with developers in most of the major cities is expected to aid profitability of the developers going forward.
Looking at the housing price indices above, we can conclude that real estate prices in cities like Greater Noida, Chennai and Hyderabad have remained steady.
After implementation of regulatory reform such as RERA, the new project launches in major cities have fallen almost 35 per cent on a year-on-year basis. Also, housing sales on a year-onyear basis fell almost 14 per cent. Delhi’s real estate remained subdued during the last fiscal, which can be seen from the chart above.
However, in the second half of 2017, the other major cities like Bangalore, Hyderabad, Chennai, Mumbai, Pune and Kolkata witnessed improvement in sales. After one year of RERA implementation, the developers are now going through structural changes and developers are adjusting their operations according to the new law. Thus, in coming years, the residential segment is expected to witness revival. Further, due to government’s impetus, the affordable housing (interest subsidies, infrastructure status to affordable housing) as a segment is expected to attract home buyers and developers in this space. Thus, we believe affordable housing segment will contribute majorly to the growth of real estate sector.
However, we believe due to regulatory changes, the residential sector is likely to go through consolidation as developers will take time to adopt changes and will be more focused on selling their existing inventory.
Apart from affordable housing, the increasing number of HNIs and ultraHNIs are preferring luxury residences. The luxury segment forms nearly 4 to 5 per cent of overall real estate sector. The HNIs, ultra-HNIs and NRIs are the key end-buyers of the luxury residences. The NRIs who draw substantial salaries abroad are investing their money in luxury residences in India. However, in the near term, the luxury market is expected to remain stagnant as the demand for middle income housing and affordable housing is rising.
Commercial real estate commencing growth phase
In the commercial segment, the office space leasing activity in India is gearing up and leasing in India’s major cities rose by almost 25 per cent YoY for the quarter ended on March 2018 to 11 million square feet. This stupendous growth was led by companies mainly involved in technology and banking & finance sectors, which accounted for almost 50 per cent of total leasing activity.
The growth of the office segment is correlated with country’s overall economic growth. Also, other factors such as market stability and access to institutional capital influenced growth of the segment. According to IMF, India is set to be world’s fastest growing economy with an estimated growth of 7.4 per cent in FY19E.
Going forward, the commitment from occupiers for office space well before completing the construction is expected to witness traction because of higher rental, greater availability of quality offerings and lack of ready-to-move-in spaces. Due to this, the vacancy level for office space is likely to be on the higher side.
In respect of retail as a segment, in calendar year 2017, almost 3.4 million square feet of new retail space was added in seven major cities of India. At the start of CY2018, the government allowed 100 per cent FDI in single brand retail through automatic route as against the previous norms of 49 per cent FDI through automatic route and up to 100 per cent through approval. This development is likely to boost the demand for commercial spaces, which in turn would lead to growth of the real estate sector in the country. Also, several new norms such as longer shopping hours and an updated framework for establishing real estate investment trusts (REITs) have attracted the attention of various private equity funds.
Looking at office space segment, the rising demand from sectors like engineering and manufacturing, banking, financial services, research and consulting is expected to drive demand for office space. Likewise, the expected traction in sectors like pharmaceuticals, healthcare, telecommunications and aviation would contribute to demand for office space.
Retail segment: -
As the standard of living of consumers in India is increasing, they are increasingly going for shopping at multi-brand malls. India is expected to be the fastest growing e-commerce market in the world. The omni-channel mode of shopping is witnessing growth, wherein the buyer can buy online from any devices such as telephone, or in a bricks and mortar store. Thus, e-retailing is expected to contribute to the growth of retail real estate segment.
Apart from key cities of Delhi-NCR and Mumbai, which have been the focus of organised retail activity, other major cities such as Bangalore, Hyderabad, Chennai and Pune are also now-a-days attracting investors to invest in retail space over the last few years. In the current calendar year, six million square feet of retail space is expected to come from supply side in major cities. Bangalore and Hyderabad are expected to grab major share in the pie of overall new additions.
"Asia-Pacific has six of the top 15 office markets for projected rent growth over the next three years. In Asia-Pacific, rent growth will be predominantly led by Singapore. Rent growth in Bangalore will remain solid, as occupiers remain willing to pay a premium for locations with good infrastructure"
CBRE - Global real estate market outlook 2018
Logistic &Warehousing :-
The government’s impetus to drive infrastructure activity through initiatives such as ‘Make in India’, ease of doing business, GST, etc would attract large investments in asset classes such as industrial estates, industrial parks and warehousing. Also, due to the advent of GST, the warehousing sector in India is likely to be positively impacted as the corporate sector is expected to consolidate and go for larger warehouses. The warehouse segment is mostly dominated by unorganised players and with structural changes in regulations, the logistics or warehouse segment in India is expected to witness shift from unorganised to organised sector.
The growth in e-commerce business is also likely to bring growth in logistics segment along with it. Also, the 100 per cent FDI in e-commerce is likely to be a catalyst for growth of logistics and warehousing segment.
Due to the lack of quality supply and implementation of the GST, this is the perfect time for organised players to enter the warehousing sector. Notably, the robust demand from sectors vis-a-vis e-commerce, FMCG, retail and engineering and manufacturing is expected to drive transaction activity in 2018.
Notably, the government’s decision to confer infrastructure status to logistics, coupled with the growth in infrastructure, are expected to propel growth of the warehouse and logistic segment.
Blockchain technology in real estate
Currently, the property title is a piece of paper and the procedure for transferring the title is lengthy. Additionally, the cost of streamlining property title records is high. Moreover, many small investors are keeping themselves away from the real estate sector as they are afraid of encroachment of land as happened with Kishore Khosla in the popular movie Khosla Ka Ghosla. According to one study, property related disputes form almost 66 per cent of all civil cases and a 0.5 per cent strain on the GDP. But if the digital contracts are used in the real estate sector, the contract that are executed during a transaction will be automatically safeguarded by the efficiency of blockchain mechanism without any human intervention. In fact, Andhra Pradesh has become first state in India to use blockchain technology for managing land records and streamlining vehicle registrations. The terms of the smart contract are transparent to everyone and so reduce the chances of future litigation. For success of blockchain technology, it needs mass adoption by the users. Besides, as the electronic payment transaction system in the country is still in its nascent stage, its adaptability will remain a challenge in the near term. In various parts of the world such as Western Europe, North America and former Soviet Union, the countries are already implementing transactions through blockchain-based smart contracts.
What is blockchain?
Blockchain is technology which can record transaction in the ledger and can be written onto with additional information, but the previous information, stored in blocks, cannot be edited, adjusted or changed.
Government’s regulatory reforms to pave path for real estate industry
This year the real estate industry is likely to go through consolidation phase due to implementation of the RERA. New regulation will make developers to focus on executing ongoing projects rather than launching new projects. The government’s impetus for affordable housing by giving infrastructure status to this segment bodes well for the real estate industry. The chart below clearly indicates that affordable housing is witnessing strong traction: - Regulatory reforms such as RERA and GST will help reinstate investors’ and home buyers’ confidence in the industry, which in turn will drive growth of the overall sector in the coming years. However, one factor that may have adverse impact on home buyers’ decision is the reverse trend in interest rate. Looking at the data given below, it seems that real estate industry is witnessing normalisation of RERA impact with uptrend in sales.
Conclusion: -
India, being the second largest country with a population of around 130 crores, will need crores of homes in years to come. Thus, a strong traction for the residential segment in the coming years is a clear possibility.
The increasing demand for affordable housing and various government subsidies and incentives are expected to result in higher participation of private players.
Furthermore, with structural changes in regulatory norms, such as RERA, amendment in the Benami Transaction Act, easing the norms to encourage REIT listing, GST, etc. are expected to result in improvement of confidence among institutional investors.