Realty Sector Growing Slowly And Steadily
The economic slowdown is prevalent and is impacting several sector stocks including real estate stocks negatively. Having said that the branded real estate developer are showing signs of steady recovery. Shohini Nath explores how grim the situation is for the sector even as she highlights the pockets of growth within the sector. Read on.....
The real estate sector in India is a key sector that adds to the growth and development of the country. With rapid urbanisation, growing workforce and nuclear family lifestyles, the demand side for real estate remains strong. India's population currently stands at more than 1 billion, which accounts to 17.74 per cent of the total world population. Due to the pressing need for housing and modern amenities, the real estate sector has been witnessing constant growth over the years. However, the growth was muted for a couple of years and investors are now questioning whether it is a smart move to invest in the realty sector or whether they should avoid it.
On the global front, post the strong economic growth in 2017 and early 2018, the growth has notably shrunk due to a confluence of factors affecting the major economies. The global growth rate is estimated at 3.6 per cent in 2020, according to the World Economic Outlook. The Indian economy has decelerated at a faster pace in the fourth quarter to 5.8 per cent, the lowest recorded in five years. The liquidity crisis of NBFCs and the default by IL&FS both hampered consumer demand, which contributed greatly to the economic slowdown.
Over the years, buyers have expressed low confidence in buying property due to problems such as delays in project delivery as projects are not completed on time; affordability is low due to an increase in interest rate leading to expensive home loans being offered by financial houses. The buyers still complain about transparency issues with the developers. Moreover, buyers are confused about whether to invest in commercial or residential real estate. Customers usually make more profit by investing in commercial properties rather than residential ones as they can expect a hefty return on investments. Although investment in commercial space involves many legal aspects as compared to residential properties, customers are willing to buy the property but somewhere the lengthy process acts as a barrier.
Housing Market
The housing market in India could be divided into two parts, namely, needbased housing and luxury housing. The need-based housing comprises of one, two or three BHK flats, which range from 400 sq.ft to 1,500 sq.ft approximately, while the luxury housing units are sold at a higher ticket size of Rs.50 mn-500 mn. The need-based housing claims high velocity and comprises units relatively compact in size, ready-to-move-in or one-year to the possession, have smooth connectivity to commercial catchment areas and come with basic in-house amenities. Here, the risk of price crash appears negligible owing to good demand. A developer is likely to offer a discount of 10-15% on the rack rate owing to the steady demand. The affordable housing segment receives high demand from the burgeoning middle class working population that needs units with excellent connectivity to major commercial hubs and modern lifestyle amenities. Thus, major price correction in the need-based housing is less likely to occur.
Some studies suggest that in central Mumbai, the luxury market is going steady and the developers have been able to maintain stable prices in a location where the view and gentry and the units are Vastu compliant. However, the velocity of the luxury real estate market has slowed down over the past few years. Distress in projects comes with a mismatch between the price expectations and the prices offered. In such cases, prices have crashed by as much as 40 per cent from the rack rate, which is further beaten down by re-sale inventory too. In the case of re-sale, there have been instances of deep discounts. The luxury real estate market is facing a demandsupply disparity, which has led to a price correction of up to 25 per cent in the last few years. Considering the re-sale market, deals were closed at 30 to 40 per cent discount on the initial quoted prices. Fresh investments are not flowing into luxury real estate lately, and most of the sales are either happening on an upgradation basis, which is largely funded by the sale of other property.
The housing real estate market is likely to be greeted with a strong demand if homes are packed with modern lifestyle amenities at affordable prices. With the shift in lifestyle as Indians' median age being 27 years, coupled with higher standard of living and increasing density in the metro cities, the demand for housing is bound to remain sturdy. Furthermore, subvention schemes like ‘20:80’ and ‘pay 5% now and rest on possession’ have helped boost consumer demand from the dual-income nuclear families
Post the RERA implementation, affordable housing could push the volumes of real estate units over the coming quarters as the real estate developers are offering more affordable and mid-income housing projects.
Commercial Real Estate
Industry reports have revealed that the commercial real estate space saw over 10 per cent rise in absorption. Cities such as Bangalore, NCR and Mumbai saw the highest activity. The supply of commercial real estate was quite stable and the steady demand led to a slight increase in the average rental values. The commercial segment is charting positive curve, which may be due to the substantial increase in investments in the office segments. Also, the investments that came in 2018 were approximately USD 3 billion in contrast to the drop in investments witnessed during 2016-17.
The service sector which could be directly linked to the growth of the commercial real estate segment contributes to more than 50 per cent of the Indian GDP and is ever-growing. The commercial estate has to be supportive of the growing service sector, thus showing direct proportionality of growth between service and commercial estate sectors. NASSCOM has ranked India third in being the biggest start-up hub in the world. Hence, the demand for office spaces and co-working is projected to be high. In terms of investment in the commercial real estate sector, high quality brownfield projects are in demand, but due to unavailability of the brownfield spaces, many investors are taking up the construction of greenfield projects in the commercial market.
Retail real estate
With the rising rate of consumption in the retail sector, the retail segment of the real estate sector is going to witness a decent thrust in demand. In 2018, 7.8 million sq ft of space was procured to construct malls, which was 40 per cent higher than 2017. According to JLL, the retail sector is estimated to grow to Rs.1 trillion by 2020 at a CAGR of 12-15 per cent. Consumption in India is seen to be growing at a rate superior to that of nominal GDP. Annuity income is also expected to grow steadily. Retail real estate has emerged as a significant contributor to India’s economic activity. Multiple international brands are foraying into the Indian market and have been expanding since past few years. These brands are looking for sophisticated, quality spaces across India. Improved private equity interest in key leasehold retail assets has been witnessed. The Real Estate Investment Trust (REITs) platform has enticed private equity players, who are fast gearing up to expand their retail portfolio across cities. While rental values have seen marginal appreciation, numerous retailers have started preferring the revenue-sharing model over the fixed-rent model in the last few years.
HOUSING FINANCE and GOVERNMENT SCHEMES
The major initiatives of 2018 for housing finance included Affordable Housing Fund under the National Housing Bank to boost the supply of rural housing and augment the supply of affordable housing in urban areas.
Banks are not willing to fund real estate developers and the dependence of developers on NBFCs/HFCs has increased over the years. But due to the liquidity crisis triggered by the IL&FS default in September 2018, lending to real estate developers by NBFCs and housing finance companies (HFCs) has fallen by approximately 50 per cent, according to the JLL report. The NBFCs and HFCs are curbing fresh lending to real estate developers. However, smaller lenders have come to the rescue of builders. As a result of the NBFC crisis, lending has now become selective and demands more financial discipline.
The Indian government with an aim to create a more equitable and fair transaction between buyer and seller of properties introduced the Real Estate (Regulation and Development) Act, 2016, which seeks to protect homebuyers as well as help boost investments in the real estate industry. Along with this, a benami transaction act in real estate was introduced to stop the illegal transactions in real estate. Aadhar linkage was made mandatory for all property transactions in order to curb malpractices and inflow of black money.
The government proposes to provide deduction up to Rs.1.5 lakh for interest paid on loan taken for purchase of residential house having value up to Rs.45 lakh. This will be in addition to the existing interest deduction of Rs.2 lakh. It is proposed to increase the limit of carpet area from 30 square meters to 60 square meters in metropolitan regions, and from 60 square meters to 90 square meters in non-metropolitan regions. It is also proposed to impose a limit on the cost of the house at Rs.45 lakh in line with the definition in the GST Act. This will promote rental housing, which in turn will provide a boot to the real estate sector.
Indiabulls Housing Finance (IBHF) has very recently auctioned off the Palais Royale project in Worli for Rs.705 crore after the developer, Shree Ram Urban.Infrastructure, defaulted on its debt repayments. Reports suggest, Indiabulls is planning to exit realty altogether by selling a controlling stake in its real estate arm.
Housing Real Estate Scenario across India Fig A explains the number of units sold and the new launches in FY19 in eight major cities in India. Hyderabad and Kolkata are two cities which have an almost equivalent consumption for the supply in the real estate industry.
Considering the YoY percentage growth in sales and new launches units in FY19 (as shown in Fig B), there is a mismatch in some cities. It signifies a reduction in demand for real estate in Delhi. In Pune city, there is an imbalance between the percentage growth in YoY of sales units and new launches. There is a buzz that IT and other companies are opening new branches in the city and the city is developing into a metro city, which contributed to the boost in new launches in the city of Pune.
According to a report, the Mumbai Metropolitan Region has around 89 projects that are stalled as compared to 67 projects in the National Capital Region. Pune comes in next with nearly 28 projects worth Rs.7,000 crore coming to a standstill.
The realty sector performance on the bourses
The realty index on the bourses has been performing at a sluggish pace. It is quite evident from the graph that since the fall in 2008, some revival was witnessed in 2009-2010, but since then, it has remained at a constant level.
The S&P BSE Realty index touched its all-time high level of 13,848.09 on Jan 8, 2008 and its all-time low on Feb 12, 2016 at 1000.08. Approximately in a span of 10 years, the realty index has witnessed a stagnant performance with moderate to flat growth.
The table indicates the returns of BSE Realty index as compared to the returns of Sensex. Since Jan. 2019, the Realty index is outperforming the Sensex and has done the same in a period of one year too. Selected stocks have performed well in the recent past when compared to five-year returns. Many investors had shunned the realty stocks after witnessing the disheartening trajectory.
(Data as on July 22, 2019)
"Post DeMo and RERA, Branded Developers Dominate with 53% of New Housing Supply in H1 2019 . Top 7 cities saw 73,930 units launched by branded players; 65,550 units by nonbranded players in H1 2019. Prior to DeMo & RERA in H1 2016, non-branded developers dominated by 60:40."
Santhosh Kumar
Vice Chairman
ANAROCK Property Consultants
Conclusion
The slowdown in growth rate of real estate is due to the deterioration of financial situation of real estate developers, lingering effects of demonetisation, mismatch in demand and supply, liquidity crisis and global economic slowdown. On another note, J.P. Morgan report has revealed that the seven-year residential down cycle that started in 2011 has ended. The debt levels of listed players (branded) have gone down and their rising cash levels provide the scope for new launches. Large developers are expected to announce major capacity expansion programmes in the near future. Even with the liquidity crisis, the established developers with consistent delivery track records still have plenty of access to capital through both debt and equity. So, in reality, it is not a gloomy picture as it may seem. As for the investors,we have seen some realty stocks outperforming the markets which could have come about due to the structural change in the real estate sector like advent of RERA boosting home buyers' confidence and also reviving investors sentiments to invest in the sector. If the liquidity situation betters, we suggest you to hunt for players that have no debt and plenty of cash. Looking forward to 2020, real estate developers and investors must have the vision to anticipate emerging trends in the medium term and prepare for them to spell success. The winning developers of 2020 would have already started to shape their responses to some or all of the fast-evolving trends. Invest in realty stocks, cautiously and selectively.