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The Next Wave of Growth

Demonetisation and RERA had resulted in temporary slowdown in real estate activity. However, analysts feel that the policy initiatives which had dampened activity, complemented by the focus on affordable housing, will have a positive mid to long-term effect on the industry

By Gyanendra Kumar Kashyap

Real estate has been a key driver for the economy. However, lack of transparency and dwindling consumer confidence had put the industry under strain in the past 3-4 years. But post-November 2016, a slew of government initiatives including RERA, GST and demonetisation have proved to be catalysts for increasing transparency and boosting consumer confidence.

Trade analysts are of the view that the long term market dynamics for the sector, which is expected to touch $180 billion by 2020, will remain positive especially in the residential market.The building materials industry needs to analyse the impact these dynamics are likely to have on the business of developers, and eventually on demand for the goods and services that go into construction and their interiors.

The government’s emphasis on housing, and its efforts to mitigate risks in the real estate sector by introduction of RERA, has not gone unnoticed by foreign institutional investors and the sovereign and pension funds. A large number of these investors have made changes to their portfolio allocation strategy, allowing investment exposure to Indian real estate. They are investing in commercial assets (office spaces and malls), and also in under-construction residential properties. Players such as Qatar Holdings, CPPIB, Blackstone, Ivanhoe Cambridge, APG and Xander are readying blueprints for long-term investments in realty. As a matter of fact, the realty sector received investments of over Rs 16,000 crore (US$ 2.51 billion) as both debt and equity in the first half of 2017, and 56% of these investments were in residential projects.

The introduction of the Real Estate (Regulation and Development) Act, 2016 has pumped a new lease of life into the sector. This is expected to weed out unorganised players from the industry and whip up buyers’ confidence, bringing buoyancy back into the sector. Further, the government’s push towards ‘affordable housing’ and giving it infrastructure status has accorded the much needed momentum to industry. At the same time home loan sops and interest subsidies under the Pradhan MantriAwasYojnaare aimed at creating demand for these homes.

Residential Market
After a tumultuous H2 2016 when the demonetisation needle punctured the market and pulled down residential sales and launches by 46% and 23%, respectively, H1 2017 ushered an eventful period. While the first two months of H1 2017 saw consumers and the industry as a whole grappling with the aftermath of demonetisation, activity picked up in March and April. May 1 marked the implementation of the Real Estate (Regulation and Development) Act 2016.After the initial dilemma regarding its implementation, all stakeholders have reconciled to the fact that RERA will be a reality sooner rather than later. With developers re-directing efforts from launches to RERA compliance, the pace of launches was lower in H1 2017.

However, now ‘ready for possession’ apartments are available across markets. With ready projects kept outside the ambit of RERA, developers have been focusing heavily on sales of their ready stock.The impetus to the realty market, particularly the residential market, has come with government’s focused attention on the affordable housing segment. Over the last year the government has announced a series of measures to give a fresh lease of life to this segment.

Focus on affordable housing is like a structural change, and analysts believe that supply side response to this focus area implies it is going to be a sustainable theme going forward. The latest set of numbers indicate that the share of ‘less than `2.5 million’ ticket size housing, that had risen from 17% in H1 2016 to 20% in H2 2016, has further jumped in the latest H1 2017 period to 36%. The category of housing valued at less than Rs 5 million is now as much as 71% across the top eight cities, substantially higher than the 52% share in H1 2016.

With this backdrop, residential launches in the top eight cities of the country declined by 41% to 62,738 units in H1 2017, compared to 1,07,120 units in H1 2016. The decline was 9% compared to the demonetisation period of H2 2016 when 68,702 units were launched. Ahmedabad and NCR were the worst hit, with launches falling by 79% and 73%, respectively.

With consumers opening up to the confidence infused by RERA and government measures towards affordable housing, sales decline was not as severe as noticed in launches. Sales during H1 2017 declined by 11% to 1,20,756 units, compared to 1,35,016 units in H1 2016. Sequentially, however, sales are 11% better compared to the demonetisation period of H2 2016 when 1,09,159 units were sold.Unsold inventory levels at 5,96,044 units in H1 2017 are 10% lower than 6,60,239 units in H1 2016 and are consistently trending lower compared to the peak in H2 2014. With the baggage of unsold inventory and state of the residential property market, weighted average property price has stagnated; developers in most markets have been forthcoming in offering freebies and discount for sales closure.

Office Market
Office market fundamentals across the country remain tight with vacancy levels hitting new lows for the 11th straight period, as the supply crunch shows little sign of abatinggiven the slowdown in IT/ ITeS spending. The office space demand has seen a 10% decline y-o-y in transaction levels during H1 2017 compared to a 13% growth in the previous reference period.

Co-working space is emergingas a trend; firms are taking up space in Bengaluru, Pune and NCR. Across the top six cities, such co-working space providers have taken up around 0.5 million sftof office space during H1 2017.

In terms of deal size Pune recorded the largest deals, marginally edging out Bengaluru, with the average deal size in the city amounting to nearly 48,000sft in H1 2017. Chennai and Hyderabad witnessed the smallest average deal sizes at 23,000sft and 18,500sft, respectively. The average rental values across these six cities grew at 7% y-o-y during H2 2016. While Mumbai saw flat y-o-y rental growth, Hyderabad and Bengaluru experienced the strongest rental growth at 14% and 8% y-o-y, respectively.

Affordable Housing
According to estimates, the shortage in urban housing is around 1.9 crore (19 million) units and 95% of this shortage is in the affordable housing segment. In a bid to bridge this huge gap between demand and supply, the government launched the ‘Housing for All by 2022’ initiative in June 2015. Subsequently it came up with policies to help create a conducive environment so that private developers can make their foray in this field.

The first major push to affordable housing came in the Union Budget 2016–17 proposals, where the government enunciated the standards that housing projects need to qualify to be categorised as affordable. As per budget proposals, projects in which flats had built-up area of up to 30sqm in the four metro cities, and 60sqm in other cities, were to qualify as affordable projects. However, in the Union Budget 2017–18 proposals, the guidelines for affordable housing were further sharpened and made more practical. The dimensions of housing units were changed; instead of built-up area, the carpet area was to be considered. The most important boost that Union Budget 2017–18 proposals gave to the affordable housing segment was in the grant of infrastructure status; thus giving banks more elbow room to provide loans for houses in this segment at more competitive rates.

The Pradhan Mantri Awas Yojyna (PMAY), introduced in June 2015, is another initiative that will give a boost to affordable housing. It is an interestingsubsidy scheme called Credit Linked Subsidy Scheme (CLSS) for purchase/construction/extension/improvement of houses catering to the economically weaker sections, lower income groups, and the middle income group. Under this scheme housing loans of up to `9 lakh and `12 lakh will now get interest subvention of 4% and 3%. This scheme is intended to give a boost to projects in the peripheral areas of metros. Further, given that tax incidence is likely to go down rather than up under GST, and that the developer should pass on the benefits to the consumer, affordable housing could become just more affordable.
Market reports suggest that affordable housing schemes have received very good response in areas such as Mumbai Metropolitan Region (MMR), Delhi-NCR and Bengaluru. In the MMR, affordable housing projects have already started taking shape. XRBIA Chembur Central by XRBIA and Crystal Group, in Mumbai, is one such example. Ruparel Realty’s affordable housing project in Kandivali West is another. A number of leading developers have plans to realign their business objectives and build more modest, affordable apartments. Their plans are still in initial stages, and a few affordable housing projects are expected to be launched in the forthcoming months.

Road Ahead
Post RERA, it is expected that the real estate market will be much more transparent and investor friendly. The bill is likely to add to buyer confidence as they are expected to feel more in control/aware of any changes in their project. With RERA being implemented across the states, developers are likely to focus on timely delivery of their ongoing projects and also remain increasingly flexible on pricing and payment structures. Consolidation is also on the cards as smaller developers are expected to enter into collaborations and joint developments with prominent players.
The industry witnessed what was expected — a short-term shock; however, the economy is already on its way to absorbing the impact of the move. Consumption/sales across sectors that had seen a relative dip in the immediate months post demonetisation, are already picking up at an expected pace, mainly due to the smooth remonetisation process. Several steps taken by the government will further improve transparency and increase investor confidence in the real estate market in the long run. ')}

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