Indian real estate: A story of resilience and resurrection

India—with its growing infrastructure needs in retail, hospitality and commercial sectors—is looking at a slow but steady rise of its real-estate sector post a turbulent phase triggered by a slew of initiatives aimed at weeding out black money from the system and making it more transparent. These initiatives were:

1. The Real Estate (Regulation and Development) Act 2016 (RERA) which calls for setting up of bodies in each state for the regulation of the sector and also act as adjudicating authorities for speedy dispute redressal;
2. The 2016 amendment Benami Property Act, which prohibits benami transactions—or transactions made by proxy with the purpose of laundering black money—and provides for confiscation of such property;
3. Goods and Services Tax Act (GST), in which only GST-registered businesses are eligible for tax credits;
4. Amendments in the Real Estate Investment Trusts (REIT) act that aim to increase liquidity in the sector; and,
5. Demonetisation, which dealt a body blow to black-money transactions in real estate.

The worst is over
The worst though, observers say, is over and the sector is now gathering momentum again. India Brand Equity Foundation (IBEF) projects the Indian real-estate sector to grow to $1 trillion in 2030, from the $120 billion that it was in 2017, and also says that it will be contributing 13 per cent to the nation’s GDP by 2025.

We spoke with Anurag Sharma, MD at Jaipur-based Alokik Group, who says that the demonetisation was the hardest blow and that “In last three years, we are hardly seeing any new project launch in Jaipur.” But he also said that these reforms are a paradigm shift and that “Sales have definitely been affected, but the sector is now more user friendly.” For instance, he said, demonetisation resulted in 30 per cent and 50 per cent declines in housing sales and launches, respectively, but it also improved the stock market performance and therefore resulted in an increase in private equity from foreign and local investors.

Sharma’s claims are validated by the inflow of $257million in foreign direct investment (FDI) in the second half of 2017, which is double the entire FDI that came in 2016 into the sector, according to the Department of Industrial Policy and Promotion (DIPP). Even RBI statistics from December 2017, show a sequential increase in India’s housing pricing index (HPI) of 0.4 per cent in six of the ten major Indian cities, a sign that the sector has started gathering steam.

Even the aftershock of RERA, according to Sharma, is settling down now. The act gave more teeth to consumer bodies to fight builder malpractices by making the system and 31,500 projects have been registered so far under RERA. The mid- and long-term effects of RERA, he explains, will be advantageous for home buyers, “After formation of SEBI, people thought Indian stock market will crash, but it has grown manifolds in past 20 years. It is same with RERA, people will oppose it as they are still not accustomed to such regulations.” The RERA act is going to bring more transparency, will enhance quality delivery of projects along with helping consumers identify shady real-estate developers.

On being asked whether RERA is a roadblock or catalyst, a RERA-registered Greater Noida real-estate agent, Ankit Sirohi told us that “The registration process does not take time and it allows customers to file a complaint if they find a discrepancy between what was promised and what was delivered.” “However,” Sirohi continued, “the judicial process will take time and this makes the whole process cumbersome.” Under the RERA Act, developers and real estate agents have to register their projects and maintain the transparency for any kind of transactions and changes in the projects.

Another pain point that emerged in the second half of 2018 was the non-banking financial company (NBFC) crisis. It was in this period that rumour mills went abuzz about a systemic liquidity problem in the NBFC space, while some analysts dug deeper to claim asset-liability mismatch among most players.
Real estate is heavily dependent on NBFC funding and is accountable for more than 50 per cent of developers financing, reaching close to ₹4 trillion in fiscal 2018. Shobhit Agarwal, MD and CEO at Anarock Capital says that “nearly $34 billion of mutual funds debt in NBFCs and HFCs (Housing Finance Corporation) is maturing between October 2018 and March 2019. Prior to the crisis, the sector was already dealing with a massive cash crunch and subdued demand, due to which more than 75 per cent of the available credit facility was already exhausted.” Despite these crises, 2018 fared well with the sector, according to a Knight Frank report, which says that in the year:

1. residential sales grew by 6 per cent;
2. new project launches rose by 76 per cent; and,
3. office space leasing saw a high of46.8 million square feet.

The report also recorded a decline in unsold inventory levels at the end of 2018 (at 468,372 units), which was 11 per cent lower compared with end of 2017 and 30 per cent lower than 2016.

Shishir Baijal, Chairman and Managing Director at Knight Frank India puts year 2018 as overall good for real estate on account of government incentives such as lowering of GST rates and affordable housing initiatives. “The residential market in 2018 recorded a recovery after seven years, which has been led by the affordable segment. The supply side has accordingly calibrated itself in this period.The commercial market surpassed previous records and registered a new high in 2018,” Baijal says. Having said that, NBFC crisis created a liquidity crunch in the second half of 2018, which restricted sales, particularly in Mumbai and NCR in the second half of 2018.

Current trends
According to IBEF, the demand for office and residential spaces will continue to rise in the foreseeable future and thus private equity investments in tiers 1 and 2 cities will rise to $100 billion by 2026. Also, the online real-estate platform Zricks predicts a 30 per cent rise in the demand for housing in the mid-term and says that affordable housing will be the next major driver in the sector. Similarly, the startup culture, which has reached Indian shores, will pump up the demand for co-working spaces that are available at affordable rents.

In the backdrop of such rising demands, the five main trends that the real estate sector will witness are:

1. Transparent processes and paperwork

Thanks to the RERA Act 2016, the real-estate consumer today is much more educated and knows exactly what to keep an eye out for in when purchasing real-estate. RERA has made all transactions much more ratified and open to inspection because it stresses fair play, just practices, and adoption of a professional outlook towards the system.

2. Increase in investment

With the Reserve Bank of India still a bit apprehensive about lending money to real estate businesses given their record of showing low profits by indulging in shady deals, the sector seeking funds elsewhere. Developers are now focusing on private equity funds and pension and in the period 2010–2016, the percentage of non-institutional fund sources went up from 25 per cent to 75 per cent of the total market.

3. Further streamlining and integration of reforms

Prior to the “reforms,” a lot of individual real estate developers went bankrupt due to the lack of sales in real estate, and the situation was further impacted big players joined forces and pooled in resources. The reforms will therefore be streamlined further.

4. FDI and private equity

As mentioned in point#3, investment will increase in the form of FDI and private equity, and reliance on banks will decrease further. Thanks to RERA, the Indian real estate market is already witnessing a lot of such investment.

5. Eco-friendly(Green) buildings

This trend is not related to the reforms but has surfaced on account of increased environmental consciousness. The green building footprint of the country has risen from a meagre 20,000 square-feet to an impressive 4.5 billion square-feet. India now has 10%–12% of all green building worldwide and this number is steadily rising

The outlook
Industry sources predict a bright future for the Indian real-estate sector. Sharma says that revival of the sector will take time and 2019 is a year of transition from the old to the new order, and his view is in sync with the thoughts other players we spoke with. Everyone agrees that once measures to make the sector more transparent and black-money-free are further streamlined and the present cash-crunch blows over, the numbers predicted by IBEF and other research organisations are achievable.

A few such measures that real-estate players in India are expecting are:

1. Rationalisation of GST
   Currently, real estate is subject to both GST and stamp duty. One demand is the reduction of GST to eight per cent from the current 12 per cent across all housing segments by abolishing the current 60 square-meter GST ceiling. Also, the current land abatement rate of 33 per cent should be done away with in metros where land cost can go up to 70 per cent of the total unit cost.
2. Proper single-window implementation
   Poor single-window compliance is one of the major reasons for delay in real-estate projects. Proper compliance of the system will clear out the operational issues and could turn out in reduced prices.
3. Liquidity crisis in the sector
   RERA, demonetisation, and GST have stalled many real-estate transactions and the NBFC crisis further adds to the sector’s woes. This issue can be resolved via having a proper loan framework.

4. Acknowledge the housing problem
   The first step in solving a problem is recognizing and acknowledging it. The sector is of the opinion that the government should not just recognize but also measure the magnitude of India’s housing problems in order to help real-estate players solve it.

India’s real-estate sector is the largest employer after the agricultural sector and supports many other ancillary sectors. The government should therefore not only streamline present reforms but also come up with new ones if required and provide ample opportunities for the real estate fraternity in both major and emerging Indian cities to not only conserve the momentum the sector has gathered but also add to it.