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Reflections of 2017 and 2018 Review


The year 2017 will go down in the history of Indian real-estate as the year that changed the sector forever. Realty Plus brings a year-end analysis and views and opinions of the sector leaders.
Never in the history of Indian real estate have so many major events taken place within such a short period of time. Indian real estate has witnessed a ‘systems re-boot’ – beginning with demonetization, the legislation on Benami properties, RERA, GST followed by the amendment to the Bankruptcy and Insolvency Code.
Additionally, the Union Budget for 2017-18 provided affordable housing with infrastructure status and the Pradhan Mantri Awaas Yojana (PMAY) offers interest subvention schemes to incentivize affordable housing segment. “Under the PMAY (Prime Minister Awas Yojna), the earlier MIG-1 carpet area of 90 sqm has been increased to 120 sqm and the earlier MIG-2 carpet area of 110 sqm has been increased to 150 sqm. So the housing under the above categories shall avail the benefits, subsidies and loans of the PMAY which is expected to give a big boost for the real-estate market in the coming year 2018,” said Parveen Jain, Vice Chairman NAREDCO and CMD, Tulip Infratech Pvt Ltd.

Mr. Parveen Jain
Certainly, Indian real estate market is agitating for a better tomorrow. The regulations implemented are stringent but were need of the hour. Over a period of time, they will act as catalyst in speeding up the realty growth. It is accounted that at least a time span of two quarters is required for the aftermath to bear its actions. Amarjit Bakshi, Managing Director, Central Park explained, “The growth of real-estate sector remained muted for large part of the year especially after the introduction of regulatory measures. Home buyers adopted a wait and watch approach in anticipation of property prices to be reduced while others considered whether to go for an under-construction or ready to move in property.  While the premium properties uptake has remained at the same level, the mid and aspiring housing segment has taken a blow with correction in property prices. The growing unsold inventory is resulting into developers resorting to reduce property prices further. From a markets perspective, many investors are actively considering adjoining areas of established residential and commercial centres for investments due to factors such as affordability and rapid infrastructure development, for e.g. Sohna being preferred over Gurugram.”

Mr. Amarjit Bakshi
Reality Check
The residential real estate sector has been facing headwinds for the past few years, primarily due to weak demand. This is reflected in declining sales velocity and subdued cash collections (both in fiscal 2016 and in the first half of fiscal 2017), fewer project launches, and large unsold inventories. Demonetisation has further impacted demand, especially in secondary market transactions and in micro markets with high investor concentration. Demand remains muted as buyers adopt a ‘wait and watch’ mode.
Developers are likely to face funding challenges in the short-to-medium term, which could further delay on-going projects. In addition to high reliance on non-bank funding, developers with a diversified portfolio are further leveraging commercial assets and resorting to sale of assets to tide over funds crunch. Over the long term, however, demonetisation, along with the implementation of The Real Estate (Regulation and Development) Act, 2016, should improve transparency and support the industry’s growth and end users’ confidence.
Demand is expected to remain muted in the near term and recover gradually over the medium term, with sustained improvement in macroeconomic conditions. In the affordable housing segment, demand is expected to stay strong given the relatively low ticket sizes and impetus from the government’s ‘Housing for All’ programme. The allocation under the Pradhan Mantri Awas Yojana received a special allocation of Rs 29,000 crore for fiscal 2018, an increase of 38.7% over previous fiscal.
In commercial real estate, vacancies have reduced steadily on the back of increasing absorption over the last couple of years and limited additional supplies. Rentals have also been rising steadily. Occupancy is expected to stay healthy driven by improving business conditions.
The retail sector continues to witness strong traction given the healthy performance of large and established retail malls across the country. Large foreign institutional investors have been scouting for good properties across metros, and large and small cities, given the strong growth potential over the medium term.
Source: CRISIL Ratings Round-Up Fiscal 2017
The Sales & Marketing
The year started with speculation of prices correcting by correct 30% to 40% across the country. This as expected put a stop on new sales. The government however did try to promote the real-estate sector by loosening some of the conditions around the tax-free scheme for affordable housing. This along with the inclusion of middle income group into the category of people who can avail of the interest subsidy from the government pushed developers to reconfigure their product mix towards more affordable housing. As a result, the average size of homes launched has dropped drastically.
As per PwC report on Key Tax Issues at Year End for Real Estate Investors 2017/2018 for India, while optically the tax rate may appear to be higher, increased availability of credits to real-estate developers should lead to reduction in prices in the long run. Further, GST has also introduced anti-profiteering provisions, mandating the businesses to pass on the benefit of reduced tax incidence on goods or services to the consumers. This would in turn ensure reduction in prices for the consumers.

Mr. Rohit Gera
While India has improved on the ease of doing business rankings put out by the World Bank, the one stubborn category that barely moved was the ease of dealing with construction permits where the movement was from the rank of 185 to 181.  “For the real-estate sector to actually start seeing a good momentum of sales (which is necessary to raise the overall GDP of the country) there needs to be a stable tax structure and tax regime. The current chatter around taxing the unsold ready inventory with developers further leads to instability in the mind of the home buyers.  This causes further deferment of the decision to buy a home.  This is detrimental to the industry and the economy,” expressed Rohit Gera, VP CREDAI Pune Metro and Managing Director, Gera Developments Pvt. Ltd.
Considering the pricing difference in the sector, a major fall in prices was observed across the cities like Delhi, Mumbai and Chennai. But the after effects over the year are on a positive end. Developers and buyers both have uplifted their game; buyers have become more intrepid with more transparency and opportunity in the market and the developers have observed a more smooth and regulatory business process. Manju Yagnik, Vice-chairperson of Nahar Group is of the view that property rates still stand independent of radical policy reforms and may witness some alteration in long term horizon. ”As developers have responded well to GST ad RERA, they will try certainly not to pass on any extra cost burden to the end user. Today’s market is very much stable for buyers, options are available, making it a good time to invest in a house.  Also the recent move of linking the Adhaar with all the property transactions and enhancement in carpet area, MHADA houses are all positive steps taken for the growth of the industry which is benefitting buyers and developers too.”

Ms. Manju Yagnik
For funding, the industry continued to engage in primary sources i.e. bank loans, institutional investors and internal accruals. Of late, the industry has seen Joint Venture (JV) between developers for projects where finance component is brought in by another partner.  Talking about the newer funding options, Ashwin Sheth- Chairman and Managing Director, Sheth Group stated, “The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which will allow investors to invest in the Indian realty industry. This would help increase the cash flow in the sector and create opportunities worth billions over the years. Moreover, the liberization of the FDI norms will further improve the cash flow into the sector and promote a robust environment.”

Mr. Ashwin Sheth
The Performance in 2017
This was truly a year for real estate that was favourable as also challenging. The progressive policy reforms and tax amendments, infrastructure status grant to affordable housing segment, RERA, GST, RBI Policy and REITs introduction has had a cumulative effect on transforming the fabric of the market. Shishir Baijal, Chairman and Managing Director, Knight Frank India Pvt. Ltd briefed, “The testing times facing the real estate sector in wake of the reforms-driven new order has been much debated this year. New residential projects dried up as developers’ focus shifted towards becoming compliant to the new order. Similarly a slowdown hit home sales as buyers turned wary. The next 12 to 18 months are likely to be the ‘under observation’ period for the real-estate sector. Industry stakeholders should spend the period in reorienting businesses in line with the new order. We are also hopeful that India’s strong economic fundamentals still puts it among the fastest growing economies in the world.”

Mr. Shishir Baijal
In line to boost the realty sector, the government reduced the holding period for computing long-term capital gains from transfer of immovable property from 3 years to 2 years. The government also paved the way for ease of doing business by announcing that construction permits would be issued in 60 days.  According to a recent JLL report, 50% of inventory of RERA registered projects has been sold.  Additionally, the RBI reduced the interest rates to 6% making it the lowest. This will surge demand in the housing sector with fence-sitting buyers finally making the plunge and buying homes.

Mr. Sushil Raheja
Giving a comprehensive view Sushil Raheja – CEO, Raheja Homes Builders & Developers stated, “Luxury projects saw a decline in demand and sales but affordable housing is set to mark its success in the market.  One Crore houses are expected to be built by 2019 in rural areas, which will allow cheaper sources of finance and external commercial borrowings. The expectations are not completely matched as it is too soon to declare; by the 2nd quarter of 2018 substantial aftermath can be done. Year 2018 will show ascendancy in the real estate sector; all the policy reforms and structural modifications will manifest its profits and gain in this year.”
Demonetization squeezed liquidity out of developers, forcing them to change their business models. For instance, developers now prefer to enter into joint development agreement with land owners over outright purchase of land.
The positive impact of demonetisation from a home buyer’s point of view is a fall in home loan rates and home prices. Land prices are however expected to remain the same. The other positive effect of this reform measure is an increase in regulation and tax compliance, though how much of this would translate into an increase in tax collection will have to be seen.
In the residential segment, the supply of new homes was low, which is perhaps good as it will balance out the high levels of unsold inventory in major cities. Home sales will continue to be weak. Property prices will also be under pressure in regions such as NCR and Mumbai, which have high unsold inventory, more so in the luxury housing segment.
Real Estate Investment Trusts, which were much awaited in 2017, did not take off during the year because of confusion over GST and other regulatory matters. The experts expect the first REIT listing to happen sometime in late 2018 or early 2019.
In the office space, strong economic growth continued to generate demand. Vacancy levels in some cities such as Bengaluru, Chennai, Hyderabad and Pune is around 5-10%, while pan India vacancy is at around 14-15%. On the supply side, there is a shortage of grade A office space and this gap is keeping office rentals strong.  In comparison, retail properties saw significantly less rental value appreciation, especially in the National Capital Region. Mumbai and Bengaluru fared better.
Sachin Sandhir, Global Managing Director – Emerging Business, RICS added, “The year saw India’s courts come to the rescue of distraught home buyers in multiple cases filed against developers. Organised real estate developers, with access to institutional funding will find it easier to comply with RERA which has increased both the compliance level and cost for developers. Demand for luxury homes has taken a hit, while affordable homes continue to attract buyers. It is difficult to quantify the exact impact of GST on property prices. While developers will be able to avail input credit on goods and services bought and used during the construction process it is yet to be seen if they will pass this benefit to home buyers. The new tax regime is expected to keep real estate costs low for the affordable housing segment, thereby making it cheaper.”

Mr. Sachin Sandhir
The growth prospects in 2018
Due to major policy overhaul induced, it will take a few more months for the real estate sector to come out of the after-effects of the policy changes. However, the measures implemented will prove beneficial in the long run and will translate into a win-win situation for both consumers and developers.
Consumers will be more confident while making their investment decisions leading to increased sales in the sector. The market will be a lot less muddled as only established players will exist in the business and consolidation is expected to take place. This will lead to more investments in the sector by institutional investors. In the meantime, the developers need to be more resilient and support governmental measures in tandem to put forth a more responsible and progressive image of the real estate market.
Also, affordable housing will be a buzzword in the sector in 2018 due to Government’s focus on ‘Housing for All by 2022’ and is a good opportunity for developers to capitalize on.
In 2018, the demand for office space is expected to remain strong. Office rentals in the cities of National Capital Region, Mumbai and Bengaluru will continue to outperform thanks to strong demand from office space occupiers. Retail segment will maintain its status quo. In the home loan mortgage business, we expect newer players to give tough competition to older and more established players.
To sum it up, 2018 will continue to pose some challenges for the residential segment as far as home sales and prices are concerned. Compliance could be a problem for some developers, resulting in consolidation in the sector. Home buyers will emerge as the ultimate winners with RERA acting as a panacea to most of their home buying woes. Moreover, encouraging foreign and domestic investors by implementing progressive policy reforms will contribute in changing the business processes of the sector.
Giving his prediction for the next year, Dr Niranjan Hiranandani, National President, NAREDCO  & CMD, Hiranandani Communities and said, “Looking into 2018 and the future, rationalization of tax as a result of the move to cover real estate fully under GST, and providing a boost for rental housing are the two key drivers to look forward to. Then, adopting global best practices seems to be the apt way of working towards a better next year, and Indian real estate largely, has adopted this route through 2017, going into 2018. In the new post-RERA and GST regulatory regime, real estate and the Indian economy require proper working methodology, one that is transparent and includes accountability – which will ensure transparency and accountability. Given this, 2018 should be a year that brings sustainable growth to Indian real estate.”

Mr. Niranjan Hiranandani
Real estate developers are unlikely to forget 2017, which was like a bad dream come true, and look forward to better business in 2018. The current buyer sentiment is of wait and watch before taking a plunge into buying high end and mid segment housing due to changes taking place because of GST and RERA. Also these changes are totally new and buyers will take some time to grasp and get used to them.

Mr. Shailesh Puranik
Shailesh Puranik, MD, Puranik Builders Pvt. Ltd added, “For the Indian real estate sector, 2017 is marked as a year with highlights and challenges with various news and policy changes. Reforms like RERA, REIT, GST, Demonetisation have resulted in creating transparency in the real-estate sector which in turn has helped in improving the perception of investors and financial and thus will provide developers capital and cash flow for completion of the project with the stipulated time.”
Also, due to demonetization the fund flow in banks is increasing tremendously which is going to have a positive effect as far as banks giving housing loans are concerned. It is expected that the bank housing loans’ interest rates may further fall proving beneficial for the buyers and shall inculcate more interest in purchasing property. R K Arora, Chairman, Supertech Limited added, “”The government announced Credit Linked Subsidy Scheme (CLSS) during the year, has made loans availability at much affordable rates, thereby benefiting both buyers and developers community. Under the scheme, interest subsidy is credited upfront to the loan account of beneficiaries through lending Institutions resulting in reduced effective housing loan and equated monthly instalments”.

Mr. R K Arora
For sure, home buyer confidence is reviving, and more fence-sitters will spring into action in 2018. Overall, the coming year of market recovery will be defined by restricted new launches, gradually improving sales and declining unsold units. A notable phenomenon in 2018 will be a large-scale consolidation of developers and brokers and distressed assets changing hands.
“We may not see a scintillating residential market recovery in 2018, but it is certain that whatever recovery and growth we see from here onward will be sustainable and backed by stronger market fundamentals than ever before. The days of speculative peaks and troughs are safely behind us,” prophesized Anuj Puri, Chairman – Anarock Property Consultants

Mr. Anuj Puri
The upcoming year will be the year of consolidation in the industry, where developers with deep pockets, commitment to corporate governance and transparency will sustain their operations while non-serious players will be weeded out. Though RERA, GST and demonetisation hit the real-estate industry in the short term, these reforms are bound to benefit the sector and the economy in the long-term.
FICCI-NAREDCO-Knight Frank Sentiments Index
The analysis of the stakeholder expectations from the residential and office sectors for Q3 2017 versus the actual market statistics reveals interesting insights.
The survey conducted in Q1 2017 (January–March 2017) soon after demonetisation had a mixed industry outlook. The current sentiments had picked up in Q1 2017 as opposed to the preceding quarter, with respondents extending their support to one of the most important structural reforms in the country. However, the industry sentiments largely remained tepid for the coming six months.
The expectations in our survey in Q1 2017 reflected optimism regarding the residential sales in the following six months (April–September 2017); however, the buyers across major cities have stayed away from the market and have continued their wait-and watch mode. Buyer evasiveness and developer defaults have all contributed in marring the sentiments for the future of residential sales.
As regards residential launches, the survey sentiments in Q1 2017 are in sync with the current market reality. Developers are concentrating on completing their projects and are aligning themselves to reforms like RERA and the GST.
The stakeholder expectations towards price appreciation in our survey conducted in Q1 2017 was not too positive for the next six months. The ground reality substantiates these sentiments since property prices at the end of September 2017 have largely remained stable as opined by the stakeholders six months back.
On the office front, leasing volumes and new supply have been holding steady in Q3 2017 as was opined by stakeholders six months back. In terms of rentals, contrary to stakeholder expectations rentals across cities have remained muted at the end of September 2017.
Therefore, in a nutshell, our survey findings suggest that the real estate sector is going to be under tremendous pressure in the coming six months. The residential sector will see a further downward trend in sales and launches and the prices will remain muted.
Office supply will be under stress and leasing volumes will hold steady in the coming six months.
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