A look at any unfinished concrete tower scraping the Indian sky is enough to gauge the state of the domestic real estate industry in 2019 - a lot of effort invested into it, but not enough to deliver concrete results in the shape of happy homes.
That adequately sums up the struggles of builders as well as the government, which unveiled a string of measures to support the real estate sector as it sought to revive a flagging economy. The end result: all efforts fell short of exorcising the problems haunting the industry, at least for now.
The residential property market remained muted with flat prices and lackluster sales, as the multi-year demand slowdown continued. The saving grace in an otherwise dull property market was the healthy demand for rent-yielding commercial properties, which attracted huge investment from global institutional investors.
That further manifested itself in the successful listing of India’s first Real Estate Investment Trust (REIT).
According to our research, housing sales in the nine major cities in India stood at 2,40,736 units during January to September, 2019, which was lower by 5 per cent compared to the same period a year ago. New launches, too, were down 34 per cent y-o-y at 1,41,934 units.
The trend is likely to be the same for the full year despite several steps taken by the government and the Reserve Bank of India to boost demand.
A liquidity crisis in non-banking finance companies (NBFCs), a major source of funding for the real estate sector, aggravated things further and resulted in a huge cash crunch for developers. A ban on subvention schemes, under which developers paid interest on home loans on behalf of consumers until possession, did not help the cause either.
However, the Rs 25,000 crore fund set up by the government to revive over 1,500 housing projects comprising 4.5 lakh units does hold out hope that the market would improve this year. Also, significant progress made in resolution of two bankrupt companies Jaypee Infratech and Amrapali is expected to lift the mood and help in rebuilding trust among buyers as well as the market in general.
Some other measures, which will have a positive impact include tax incentives for home buyers announced in the budget and changes proposed in the Insolvency and Bankruptcy Code (IBC).
Real Estate and Economy
To talk about the strong positive correlation between the real estate sector and the economy is stating the obvious, but it ought to be emphasized that this sector is one of the key drivers of the economy and also the second large employment generator with a huge multiplier effect on growth.
If the real estate industry does well, around 200 other sectors, including steel, cement, paints and bricks among many others, stand to benefit. This is one sector the success of which can effectively arrest the decline in industrial as well as economic growth and help the government in achieving its ambitious target of making India a $5-trillion economy by 2025.
Solving Multiple Problems
The housing sector in the past has suffered on various counts. The main ones being poor demand, unaffordable prices, excessive supply, incomplete projects, absence of proper and adequate policy support, disproportionately high usage of black money, sky high interest rates and inadequate regulations, among many others.
All these problems cumulatively impacted the housing sector, leaving home buyers high and dry and equally left the builders in a tough spot. There were no easy solutions to the problems plaguing the real estate sector.
The government on its part has tried to look at problems holistically and has come up with solutions, which will augur well for the real estate sector in the days to come. It has enhanced tax incentives for homebuyers to encourage them to enter the property market.
The other important initiative of the government, which is having a positive impact on the real estate sector, is the enactment of RERA or Real Estate (Regulation and Development) Act. The law provides great comfort to homebuyers by mitigating the fear of losing money in case a project fails to take off.
And more recently, the government has introduced the IBC (Second Amendment) Bill, 2019, which seeks to prohibit individual home buyers for approaching the insolvency court against builders. One would now need 10% of buyers or 100 buyers (whichever is lower) to come together to go to the insolvency court. This has brought balance in the law that now would provide adequate protection for both buyers and builders. The law is expected to be passed by the Parliament in the next budget session, but an ordinance has been issued to implement the decision.
The other good news is that the Rs 25,000 crore fund for stalled housing projects, the SWAMIH Investment Fund, has become fully operational and the Investment Committee has initiated the process of completing due diligence on the first set of applications.
Prospects for 2020
This year is going to be a year of consolidation and growth for the real estate sector for the reasons, which are quite visible and for everyone to see. The green shoots are too visible to be ignored.
The first and the foremost reason is that with the setting up of the Rs 25,000 crore fund, the government has created confidence among current and prospective buyers that they would not be left high and dry in case something bad happens to their project.
The increase in tax deduction on interest on home loans to Rs 3.5 lakh from Rs 2 lakh for homes priced up to Rs 45 lakh combined with low interest on home loans, following the RBI’s decision to cut key lending rates by 135 basis points this year, would aid housing demand in a big way.
As regards commercial property, it has been performing well over the last several years, driven by demand for quality offices from IT/ITeS and co-working players. The trend is likely to continue even next year.
Office space demand may also benefit from the reduction in the corporate tax rate, as companies look to expand their operations.
New trends and concepts such as co-working, co-living/student housing and Grade-A warehousing, gained further momentum and many big developers announced entry into these businesses as part of their diversification strategy. These new segments are expected to grow further in 2020 and beyond because of the huge untapped potential.
(By Dhruv Agarwala, Group CEO, Elara Technologies)