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Construction : Web Exclusive | December 2017 | Source : CW-India

2017: A year of challenges for the real estate sector

2018 will continue to pose some challenges for the residential segment; we may see consolidation in the sector owing to compliance issues

It’s been an action-packed year for the real estate sector. The year 2017, started on a slow note, with the sector still reeling under the shock of demonetisation – a policy measure announced by the government in November 2016, to flush out black money from the economy. Demonetisation had a negative impact on both, home launches and home sales. In the first couple of quarters following demonetisation, new home launches and demand for homes was muted across the country. The secondary or the resale market was hit more than the primary market, because of the predominance of cash transactions in the resale market. Transactions in the secondary market fell by as much as 50 per cent. Demand for affordable homes was relatively better than that for luxury homes, which again has a high component of cash transaction.

In effect, demonetisation 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 sector started to recover in the second half of 2017. 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.
The year also saw India’s apex court come to the rescue of distraught homebuyers in multiple cases filed against developers. RERA is expected to take care of all future buyer grievances. It was a year of changes for the sector, with the implementation of two historic legislations, the Real Estate (Regulation and Development) Act, 2016 and Goods and Services Tax (GST). Businesses had to be realigned to comply with the stringent rules of RERA and GST. New project launches have slowed down and home prices seem to be under pressure. RERA 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, we will have to see if they will pass this benefit to home buyers. GST is nevertheless expected to benefit affordable housing. The new tax regime is expected to keep real estate costs low for the affordable housing segment, thereby making it cheaper.

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 per cent, while pan India vacancy is at around 14-15 per cent. On the supply side, there is a shortage of grade A office space. It is less than half of the current office stock across top eight cities at 280 million sq ft. The gap between demand and supply of good quality office space is keeping office rentals strong. In comparison, retail properties saw significantly less rental value appreciation, especially in the NCR. Mumbai and Bengaluru fared better. While occupier demand continues to rise in the office sector, there was no change in demand in the retail segment.

In 2018, the demand for office space is expected to remain strong. Pan-India vacancy levels will remain more or less same at 14 per cent to 15 per cent. We could even see a fall in vacancy levels in some cities such as Bengaluru. Office rentals in the cities of NCR, Mumbai and Bengaluru will continue to outperform thanks to strong demand from office space occupiers. In terms of the city breakdown, Bengaluru exhibits stronger office rental growth projections when compared with Mumbai and the NCR. Capital value expectations for the next one year for office, retail and industrial segments are slightly lower. Still, solid growth is expected across segments over the next one year.

In the residential segment, we are likely to see fewer project launches, at least until developers are familiar with the new regulatory framework of RERA. The supply of new homes will be hit, which is perhaps good for the sector because it will help balance out the high levels of unsold inventory in major cities. RERA might even impact the business of smaller developers, because of the mandatory requirement to hold 70 per cent of buyer advances in an escrow account. This could lead to a consolidation in the industry. Organised real estate developers, with access to institutional funding will find it easier to comply with RERA. We are already seeing new business models emerge, wherein developers are doing joint development of projects with land owners. RERA is expected to do a lot to improve confidence of home buyers in the real estate sector. It will usher in transparency, reduce delays and defaults in projects, introduce professionalism in the sector, improve accountability of developers towards home buyers, protect the interest of buyers and bring in standardisation in the sector.

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. We believe that once the confusion clears, we will see REIT listings. We expect the first REIT listing to happen sometime in late 2018 or early 2019.

Retail segment will maintain its status quo. Good developers, who understand the mall concept, will do well and the rest will struggle. In the home loan mortgage business, we expect newer players to give tough competition to older and more established players. We could see a churn in the mortgage business, with the entry of new and aggressive 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. Developers will become more familiar with GST and RERA and this should help them plan their businesses better. Compliance could be a problem for some developers, resulting in consolidation in the sector. Office segment will continue to do well with strong office rentals. Home buyers will emerge as the ultimate winners with RERA acting as a panacea to most of their home buying woes.

About the Author:
Sachin Sandhir is Global Managing Director-Emerging Business, RICS.

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