A recent report published by CBRE indicates an economic growth of around 7.5 per cent for India, making it the fastest-growing G20 economy. The acceleration of structural reforms, the move towards a rule-based policy framework and low commodity prices have provided a strong growth impetus. Further, recent deregulation measures and efforts to improve the ease of doing business have boosted overall investment activity. Against this backdrop, the real-estate sector gains significant importance as it broadly contributes to 15 per cent of the GDP and is the second largest employer. Indeed, with globalisation and the subsequent growth of corporate environment, the need for real estate - retail, hospitality, housing or commercial û has increased vastly.
In fact, the real-estate sector had been in the news throughout 2016, whether it was the demonetisation drive, passage of the Real Estate (Regulation and Development) Act (RERA) 2016 to introduce accountability in the property market, amendment to the Benami Transactions Act, boosting the affordable housing segment by giving it an infrastructure status, GST or the launch of REITs. All these measures have been aimed at bringing in transparency and boosting consumer sentiment in a sector that has largely been unorganised. We, therefore, expect a positive outlook in the coming quarters though the start to 2017 had been slow. Another report published on growing investor interest has pointed out that the real-estate sector will witness about $7 billion of investments in 2017 and is expected to hit the magic $10 billion mark by 2020.
The demand-and-supply story
The residential real-estate market was subdued in 2016, with housing sales and new project launches experiencing a decline by over 18-22 per cent YoY and overall market sentiment varying across cities. With demonetisation, buyers maintained a cautious approach, further impacting sales. However, with the implementation of RERA and interest subsidy for households earning less than Rs 18 lakh per annum along with the other policy measures, things look to stabilise towards the end of 2017 depending upon market conditions. The mid-end and affordable housing segments, which have a larger presence of end-use buyers, will see some buying to stabilise the decline in sales as financing options have also got cheaper.
On the commercial property front, growing demand for commercial property, steady rentals and interest from institutional investors resulted in a positive 2016 for the market. This trend is likely to continue in 2017 with an upswing in economic activity driven by technology, engineering, consumer goods and the BFSI sector. Further, REITs will enhance transparency and governance in the real-estate market and attract more institutional fund flows into the sector. This will help developers reduce their reliance on banks for funding and free up capital for deployment in other projects.
On the retail side, while e-commerce continues to grow, it shall coexist with brick and mortar stores, which remains the backbone of the retail sector in India.
Long-format stores have gained popularity on the back of urbanisation and consumption-led demand not only in Tier-I cities but in Tier-II and Tier-III cites as well, thus pushing the demand for retail space. Economic growth led by the focus on manufacturing and the 'Make in India' initiative has spurred demand. Overall, the outlook for the real-estate sector looks positive and the sector will see some action towards the end of 2017.
A comparison of the BSE Realty Index vis-a-vis the Commercial Index in the chart clearly indicates that the commercial property index has outperformed the BSE Realty Index.
In order to fill the gap in urban housing, the government has announced the Housing for All by 2022 initiative. It has also granted infrastructure status to affordable housing, thus providing developers with cheaper sources of funding, including external commercial borrowings (ECBs). They also get more time for project completion. Housing finance companies have also put their strategies in place focusing on middle-class and aspiring lower-middle-class borrowers, and are offering them tailor-made affordable housing schemes. It is expected that ready-to-move-in properties or projects close to completion will witness increased demand in 2017, which will also receive support from the interest subsidy announced for first-time affordable housing home-buyers in 2017. Some developers already active in the sector include Tata, Mahindra, Purvankara and Xrbia, while many others have geared up to join the bandwagon.
Investment activity in the sector
Over the past few years, the real-estate sector has witnessed a high level of investment activity in the office, residential and retail sectors. As mentioned above, recent policy measures - RERA, easing of FDI norms, demonetisation, Benami Act and REIT - are all expected to increase transparency and enhance investor confidence in the sector. Another landmark decision on GST, which will simplify tax compliance and minimise the scope for double taxation, is expected to bring down the project cost for developers and provide a level-playing field for organised entities, overall providing a more hassle-free environment for both the buyer and investor community.
Private equity (PE) investments had seen some drop in investments in 2016 in comparison to the previous year, where the majority of investments were cornered by residential properties. However, in recent quarters, we have seen private equity players flocking the Indian real-estate market mainly driven by regulatory and market factors. Real-estate developers are also turning to PE funds with reduction in bank credit to real-estate developers.
Performance of real-estate companies
The charts indicates that sales of almost all the real-estate market players have taken a hit. This will put some pressure on real-estate developers for refinancing their debt obligations in 2017-18.
About the author:
Vijay Agrawal, Executive Director, Equirus Capital, has over 16 years of experience in the infrastructure, pharma, healthcare and IT sectors. His specialties include fundraising through equity and debt, corporate and business strategy and growth management.
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