2015 to be ‘good year’ for India real estate

Date : Dec 23, 2014

With policies announced this year by Prime Minister Narendra Modi set to boost the real estate market, along with long-awaited regulatory changes, 2015 is predicted to be a good year, say Anuj Puri, of JLL India

India’s real estate market is set to take off in 2015 and long-awaited legal changes benefitting overseas investors could at last be ratified, predicts a leading real estate chief.

With many of 2014’s changes announced by India Prime Minister Narendra Modi coming into force the following year and other legal and regulatory changes planned, the sector looks set to receive a fresh boost in 2015, says Anuj Puri, Chairman & Country Head of JLL India.

Next year will see home buyers benefiting from reduced borrowing rates, increased developer-focus on affordable homes, largely stable prices and better job and income prospects.

“The year 2014 has been quite fruitful for the real estate sector in terms of business sentiment, although the real effect of many of the policies and amendments announced in 2014 will take effect only in 2015. Starting from Union Budget FY2014-15, where affordable housing was considered on par with infrastructure, to relaxation of rigidities in the Land Acquisition and Real Estate Regulatory Bill, India’s new Prime Minister has been offering the India real estate sector consistent doses of energy.

“The winds of change are now blowing more perceptibly. Inflation, including the house price component, has now been reduced to the lowest level in recallable history. Property buyers are back in force in most cities as enquiries have rebounded, and developers are finally reading the writing on the wall more accurately and coming in with the kind of supply that is relevant to demand.

“Meanwhile, multinationals that were hesitant to foray into the Indian market because of the uninspiring political environment are now dusting off their plans for India and getting their entry vehicles back in gear. Going by the recent reports of recruitment agencies, many more jobs will be created in 2015 – especially in the IT/ITeS, manufacturing and services sectors – and the demand for homes will increase visibly. Also, REITs are hitting the market at long last, and only a few details need to be sorted out before they get the funding wheels spinning.”

Mr Puri says 2015 will be a good year for the real estate sector because:

• The threat of inflation has been tackled and borrowing rates are sure to go down from the current levels. Also, with property prices staying stable and good deals being offered by developers in order to clear their inventory, fence-sitting buyers will be further encouraged to buy.

• Economic activity is gradually picking up, and the Central Bank anticipates GDP growth to reach 6.5% y/y in the next financial year (FY2015-16). Corporate India has already made it clear that there will be more hiring of talent to help tackle rising business activity. Put together, this means a rise in jobs and incomes, which in turn is very favourable for both residential and commercial real estate.

• The market has witnessed a re-orientation and developers are now largely focusing on affordable homes. This will go a long way, though definitely not all the way, in bridging the existing wide gap between demand and supply of affordable homes.

In 2014, new residential launches, particularly luxury projects, saw a consistent fall every quarter due to subdued demand and high prices, but affordable housing improved. Many large developers who in the recent past concentrated on the mid-to-high segment due to better margins played the volume game and entering into affordable-segment projects. Since developers are sitting on close to 30 months of unsold inventory in the mid-to-high-end segment, there will be a rise in cashflows.

In 2015, developers will become more earnest about pricing and sizing their offerings correctly. Smaller, yet better-designed and more efficient homes will define the residential real estate market in 2015, and selective corrections in some of the over-priced cities will help bring about faster sales for stagnated supply of larger configurations.

Townships will become more prevalent, and the supply of luxury homes will moderate to fit in with lower demand.

Most of the total unsold residential inventory is still under-construction and completed projects have only moderate vacancies, so buyers looking for prompt deals will find limited room for negotiations.

But for those who can wait, the attractive offers doled out by developers during the festive season of 2014 are likely to continue into 2015.

In real estate capital markets, 2014 saw gradual growth in demand for Indian real estate, particularly after the general elections in May. Fund raising activities picked up and this momentum will continue into 2015 with more joint ventures becoming popular, Mr Puri predicts.

“We will see less of one-way investments and more of partnerships between investors and developers and other land owners.

“Joint venture and club funding will become the preferred mode as 2015 progresses. With the improvement of the economic situation, Pune, Chennai, Hyderabad and Kolkata will start attracting sizeable investments along with the top three metros of Mumbai, NCR and Bangalore.

“This will be a notable change from dynamics seen in the past, wherein only these three cities ruled the roost. In fact, we will see Grade A commercial properties in tier 2 and tier 3 cities appear on the radar of investors, though a full-on focus on these opportunities will probably not take place in 2015.

“Attractively-placed office assets and high-demand residential categories, especially well-located mid-income projects, will continue seeing considerable investments in 2015.While investors may continue to show limited interest in retail real estate, we will see increased interest in the hospitality sector as compared to previous year.

“REITs got a green signal from the government in 2014, and this will help ease the pressure on the balance sheets of cash-starved developers. However, the listing of new REITs will be slow and steady. While REITs will succeed over the longer term, they need to pass through the challenging phase ahead for them over the next two years.”

On the regulatory front, Indian real estate will continue to faces a fair share of problems in 2015, with a number of vital real estate regulations and initiatives gathering dust on bureaucratic tables. “These need to be fast-tracked and implemented in 2015, because they are crucial for the real estate sector’s growth and graduation from opaqueness to transparency.

“While many believe that there is little done by the currently ruling government for the real estate sector, there is a positive sentiment underway owing to small but significant steps taken in the right direction by the new government.”

Two landmark policies that were introduced by the central government are the Land Acquisition, Redevelopment and Rehabilitation (LARR) Bill and the Real Estate Regulatory Authority (RERA). However, after almost a year of these two bills being introduced, there has not been much progress due to tough clauses in both, which were actively debated.

Once finalised, the revised bills will appear more investor-friendly and create a favourable environment for developers, buyers, and investors to operate in 2015.

The single-biggest hurdle that the entire real estate sector will face in 2015 is related to land and the industry hopes that the regulatory stranglehold will finally see loosened – especially given the government’s vision of establishing 100 Smart Cities that entails significant volumes of land.

The LARR (Land Acquisition, Rehabilitation and Resettlement) Act was formulated and re-formulated to counter land-related bureaucracy in India. On the ground, it has actually done quite the opposite ad become a deterrent for developers as well as investors to operate in the Indian real estate and infrastructure space.

“The real estate sector is desperate to get past this hurdle. It is not just a question of making land available for primary real estate development; the government has correctly identified infrastructure development as they key to accelerated economic growth, and infrastructure is highly land-centric.”

The still-pending Real Estate Regulatory Bill has been hotly contested at every stage, and its approval has been deferred again only recently.

“There is no doubt that it must be enacted sooner rather than later so that the Indian real estate market becomes attractive for foreign investors. However, no version of this Bill that has evolved from the various objections and arguments from the industry’s stakeholders has been universally acceptable so far. It will require a strong and determined government to push it through.”

Three recent revisions to the RERA could conceivably lead to its unilateral acceptance and consequent ratification in 2015:

• Reduction of minimum balance to be maintained in the escrow account of a project has been reduced from 70% to 50%. This will effectively allow developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects, and will work in their favour by also allowing them to grow their land and/or project portfolio. The 50% mandate will still place enough restriction on developers to divert funds elsewhere and ensure better completion records
• Coverage expanded to the commercial real estate sector: While the previous version of the bill envisaged coverage of only residential sector, the new government wants commercial real estate to also fall under the ambit of the regulatory authority and its clauses.
• All projects which have not received their completion certificates will also be now covered under the bill and hence this allows larger umbrella coverage for buyers and investors.

While the RERA initially aimed at providing an alternate redress mechanism, the new provisions are talking of no recourse to other consumer forums, which could lead to to pressure on the regulatory body from the rising number of cases.

The recommendations have been made by the ministry and sent to Prime Minister Office for approval before the cabinet approves it. “It is unclear whether the Real Estate Regulatory Authority will finally be ratified as a law in 2015, but the fact that hard discussions are happening is definitely positive, and indicative of the new government’s determination to make it a reality.”

By Adrian Bishop, Editor, OPP Connect

Source And Courtsey By  :- http://www.opp-connect.com/22/12/2014/2015-to-be-good-year-for-india-real-estate/