Indian Real Estate 2013: Uncertainty haunts developers

Amidst a global economic slowdown as a consequence of the US fiscal cliff and Eurozone debt crisis, India’s growth forecasts too have been revised downward over the last three quarters of the year. Even in 2013, it is unlikely that we will see a spurt in growth given the existing inflationary pressures and large fiscal deficit which could adversely impact the scope for policy stimulus in the country. Specifically in the real estate sector, despite the opportunities, the prevailing global and local market conditions have affected investor sentiment, experts feel.

Given the overall economic climate, coupled with the increased incidence of property prices, high interest rates and low sales, along with dismal corporate earnings growth, weak employment scenario in the sector and fluctuating rupee value are keeping investors at bay. Additionally, India hasn't really delivered since 2005 on the promise that it held as an investment destination. With exits difficult and returns less than half of those initially promised, international investors seem to be staying clear of property markets in the country.

According to Sachin Sandhir, Managing Director, RICS South Asia, “Across micro-markets, investor sentiment has been impacted due to inflationary pressures and rising interest rates through the course of 2012, which have only come down marginally with a few policy revisions by the apex bank in the second half of the year. Slower GDP growth rate projections; shortage to the tune of 85% in real estate and construction professionals available today, as highlighted by a recent RICS research and high debt burden of real estate developers have also impacted investor confidence in the residential sector.”

Pinning hope on the forthcoming real estate regulatory bill to meet certain challenges the industry is facing today, Ashwani Prakash, Executive Director, Paramount Group, said, “With expected reforms, in terms of real estate regulatory bill we expect to address various challenges the industry has faced throughout the year.”

Further elaborating the existing demand the year has witnessed for the segments starting from luxury to the theme projects, Ashwani said, “The solution of Greater Noida West (Noida Extension) issue has also brought smile on the faces of many who have invested in the region and can expect the region to grow further in the future. The announcement of D.M.R.C to connect the area by Metro has given a further boost to the developers and also to the prospective buyers. In NCR Noida has emerged as a preferred region and has seen tremendous development and we expect the trend to continue in the year ahead.”

Predicting that the sagging momentum will pick up for real estate from the second half of 2013, Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India, said, “The country’s economic environment will certainly improve in 2013, with a corresponding gain in momentum for real estate. The most tangible benefits of economic improvements on the Indian real estate space will be seen in second half of 2013.”

Blaming several bottlenecks from plan approvals to land acquisition for the slow growth and high property prices in 2012, Puri said, “Residential property prices have breached affordability limits in cities like Mumbai. Nevertheless, developers will have to factor in the ground realities of the business while debating the lowering of prices to catalyse sales in 2013. Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders are already beset with the increased costs of license costs and cost of construction.”

Although most of the cities of India will see an increase in residential launches in 2013, the southern cities of Bangalore and Chennai will witness a decline in launches as compared to 2012YTD, Puri said, adding, “It is important to note that these two cities recorded a historical high in terms of the number of launches during 2012.”

According to Sanjay Dutt, Executive Managing Director – South Asia, Cushman & Wakefield, “For the Indian real estate sector, 2012 was a year of cautious approach as stakeholders - developers, investors and occupiers began the year with an air of skepticism, a trait that continued through the year. Rising inflation, rupee depreciation and increasing cost of capital added to the woes that affected demand as well as future supply dynamics of real estate in the country.”

Pointing out that the residential was the only sector that had witnessed moderate growth, compared to the commercial sector that includes office, retail and industrial that saw limited or no growth, Sanjay blamed the government for not acting swiftly to arrest the trend.

Interest rates remained stable but on the higher side in 2012 which affected both developers as well as end user purchasers, he said, adding, “Developers, who were reeling under aspects like high debt, high cost of servicing debt, increased cost of construction, and restrained demand from end – users, were forced to maintain the prices rather than reduce it. Thus, they adopted innovative solutions to increase profitability by adopting measures as increasing operational efficiencies, re-packaging offerings, attractive schemes and targeting HNIs and customizing offerings as per buyers’ preferences.

“Majority of new launches were aligned to end user and investors taste. On one side residential units are smaller with no frills to appeal to masses, on the other lot of branding is being done to attract and differentiate residential developments. Tall, Green, Designer etc. are the signs of competitive environment,” he signed off.