Anuj Puri, Chairman & Country
Head, JLL India, dwells into the difficulties faced by Real estate sector in
2014 and what the New Year holds for the Indian real estate. Will there be a
turnaround? Will the government push the stalled real estate regulatory Bill,
Land Acquisition Bill and Real estate Investment Trusts to propagate the growth
in the already sagging sector? Let’s read on...
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.
2015
will definitely be a good year for the real estate sector
The threat of inflation has completely submerged,
and borrowing rates are sure to go down from the current levels. This will
encourage potential buyers planning to avail of home loans to finally take the
plunge. Also, with property prices staying stable and good deals being offered
by developers in order to clear their inventory, fence-sitting buyers be
further encouraged to press the ‘buy’ button.
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.
Residential
Real Estate
During the year 2014, new launches of residential
units saw a consistent fall every quarter as a consequence of the subdued
demand and high prices. While this was largely the case with high-end projects,
the affordable housing segment definitely began to gain favour. This segment
was firmly lodged under the priority schemes of the government and central
bank, and buyers were seen finding comfort in investing in such projects given
the smaller ticket sizes and improving connectivity in the suburbs of the major
cities.
In the second half of 2014, many large developers
who in the recent past concentrated on the mid-to-high segment due to better
margins were seen eager to play the volume game and entering into
affordable-segment projects in the deeper suburbs. This heartening trend began
the ground work on bridging the wedge between demand and supply in our major
metropolitan cities. Since developers are sitting on close to 30 months of
unsold inventory in the mid-to-high-end segment, we also saw an increase in
cash flows because of this new focus.
Completions,
Net Absorption & Unsold Inventory – Residential
In 2015, developers will become more earnest about
right-sizing and right-pricing their offerings. 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 align with the slow demand dynamics for these offerings.
Pricing
Trends
A large portion of the total unsold residential
inventory is in the under-construction projects, while completed projects have
only moderate vacancy. Home buyers looking for ready-possession property will
therefore find limited room for negotiations when compared to buyers who can
wait for some time to get possession. The attractive schemes that were doled
out by developers in under-construction projects during the festive season of
2014 are likely to continue into 2015.
2015 will see home buyers benefiting from reduced
borrowing rates, increased developer-focus on affordable homes, largely stable
prices, and better job and income prospects.
Affordable
Housing
Affordable housing will clearly be the flavour of
the season in 2015. While the ruling government at the Centre and the Central
Bank have clearly spelled out their intention to push for affordable housing,
it is the State governments which will need to take the implementation
initiative. The recently concluded elections have clearly indicated that better
governance, planning and good implementation are factors on which performance
will be evaluated, and affordable housing is an important yardstick for sure.
While affordability will always be a subjective term
that assumes different meanings in different markets of India, every city does
have its own affordability threshold and benchmark. Developers active in each
of the primary cities are now fully aware that they must address the demand for
affordable housing in their cities, and stop focusing excessively on high-end
and luxury offerings.
Affordable housing is in itself not a difficult
format to deliver; the challenging part for many developers will be to align
this format with their existing brand image without impacting it. Quite a few
prominent developers already have a budget housing strategy, but they have
evolved this strategy over time and ensured that the creation of such projects
becomes a natural extension of their brands. For the newer entrants who have so
far focused exclusively on higher-end housing, the process will begin only now
– and for all but the die-hard firms that will not budge from their ‘creamy
layer’ orientation, the process is unavoidable.
Coming anywhere close to negating the affordable
housing gap altogether would take about two decades of focussed supply – and going
by previous market learnings, it is unlikely that developers will retain their
current focus on affordable housing once the economy picks up sufficiently to
make higher-end housing desirable once again. However, as long as the current
momentum and orientation prevails, we will at least see some good headway being
made on this front in 2015.
Commercial
Real Estate
Over the past few years until 2014, the supply of
office real estate was higher than demand by 4 to 10 million sq ft. Our reading
is that developer had been too optimistic in their anticipation of a revival in
economic activity.
Though office real estate prices failed to recover
from the after-effects of the financial crisis up to late 2014, we did see the
beginning of a gradual turnaround. This can be attributed to the fact that
commercial real estate developers began to strategically reduce the incoming
supply to a new-normal level of occupier demand in the range of 27 to 30
million sq. ft. each year. This helped bring down the vacancy rate to 17% from
more than 18.5% just a year ago.
In 2015, demand will remain in this range,
marginally improving from the level seen in 2014. However, with the rupee
weakening to below INR 62/USD at the current time and India’s GDP growth likely
to strengthen further, the positive risk to this forecast of a sharp uptick in
demand cannot be ruled out though.
Interestingly, while office real estate have not
recovered fully from the fall in prices post GFC (unlike residential) there is
significant room for upside in the event of a positive change in business
sentiment. In fact, such an improvement was already seen after the general
elections and is already reflecting in year-end office market leases. The trend
of moderate-to-healthy leasing activity will continue in 2015.
Pan-India
New Completions, Absorptions and Vacancy – Office
Retail
Real Estate
In 2014, the retail real estate sector was one of
the biggest casualties to market conditions that increasingly favoured the
online retail community, with the exclusion of well-managed and leasehold
organised retail malls. Strata-sold, poorly-managed, badly-located retail
properties lost lustre as more retailers chose to avoid them.
2014 also saw a few of these malls either converting
into Grade B office space or reeling under the compounding effect of rising
vacancy rates. Vacancy in poorly-built and operated malls was as high as 20%,
while good quality malls were relatively better off with about 10% of vacant
space. The ecommerce frenzy that has been taking India by storm over the last
two years was at its peak during 2014, and now poses a serious challenge to
physical retailers and mall developers. The situation is compounded by the
absence of adequate regulation on ecommerce in India currently.
However, a handful of mall developers have risen to
this challenge by identifying key transitions that could help them sail
through. The measures they have undertaken include a revamped tenant mix,
adoption of the mixed-use format and delivering theme-based shopping experiences.
These practices are now common in overseas markets, and Indian retail malls
will be seen adapting to them more rapidly in 2015.
Pan-India
New Completions, Absorptions and Vacancy – Retail
Real
Estate Capital Markets
2014 saw gradual growth in demand for Indian real
estate, particularly after the general elections in May. Concurrently, fund
raising activities picked up, and this momentum will continue in 2015 as well.
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.
Real
Estate Regulation
On the regulatory front, Indian real estate will
continue to faces a fair share of problems in 2015.There are currently still a
number of vital regulations and initiatives related to real estate that have
been 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.
In the recent past, two landmark policies that were
introduced by the central government were the Land Acquisition, Redevelopment
and Rehabilitation (LARR) Bill and the Real Estate Regulatory Authority (RERA –
yet to be ratified). However, after almost a year of these two bills being
introduced, there has not been much progress. This is largely due to tough
clauses included in both these bills, which were actively debated throughout
2014. Some of those clauses were seen as
limiting the ability of the industry to function smoothly.
The newly-elected government has astutely identified
the limiting factors within the two bills and attempted to rectify them rather
than introduce new regulations that would merely add to the burden of
‘lip-service’ reforms. In that sense, the present government has done its
homework before taking up the task of resolving issues of the real estate
sector.
Once finalised, the revised bills will appear more
investor-friendly and create a favourable environment for developers, buyers,
and investors to operate in 2015 as the key changes mooted in the two bills
are:
Land
Acquisition, Rehabilitation and Resettlement Act (LARR)
The
single-biggest hurdle that the entire real estate sector will face in 2015 is
related to land – the very foundation stone of all real estate. The finite and
all important commodity of land is caught in a regulatory stranglehold that we
hope to finally see loosened in 2015 – especially given the incumbent
government’s vision of establishing 100 Smart Cities, which gives rise to
serious questions about feasibility. The creation of these 100 smart cities
will entail significant volumes of land – massive, contiguous land parcels.
In the manner that the new government has envisaged,
these smart cities will essentially be brand-new municipalities on the
peripheries of our major cities. With its avowed commitment of launching 100
smart cities, the government is de facto also making itself responsible for
making the required land available. How exactly will this happen?
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 modified LARR Act which was put into effect last
year by the UPA government attempted to reduce the bureaucracy involved.
However, it failed to achieve this purpose and in fact only increased the
existing complexities. Given the new government’s sharp focus on ‘housing for
all’, fast-tracking of infrastructure and the creation of 100 smart cities
across the country, there is very clearly a pressing need to revisit this Act
in 2015. Provisions in the bill such as the significant rise in compensation to
original inhabitants, the tedious rehabilitation clauses and other norms need
to be relaxed if it is to serve its purpose of untangling complexities and
delivering a fair shake to all stakeholders.
Consent clause: The current legislation requires the
acquisition process to go through mandatory consent of at least 70% locals for
PPP projects and 80% consent for private projects. This clause is difficult to
implement, considering the large number of people involved in the entire
rehabilitation process. The fact that the government is planning to renegotiate
these clauses is in itself a big positive, as one tight spot has been
identified.
Return of unutilised land: It has often been seen
that when land was acquired for a stated purpose and the land-losers were
promised employment opportunities and overall development of the region in
question, the project failed to take off for several years. This lacuna has
been identified, and the timeframe for return of unutilised land has been
proposed to be reduced to 5 years from the previous 10 years. This is a strong
deterrent for companies or developers who plan to acquire land without having a
clear roadmap for its usage.
Clarity on end-usage: There is a need to clearly
identify the purpose of land acquisition so that intervention by the government
can be put to right use. For instance, critical projects involving
infrastructure and affordable housing require faster clearances and may
necessitate timely intervention.
Expertise of State governments in deciding area
threshold: The amended Land Acquisition Act was to cover all private land
acquisitions if the minimum area to be acquired was 100 acres in rural areas
and 40 acres in urban areas. However, every city and village has different
dynamics, and these are best understood by the State government rather than the
Centre. Thus, the Act must consider giving States an upper hand in deciding the
coverage reveals pragmatism and flexibility.
Smart Cities beyond PPP: In order to meet the target
of an annual outlay of INR 35,000 crores for development of 100 new smart
cities, it was obvious that private funding was critical. The government has
invited full private funding of projects, with government contribution largely
limited to viability gap support.
Real
Estate Regulatory Bill (RERA)
The still-pending Real Estate Regulatory Bill has
been hotly contested at every stage, and its approval has been deferred once
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 amount was
from the monies collected from the buyers. 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. (However, for buyers, the
concerns regarding funds diversion would be higher, and the Bill would be
slightly less protectionist towards buyers.)
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. The limited
coverage was largely without any purpose and, therefore, it currently stands
rectified. Commercial projects under the purview of the bill would provide
protection to investors of commercial assets, as well.
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.
Worryingly, while the RERA initially aimed at
providing an alternate redressal mechanism, the new provisions are talking of
no recourse to other consumer forums. This can lead to pressure on this
regulatory body in terms of increases log of cases, though it will reduce
instances of multiplicity of suits.
In any case, the recommendations have been made by
the ministry and sent to PMO for approval before the cabinet approves it. Thereafter,
it will be tabled in the Parliament for passing the bill and making it an act.
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.
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