Indian Real Estate Market: Rewind 2017

The testing times facing the real estate sector in wake of the reforms-driven new order has been much debated this year. While we have already experienced the roller coaster, let us look back at things on a lighter note in the run up to the New Year.

The flurry of reforms that became reality in 2017 somewhere take me back to the 1930s when the notorious bodyline bowling brought the bite back into classical Test Cricket. Back-to-back policy interventions from the government apparently zipped past the realty sector much like lightning fast bouncers unleashing chin music on batsmen.

It all started on November 8, 2016 when the government decided to derecognise high denomination currency. The first, in the slew of long-term reforms, took the industry by storm; however, it remained hopeful of a brighter future. A few months later we saw another structural reform, the Real Estate (Regulation and Development) Act, 2016 (RERA) come into effect. And, the final salvo in this sequence was the roll out of the Goods and Services Act (GST).

The impact was blatant. New residential projects dried up as developers’ focus shifted towards becoming compliant to the new order. Similarly a slowdown hit home sales as buyers turned wary. Even the festive season failed to bring any cheer to the sector.

Despite the heartburns the industry had been optimistic until the first half of the year. But business sentiments hit the rock bottom in the September-ending quarter possibly following an objective realisation of the changing times. The real estate sector, in particular, has come to terms with the fact that buoyancy is unlikely to bounce back in the immediate future.

However, there have been some positive takeaways as well.

The government’s emphasis on housing and its efforts to mitigate the risks in the real estate sector by introduction of RERA has not gone unnoticed by institutional funds.

A large number of these investors and funds have made changes to the portfolio allocation strategy allowing investment exposure to the Indian real estate. The pension and private equity funds are investing in commercial assets (office spaces and malls) and also in under-construction residential properties. Not just foreign investors but even domestic players are raising funds to invest in the sector. The interest of private equity players in particular has shifted towards pre-leased office and retail assets.

Although the residential market in India is facing sluggish growth, sentiments among wealthy Indians to acquire homes aboard have seen an uptick. Traditionally, the desire for an overseas home in India has been largely driven by fascination for exotic locations or perhaps as a safe shelter for our children studying aboard. But today resident Indians investing in residential properties overseas are mostly doing so as sound investments.

We are also looking forward to the Union Budget 2018-19 with respect to the Real Estate Investments Trusts (REITs). It is high time we cut down the long term capital gains holding period for REITs from three years to one year.

This would bring the investment opportunity at par with equity investments. We strongly believe that the much anticipated move is the missing part of the jigsaw puzzle that could have undermined India’s REITs story.

Despite the regulatory approval being in place for quite some time REITs, a potent instrument of change in the real estate industry, have been held back. REITs would go a long way in increasing the depth of the Indian market by offering a new asset class to investors. It also provides a credible exit route for existing investors and developers of real estate.

Meanwhile, the Moody’s upgrade for India after 13-long-years has comes as bright spark amid widespread cynicism about the economy. The recognition is an endorsement of the structural resilience in our macro-economic architecture. But one cannot ignore the industry analyses of India’s business performances which has been on a steady decline. Capital expenditure has dwindled to worrisome levels and growth is unlikely to revive in the near future.

The next 12 to 18 months are likely to be the ‘under observation’ period for the real estate sector. Industry stakeholders should spend the period in reorienting businesses in line with the new order. We are also hopeful that India’s strong economic fundamentals still puts it among the fastest growing economies in the world. As they say in Cricket, it is time to you hold your guard and see off the new ball.