One of the largest employment providers in India after agriculture is the Construction and Real estate sector. The sector is in doldrums for quite some time and experiencing uneven growth since 2005. During 2007 and early 2008, the sector achieved newer heights owing to robust economy and increase in foreign investment. Global slowdown in 2008 ultimately dragged the sector down. Despite fall in the real estate prices, the buyers are yet shying away in going for the purchase. Sandeep Sharma examines the sector...
The Indian real estate sector comprises housing, commercial, retail, and hospitality segments. The housing sector contributes 5-6 per cent of the gross domestic product (GDP). The Indian real estate market is estimated to touch US$ 180 billion by 2020. The housing sector contributes around 5-6 per cent to the Gross Domestic Product (GDP) in India. During the period FY2008-2020, the market size of the real estate sector in India is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent.
The real estate is facing number of challenges on various fronts. To start with, there are hardly few takers for the existing inventories in many cities. The sector is not yet provided industry status by the government thereby not allowing the benefit of borrowing funds at a lower rate. The sources of funds are drying up and banks support is so far not encouraging. Single window clearance is still the talk of the town but no such thing has appeared so far on the horizon. Apart from the above, the key challenges also include shortage and rising cost of manpower for construction projects. The cost of the cement owing to the alleged cartelisation by the builders and developers also add up to the woes of the real estate players.
The sector was largely unorganised for a significant period of time post independence. The real estate sector now is gearing up to move towards the organised segment. Players like Tata Housing, DLF, Hiranandani, Godrej Properties, Mahindra Lifespace and many others are in the forefront of the organised brigade. Foreign players like Ascendas, Emaar, Tishman and others are very much in the game to build residential and commercial properties in India.
Rohit Gera, Managing Director, Gera Developments & VP, CREDAI – Pune Metro while sharing his view about the year gone by has termed 2016 as a turbulent year for real estate sector in India. According to him, the industry faced headwinds in terms of slow sales followed by a reduction in project launches. Not much of relief on the interest rate front. The passing of the Real Estate Regulatory Act (RERA) added more confusion to the industry. This is been a year when judicial intervention for non - delivery by developers has been at it’s highest.
According to real estate consultancy Knight Frank India, in the fourth quarter of CY2016, the sales plummeted 44 per cent as compared to the same period of the previous year. The sector is estimated to suffer a notional loss of Rs 22,600 crore after currency withdrawal. The impact of demonetization brought down the overall sales by 9 per cent to 244,680 units in 2016 from 267,960 units in 2015 as per the report. After demonetisation, the number of land registrations has dropped significantly in the Patna district.
The real estate sector growth has direct impact on more than 250 ancillary industries comprising building material, cement, steel, paints and consumer durables. With low offtake in the realty segment these sectors are also reeling under tremendous pressure.
‘Housing for all by 2022’ scheme was launched by Prime Minister Narendra Modi. The Government of India plans to build 30 million houses across the length and breadth of the country by 2022. The projects would mainly cover the economically weaker sections and low-income groups. The project implementation is planned through public-private-partnership (PPP) and interest subsidy.
As per the Department of Industrial Policy and Promotion (DIPP), the construction development sector comprising Township, Housing, and Built-up Infrastructure has received FDI of Rs 1,13,936 crore from April 2000 to March 2016. This amounts to 8 per cent of the total FDI received during this period. In order to boost the construction sector development, the Government of India has relaxed the norms to allow Foreign Direct Investment (FDI).
According to a report released by global real estate consultancy firm Cushman & Wakefield and the Global Real Estate Institute, the Private equity (PE) investment in real estate is estimated to increase by 53% from 2015 levels touching $7.2 billion this year. As per the report titled ‘Revitalizing Indian Real Estate’, in the first nine months of 2016, private equity funds committed $4.2 billion, an increase of 20% from the same period last year.
ECL Finance Ltd, the non-banking financial company (NBFC) of financial services firm Edelweiss Group, has invested Rs 300 crore with Rohan Lifescapes for the construction and completion of ongoing projects.
The construction and real estate sector is having high expectations from the forthcoming budget 2016-17. The expectations are in the form of clarity on GST, policies that can standardise use of construction materials, raising the house rent allowance deduction and relaxation in the income tax rate. With the budget, most of the stakeholders are expecting the real estate sector to bounce back in 2017.
Ar. Ricky Doshi, Founder & CEO, ARD Studio is quite optimistic about the future of the construction and real estate sector. He said, “With the country recently witnessing the demonetization act, there are a number of speculations doing the rounds regarding the upcoming budget. Currently people are facing a lot of challenges due to the demonetization policy, but, the future seems positive for the construction industry. The RBI has already announced cuts on interest rates, which is a positive sign for the buyers. They can now get home loans at a cheaper rate than before. All the major banks have announced the revised interest rates for home loans. With banks being more cash rich, there can be more news on the rate cuts that may be announced during the budget. Additionally, there are more policies expected in the near future that will further ease out the entire business of construction industry. There will be more transparency, imposing regulatory measure due to the RERA act that was passed last year. The budget may also include policies regarding low cost housing schemes which would boost the residential construction industry. Policies of infrastructure development will directly impact the construction industry as well, thereby making it an important feature in the upcoming budget.”
REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016
On 1st May, 2016 the Government of India has brought into force the Real Estate (Regulation and Development) Act, 2016. The regulation aims at improving the operational areas and creating an institutional framework to protect the consumer interest and boost the real sector growth manifolds.
SEBI NOTIFIES REGULATION FOR REITs
The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). This move is likely to facilitate easier access to funds for developers and create a new investment avenue for institutions and high net worth individuals to step in.
Fitch Ratings has lowered India's GDP growth forecast from 7.4 per cent to 6.9 per cent for the current fiscal owing to disruption of economic activity post demonetisation. Fitch is expecting the sale of residential property to go down by at least 20-30 per cent in 2017 as an after effect of Government’s demonetisation move.
Brigade Group in the South is gearing up to add 19 million sq feet into their project portfolio. Out of this around 17.35 million development is in the residential segment and is ongoing, around 1.3 million sq ft development is in the commercial segment while the balance development of 0.49 million is in the hospitality segment.
SARE Homes is coming up with a residential project at Sector 92 in Gurgaon spread over 66 acre. The developmental potential is to the tune of 6.5 million sq ft. Global investor firm KKR and non-banking finance company Altico Capital have recently invested Rs 435 crore. KKR India Asset Finance has recently lent Rs 300 crore to Puranik Builders to fund two projects in Pune.
Piramal Fund Management (PFM), the financial services arm of Piramal Group, has achieved Rs. 10,000 crore of aggregate investments in South India’s realty sector. Despite temporary disruption in the property market owing to demonetisation, the fund house expects the real estate price correction to be less than 10 per cent.
Shapoorji Pallonji Group's real estate arm SP Real Estate (SPRE) expects to reach 20 million sq ft of residential development in the next 6 years.
The prospect of building 100 Smart Cities in India holds tremendous potential and windfall profits for real estate companies across various geographies in India. The low cost and affordable housing segment promises a lot. The need of the hour is to bring down the cost of construction through innovating techniques and use of eco friendly building materials. The hopes are still high for the sector as the prospects comprise mainly the large population with aspiring middle class looking to spend more on quality housing and embracing urbanisation at a faster pace than before.