Realities of the Indian Real Estate Market - A seller's or buyers' paradise! DUBAI, MAY 2014
Being an NRI, I started looking at the real estate sector back home as the most reliable investment hub given the stable government & India shining theme at its best. But just looking at the sector one does not get the basic realities of the market. The investment may reap huge benefits in the long term but any short term ventures can roll into a disaster. I looked into the various facets & thought it should be shared with the general pupulace so that they get a sneak peek into the sector as well as know the current sentiments existing in the real estate segment.
The government may be talking of 'housing for all' by 2020 but far from general expectations, the real estate industry across the country continues to suffer from oversupply, low absorption levels and rise in QTS (quarter to sell unsold inventory) and high prices.
While green-shoots in the economy may be visible through rise in GDP growth numbers at 5.7 per cent for the quarter ended June 2014, and a dip in the current account deficit at 1.7 per cent, it may take some time before jobs in the economy and demand for housing grows. A recent report released by Knight Frank titled ‘India Real Estate Outlook’ shows that in the first half of the calendar ended June 2014, both the new launches for residential real estate and the sales volumes declined significantly. If the new launches fell by 32 per cent over that of H1 2013, the sales volume in the period dropped 27 per cent.
The report, however, projects that sales volume in the second half of calendar 2014 may rise by 26 per cent on account of the change in overall sentiments after the government announced sops for the housing sector in the Budget 2014-15 and economy recorded signs of growth.
The real estate residential market continues to suffer. Leading residential real estate markets in the country — Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bangalore, Chennai, Pune and Hyderabad continued to see a dip in their absorption rates as they declined between 14 per cent and 37 per cent. While the decline was slowest for Bangalore, the dip in absorption rate for NCR was highest at 37 per cent.
A low absorption has resulted into a rise in the unsold inventory across the country. The unsold inventory for MMR by the end of June 2014 stood at 2,13,742 units whereas for the NCR region it stood at 1,67,000 units. Over the last three years, the unsold inventory in NCR has risen at a compounded annual growth rate of 15 per cent.
A low absorption rate is also leading to a rise in the QTS — the amount of time taken to sell the unsold inventory. While the QTS for Mumbai has risen to 12 (12 quarters needed sell the inventory), for NCR it has gone up from 5 in June 2012 to 9 in June 2014. The dip in absorption rates and rise in unsold inventory on the other hand has also forced developers to delay their project launches. The report shows that the launch of new housing units declined between 16 per cent and 47 per cent. While the fall in new launches stood at 38 per cent in Mumbai, it was 43 per cent for the NCR region. Chennai and Bangalore saw a decline of 47 per cent and 16 per cent respectively. The situation may not reverse quickly as the developers who have seen a fall in demand over the last few months may practice caution while launching new projects.
However it may be different for different regions. “High unsold inventory and the poor response received by the new projects launched during H2 2013 and H1 2014 are expected to deter the developer community from launching any fresh projects in most of the cities during H2 2014,” said the report. However, other market experts paint a different picture. “The demand from buyers and launches by developers have taken off beginning April as the sentiments improved on the back of the election results,” said Om Ahuja, CEO-Residential Services, JLL India. The pick up While the economic growth has started to take-off and the overall buyer sentiment is on a rise, the second half of the calendar is expected to see a rise in demand. The report has forecast that the sales volume in the six cities covered in the report are expected to grow at 26 per cent in the second half over that in corresponding period in the previous year. Mumbai and Bangalore are expected to lead in the recovery of sales volume with a growth of 49 per cent and 26 per cent respectively during this period.
However, the industry may not see a corresponding growth in the new launches as developers may first be looking to sell the piled up inventory. The report projects that the number of new launches may grow only at 5 per cent over the next six months. The two big markets — Mumbai and Delhi NCR are expected to see a growth of 10 per cent each in the new launches in the second half on account of rise in absorption rate.
Good News
The market size of real estate in India is expected to increase at a CAGR of 11.2 per cent during FY2008 - 2020.Demand to grow at a CAGR of 2 per cent over the period 2013-17 across top 8 cities in India.
- Ahmedabad
- Pune
- Bangalore
- NCR
- Mumbai
- Hyderabad
- Kolkata
- Chennai
Total FDI in the construction development sector during April 2000-April 2014 stood at around US$ 23.38 billion.
Abnormal market statistics
Property market is predicted to witness a glut in 2012–13 owing to steady new launches at a time when sales are extremely slow. As of April 7, 2011, Navyroof.com featured an article Mumbai residential property set for fall of up to 35% by Jones La LaSalle which says property in Delhi and Mumbai could fall by as much as 35%. The reasons for this is Indian property developers who bought land at high prices are now having to bring prices down considerably and of recent residential sales about 65% of flats in Delhi and 35% in Mumbai have gone to speculators according to Jones Lang La Salle. Another article dated June 24, 2013, suggests that slow down has already started in some areas.Some Delhi commentators, such as Prerna Agarwal, feel the Indian property market needs to be looked at in context of the overall economic situation in India and the local real estate pricing trends prevalent in a region. The Indian economy is booming with an annual GDP growth rate of 8.5- 9% creating a class of potential investors with significant disposable income. As housing remains a concern in major metro cities, sufficient demand generators for residential units are there for the next decade and expect prices to rise 10–15% in India in next five years.there is no possibility of salary increases in the short term[citation needed]and middle class will endup in paying their 20 years of earnings to own a home which is very high comparing to their western counterparts.The lower middle class who are not able to afford housing will tend to look for rented houses which put pressure on rental which also pushup the inflation further .The money generated as part of selling should be controlled by the govt and thereby get the taxes.
Real estate research firm PropEquity said new home sales in Mumbai and NCR dropped over 50 per cent in Q1 of this calendar year.
Housing Slump showing up in the year 2013
The real estate market in cities across India show signs of crumbling as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May 2013, scaring away foreign investors.Unsold inventory pile up while sales are down due to very high prices.Data from property research firm Liasas Foras shows Mumbai saw the maximum inventory of unsold homes at 155.27 million square feet or 48 months of unsold inventory during the first quarter of FY14. For NCR, the inventory has more than doubled to 31 months in the first quarter of FY14, while for Mumbai it has risen from 17 months to 40 months.Inventory denotes the number of months required to clear the stock at the existing absorption rate. An ideal scenario implies inventory should be in the range of eight to 10 months. But Mumbai would take four years to sell these homes despite a slew of discount schemes, new launches and back-room negotiations.
The National Housing Bank’s Residex tracks movement in prices of residential properties on a quarterly basis. According to the index, during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices.
Builders face cash crunch after RBI put brakes on the 20:80 "ponzi" scheme. In spite of defaulting on loan repayments, sellers are refusing to cut prices, for fear of starting a market rout.
Recap of 2014, its main events and economic drivers
According to Colliers Research, Bangalore and Chennai witnessed maximum demand and growth, while Kolkata, Mumbai and Gurgaon were unchanged. Despite this, many developers launched new projects during the end of 2014.There is a backlog of unsold property. 2014 has seen delays in approvals, project clearances and targets, apart from debt commitment on property and government spending less in this area and a huge delay in finishing projects
Construction industry has grown 2 per cent from 2014 to 2015.
What 2015 awaits
According to the National Housing Bank (NHB) Residex Index, residential property prices show an upward trend in the second half of 2014. First half had seen property prices dip, as the weak rupee and high inflation had a negative impact on spending. Needless to mention that 2015 will largely be about recovery. The RBI will most likely cut interest rates and this will see more spending in the residential real estate segment. The Ministry of Statistics Program and Implementation and PwC Analysis predict a growth of 8 to 9 per cent. Added to this, the introduction of REITs, improved market sentiment and more efforts by the government to reduce project loopholes and bottlenecks in transactions will go a long way in clearing the way for positive trends in 2015.In India, real estate plays an important role, from affordable housing to infrastructure and generating employment. Here are some of the reasons why:
1. The Economic Survey of 2012-13 revealed housing to be the second largest industry that generates employment, after agriculture.
2. With more than 300 linked industries like steel, transport, construction, cement and brick, real estate contributes significantly to the country's GDP share and capital formation.
3. NHB's report places real estate as the third most impactful industry in India in terms of its effect on other industries and fourth in terms of employment generation.
4. The residential segment, comprising residential buildings, townships, schools, colleges and hospitals and other projects, makes the maximum overall contribution in the real estate industry and commands the largest part of its market share.
5. The real estate sector employs more than 35 million people, especially low and medium skilled labour
6. Directly impacts manufacturing
7. Attracts a lot of money in foreign direct investment (FDI)
Trends in 2015
1. The Planning Commission estimates that by 2030, about 600 million people will live in cities. Affordable housing therefore is a huge demand and the industry has a large gap to meet, with shortage seen among the low income groups.2. International agencies like IMF and World Bank predict an increase in GDP.
3. Real estate market is driven largely by sentiment.
4. First half of 2015 will be largely recovery with property markets.
5. ProjectVendor.com projects a 10 to 15 per cent increase in growth from FY14 to FY17 and 11 per cent growth in FY15. Residential and commercial projects, organised retail will contribute to this growth significantly.
6. Real estate construction market is poised to grow by 20 per cent between now and 2017.
7. Both large and specialised players stand to benefit and gain equally.
8. Real Estate Investment Trusts (REITs) and commercial real estate will make significant impact. REITs will have a huge impact in 2015. It is an internationally tried and tested strategy, especially in the USA, Taiwan, South Korea, Singapore and Australia. An REIT is a trust that buys, sells, develops and manages income-generating real estate property such as malls, commercial office spaces and more, with the main intention of attracting investors who can manage an interesting array of properties. Corporate investors benefit from tax exemptions. It largely impacts small investors and encourages proper investment channels in large real estate accounts, and is a better alternative to investing in stock, due to its higher returns and a diversified portfolio of investments. Blackstone, Xander, Brookfield and more real estate funds intend to launch REITs in the country and DLF, Phoenix
9. Prestige are expecting to make use of this huge opportunity.
10. The residential real estate space in India is divided into affordable housing, mid-level priced houses and the luxury segment. The onus on low cost housing is expected to put pressure on the luxury segment, but this is not significant. 2015 will focus more on recovery and clearing inventory, construction deadlines and backlogs.
11. Pricing is very important. Affordable price points will lead to higher absorption levels.
12. Easing pressure on the rupee will also impact the industry positively.
Market Size
According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received foreign direct investment (FDI) equity inflows to the tune of US$ 23,874.1 million in the period April 2000-September 2014.The Indian real estate market size is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's gross domestic product (GDP). Also, in the period FY08-20, the market size of this sector is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.
According to a study by Knight Frank, Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR). Also, Delhi-NCR was the biggest office market in India with 110 million sq ft, out of which 88 million sq ft were occupied. Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times.
Investments
The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. Some of the major investments in this sector are as follows: 1. Assotech Realty has tied up with Lemon Tree Hotels to manage and operate its serviced residences. The first project, 210 apartments under the branding of Sandal Suites, will be launched in Noida in 2015. The companies will launch 8-10 similar projects in a phased manner over the next seven years with an investment of Rs 800-900 crore (US$ 129.37-145.57 million) approximately.2. Blackstone Group LP is all set to become the largest owner of commercial office real estate in India after a three-year acquisition drive in which it spent US$ 900 million to buy prime assets. Blackstone has acquired 29 million sq ft of office space in cities such as Bengaluru, Pune, Mumbai, and Noida on the outskirts of New Delhi.
3. L&T Infra Finance Private Equity (PE) plans to raise Rs 3,750 crore (US$ 606.54 million) in an overseas and a domestic fund, and launch a real estate fund.
4. IDFC Alternatives Ltd has sold two of its real estate investments to PE firm Blackstone Group LP. The assets - a special economic zone (SEZ) in Pune and an information technology (IT) park in Noida - were sold for a combined enterprise value of Rs 1,100 crore (US$ 177.92 million).
5. Goldman Sachs plans to invest Rs 1,200 crore (US$ 194.1 million) to build a new campus in Bengaluru that can accommodate 9,000 people. The new campus is being developed in collaboration with Kalyani Developers on the Sarjapur Outer Ring Road, Bengaluru.
6. Snapdeal has entered into a strategic partnership with Tata Value Homes to sell the latter's apartments on its e-commerce platform, which marks the first time that an e-commerce company has tied up with a real estate venture.
Government Initiatives
'Under the Sardar Patel Urban Housing Mission, 30 million houses will be built by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership, interest subsidy and increased flow of resources to housing sector', according to Mr M Venkaiah Naidu, Union Minister of Housing and Urban Poverty Alleviation.The Government of India along with the governments of the respective states have taken several initiatives to encourage the development in the sector. Some of them are as follows: 1. 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 will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors.
2. The Telangana Real Estate Developers' Association (Treda) plans to host the Fifth Treda Property Show 2014 at Hitex Centre, Hyderabad. The show will be open to a mix of the populace, including prospective property purchasers, investors, architects and others.
3. The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of a software called 'Sanketham'. This will ensure a more standardised procedure, more transparency, and less corruption and bribery.
4. The Government of India has proposed to release the Real Estate (Development and Regulation) Bill which aims to protect consumer interest and introduce standardisation in business practices and transactions in the sector. The bill will also enable domestic and foreign investment flow into the sector.
What lies ahead - Sunshine at the end of the tunnel!
With Modi governement set to deliver major milestones & the look India policy of the world, I feel that you should buy a home & more so as in investment. Looking back we have a recession in 2008 but the resilent real estate sector always instills hope in this volatile market. What you buy today just as a home or to some extent show off home can turn into a solid gold mine looking 20 years down the line. Things are pretty good & a very good investment sentiment can actually push this sector into an overdrive much to the buyers ecstasy.As the Indian economy grows, the real estate sector keeps benefiting. With the increase in foreign tourist arrivals (FTA) every year, there is demand for real estate in the tourism and hospitality sector. Also, with the entry of major private players in the education sector, the major cities, that is Hyderabad, Bengaluru, Mumbai, Delhi, Pune, Chennai and Kolkata are likely to account for 70 per cent of total demand for real estate in the education sector. Demand for improved healthcare facilities is also expected to provide a boost to the construction sector in the country.