No magic wand for realty

The decisive mandate in the general elections will translate into gains for the real estate sector only if the Central government is able to work with states to push key reform measures and legislations.

Written by Anshumali Pravinchandra Ruparel | Updated: May 23, 2014 11:39 pm
a lot depends on FSI, PROJECT approvals and development planning, which are the prerogative of the states. Things may not improve if there is no harmony between the state and the Centre. a lot depends on FSI, PROJECT approvals and development planning, which are the prerogative of the states. Things may not improve if there is no harmony between the state and the Centre.

Hopes are high from the new NDA government at the Centre. While the real estate sector is expecting a turnaround in its fortunes, home buyers have only one question: What impact will this new-found exuberance have on property prices?

Currently the health of the housing sector is worrying. India is short of 2 crore housing units already and every year a deficit of 3 to 5 lakh units is added to it. The offtake is low due to the high prices. “Home buyers are keeping away from the market because of inflation and high prices, while developers are under pressure due to piling inventory,” says Sachin Sandhir, MD, RICS South Asia, a standards and certification body for the real estate industry.

Developer’s Demand

Usually for a developer, pricing is dependent on three major factors: land, cost of construction and interest rate on project loans. These were echoed in the expectations of developers that followed the electoral victory of the NDA.

“We expect that the new government will bring in reforms which will make it easy for the developers to raise money for their projects from financial institutions and banks instead of resorting to private sources of funds that demand high interest rates. We need control over prices of raw materials such as steel and cement. We also expect reduction in interest rates,” said Manju Yagnik, vice chairman, Nahar Group, a Mumbai-based developer.

Lalitkumar Jain, chairman, Confederation of Real Estate Developers’ Associations of India, the apex organisation of developers also voiced the need for a single window system of clearances and an accountable approval process.

Significantly, most developers The Indian Express spoke to left out the long-pending bill for setting up a real estate regulator. Their expectations are centred around issues that would benefit them: low cost funds, cheaper raw material and less expensive land.

Effect on Price

“It is natural phenomenon. A stable government will boost buyer’s sentiments, reaffirming trust and increase in demand,” says M Murali, MD, Shriram Properties based in Bangalore. “This would have a positive impact on the sales of residential spaces and prices may move up marginally. However, we cannot go by the temporary and transitory supply, demand and absorption levels.”

The end users and investors may enter the market with the hope that during the regime of the government with the reputation for pro-business policies, appreciation and profit will be significant.

“Presently, there is every reason for a rise in demand coming from the election results. Thus, I expect that in the short term, movement of prices will be northwards,” says Kumar Gera, chairman, Gera Developments, based in Pune. “If actions taken by government push the housing supply, then this initial price rise will stabilise. If however, expectations are not translated into actions, then this ‘invest’ sentiment will lead to a slow down.”

So, the sporadic increase in demand or sale should not be taken as a new trend. One has to wait for the actions of the new government to create its impact. “The realty sector is expected to witness a gradual revival. The developers would majorly focus on reducing the load on their existing inventories for the next 4-5 quarters. No significant price jump is expected in the next eight quarters in the markets which currently have abundant supply,” says Ganesh Vasudevan, CEO, IndiaProperty.com

“Since cost of construction has risen around 40 per cent in the past two to three years, thus, it cannot be affirmed in any way whether the prices will lower with the onset of a new government in power,” says Manpreet Grewal, regional director, Re/Max India, a brokerage.

Buyers are already staying away as their purchasing power is not enough to match astronomical home prices. The interest rates for the housing loans are also quite high. In this situation many discard further escalation of prices and most of them consider reports of higher transaction rate as an isolated incident. In fact, some developers are expecting a correction when the post-election exuberance will not translate into a sudden spurt in sales.

“The market will witness a correction in prices by 10-15 per cent on the premium segment due to a stable government. But with the cost of raw materials soaring northwards it will be difficult for developers within the Rs 1 crore bracket to witness such a correction,” says Dibyendu Banerjea, CEO-West Zone, Pashmina Developers.

States hold the reins

Government processes concerning real estate are state subjects under the Constitution. For example, different states have variety of regulations for FSI, development planning, approval norms, regulatory framework etc. From this perspective, an obvious question emerges: will the actions or the policies of the new government at the Centre have any impact in states?

“Although the Centre cannot have a significant direct impact on real estate markets, we expect the new government to take a different approach.

Since the Prime Minister-designate has been a three-time chief minister, he understands the issues at the state level and would devise policies to work around them. Besides, the Centre can indirectly influence the real estate sector strongly through measures like the regulatory bill, schemes like JNNURM and tax reforms and incentives like interest rate subvention, FDI policy etc,” says Vinit Deo, MD, Posiview Consulting Partners, a Pune-based real estate consultancy firm.

“Some states are not as forward thinking, market friendly or decisive as others, and hence such states would not witness as significant an impact as some of the others,” says Rohit Poddar, MD, Poddar Developers, based in Mumbai.

Changes take time 

For buyers, prices can come down only if supply increases, which in turn is dependent on cheaper land and raw materials. Even if the Centre is proactive in ironing out bottlenecks in say excise duties, the impact would take time to be felt.

“It will be important to see if the new government changes the policies entirely or bring about changes in the same policies. Stock market has shown instant effect but real estate sector will take time.” says Manish Shah, MD, Crescita Group, a real estate consultancy. “If decisions taken in the first 6-9 months are set in the right direction, then the indication of growth might surface in real estate segment as well. However, it will take a few more quarters to actually realise it.”

Even then, a lot depends on local factors: FSI, project approvals and development planning, which are the prerogative of the states. Things may not improve if there is no harmony between the state and the Centre. This would especially be the case if the NDA government has to get its flagship 100-cities initiative implemented.

The real estate regulatory bill needs to be passed and there are certain clauses that have generated considerable debate. These are national issues and all stakeholders and enforcing agencies in the states need to be brought on board. This is an uphill task for the new government.

“No government has a magic wand which can solve all problems at once. Reforming the economy is a gradual process, and we need to be patient. We cannot expect property prices to display the kind of sharp upward movement or reduction in capital rate is, in my belief, at least 12-18 months away,” says Anuj Puri, chairman and country head, JLL India.

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