Updated: March 4, 2017 2:06:39 am
With the country’s real estate sector becoming attractive to investors — both global and Indian — due to changes in regulatory framework, increased consolidation and transparency and the launch of Real Estate Investment Trusts (REITs), investment outlook for 2017 in the sector looks healthy. Here are six factors that will shape — or reshape — the Indian real estate sector in 2017 and beyond.
Global capital flow
India ranked fourth in developing Asia for foreign direct investment (FDI) inflows, according to the World Investment Report 2016 by the United Nations Conference for Trade and Development. The real estate sector saw equity investment on a return journey to India last year. The sector has attracted about $32 billion in private equity (PE) so far. The global capital flow into Indian real estate in 2016 stood at $5.7 billion.
Although the historic high of 2007 (in terms of total PE inflows) was not breached, last year proved to be the second-best year so far. Despite Brexit and uncertainty around the new US President’s outsourcing- and visa-related policies, PE activity also looks healthy in 2017, thanks to a strengthening and modernising economy.
India’s Tier-I cities moved up to the 36th rank in JLL’s 2016 bi-annual Global Real Estate Transparency Index. The catalysing factors for this were improvements in structural reforms and the more liberalised FDI regime.
Business model revamp
Throughout 2016, the number of new residential project launches was lower than units sold. With all states staring at the approaching deadline to implement their versions of the Real Estate Regulation & Development Act (RERA), most of them will definitely fall in line. The law will enforce transparency and accountability requirements for developers into the system.
The goods and services tax (GST) and the Benami Property Act will also have a major impact on how many developers run their businesses. Demonetisation shook up the older ways of working, but did not affect self-governing developers with the right products targeted at the working masses. The rest have realised it is time now to revamp their existing business models if they want to remain in business at all.
Currently, the residential property market is dominated by end-users — speculative investors are making a beeline out of real estate as an investment category. Residential demand is expected to pick up only towards the end of 2017 — but the recovery will be sustainable and based on much sounder market fundamentals than transient sentiment.
The commercial office space sector will get a strong shot in the arm with REITs. Real Estate Investment Trusts will have a long-term impact on developers and present them with the choice of either ‘corporatising’ or risking takeover by their bigger and better-organised counterparts. The pressure from funding agencies will simply be too strong to ignore.
Co-working spaces are popping up in Indian metros as well as Tier-II cities, providing start-ups with flexible working options at affordable rents. At last count, there were more than 100 operators in this space in India, though there is still very limited supply of co-working spaces available. This segment has many advantages such as cost-efficiency, employee motivation and retention and boosted productivity.
Certain co-working operators will prefer leasing out parts of or the entire areas of their co-working office spaces ‘anchor tenant’ corporates. In other words, co-working operators and corporates will move into a ‘hybrid’ sort of space and increasingly rely on each other.
Affordable housing in India is set to get the infrastructure status. One crore houses are to be built in rural areas by 2019, and this segment will now see cheaper sources of finance, including external commercial borrowings (ECBs).
A new Credit Linked Subsidy Scheme (CLSS) for the mid-income group with a provision of Rs 1,000 crore in 2017-18 was announced before the Union Budget 2017-18. Extension of tenure of loans under the CLSS of Pradhan Mantri Awas Yojana (PMAY) was increased from 15 to 20 years, and the Budget also increased allocation to PMAY from Rs 15,000 crore to Rs 23,000 crore in the rural areas.
The qualifying criteria for affordable housing were also revised to 30 sqm and 60 sqm on carpet rather than saleable area in the four main metros and non-metros, respectively. Moreover, demonetisation will cause land prices to ease in the next few years, especially in far-flung areas around Indian metros and Tier-II and III cities. The government’s dream of ‘Housing for All by 2022’ appears more attainable now.
The first REIT listing is expected within the next few months, and prominent PE funds such as Blackstone will likely be the first movers. REITs will attract institutional and smaller investors alike because of their inherent nature to provide regular dividends at relatively low risk.
Smaller investors are excited at this new and easier investment opportunity because:
a) Indian REITs will prefer to invest in commercial space developments — specifically the highest quality or Grade-A properties — because of the higher rental yields in this asset class; and
b) Only 20 per cent of an Indian REIT’s monies can be invested in development, which is the riskiest aspect. The remaining 80 per cent of a REIT’s assets must be invested in income-producing property.
The REIT potential in India is huge, with around 229 million sft of office space currently being REIT-compliant. Even if 50 per cent of this space is listed in the next few years, we are looking at a total REIT listing worth $18.5 billion. Moreover, India’s stock of Grade-A commercial assets is increasing, with REITs acting as a sure-fire growth catalyst.
Slowing sales and lack of financial prudence among several developers is leading to a fairly obvious conclusion — consolidation. The overcrowded real estate sector is going to become a lot leaner and meaner, with consolidation happening by ways of joint developments and joint ventures between landowners and/or small developers with bigger, better-organised players, smaller developers being bought out by larger players, and struggling developers cashing in their land banks by selling them to players with stronger balance sheets.
The pace at which this happens will depend on how much equity gets infused into the sector by the larger PE investors, and the strategy that foreign and domestic developers adopt. Some foreign developers have already entered the country, setting up base and obviously playing for keeps.
Some investors and developers will take plunge into the market now, while others will prefer to ride the fence for a while; but one way or the other, consolidation will be the name of the game in the next five years. Larger players will peak in strength by around 2021, and smaller players will be eroded. Equity investment — or the lack of it — will play a deciding role.
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