In late 2014, on one of my business trips to Singapore, I was hard-selling the merits of investing in the Indian real estate market to a veteran banker. I argued my case on the basis of the business-friendly policies that the newly elected Modi government had promised to roll out.

While the banker agreed that the Indian real estate market could not be ignored, he was circumspect about the many ills plaguing the sector. He was alluding to lack of transparency and corporate governance and delays in approvals. His parting note still resounds — He described the market as “Hotel California”, one that is “programmed to receive. You can check out any time you like, but (once invested) you can never leave!”

His implication was that while it is tempting to invest in Indian real estate, very few investors really ever make money.

In the subsequent years, interest from private equity proved my point. We have witnessed active participation from institutional investors such as Abu Dhabi Investment Authority, Qatar Investment Authority, Canadian Pension Plan Investment Board, Brookfield, Blackstone, GIC, APG and others. Of late, a number of Chinese developers have evinced interest in setting up industrial parks and residential townships. There are many more sitting on the fence.

The government has made its intentions clear, through numerous measures none of which are as bold as the demonetisation announcement on November 8. The withdrawal of the Rs500 and Rs1,000 denominations is an attempt to crack down on unaccounted money, a significant amount of which is generated and consumed in real estate. In the short term, while this measure has jolted the industry, we hope in the long run, demonetisation along with the amended Benami Transactions Act and the Real Estate (Regulation & Development) Act (RERA) is expected to change the way the real estate business is conducted.

Even prior to these announcements, the industry was already changing for the better, even though the pace was slow. The above measures it is hoped will hasten this positive change.

Availability of information on online portals has made buyers much more discerning. They have rewarded developers with a track record of having delivered on time and with the promised quality, with better sales and higher prices. More projects are being launched on the “development management” model wherein landlords tie up with Grade A developers paying them a fee to use their name to sell projects and oversee construction and marketing.

Investors are echoing similar sentiments, showing a keenness to provide equity to only top developers in the metro cities. These same developers also receive attractive debt funding terms.

This change will be further accentuated by the adoption of RERA norms, leading to greater disclosure about the developer and the project, ensuring that all approvals are in place prior to a launch and result in greater accountability through clear delineation of rights and responsibility for the developer and buyer, as witnessed in the model sale purchase agreement. Most importantly, the Act requires that 70 per cent of sale proceeds should be placed in escrow and utilised for the development of the project only.

Many argue that state governments have diluted the provisions by incorporating measures such as keeping ongoing projects out of its ambit or by allowing developers to only disclose legal cases disposed in the last five years. However, leading lawyers argue that states do not have the right to draft rules in contravention to a “central Act”.

In the aftermath of the demonetisation drive, transaction numbers have come down drastically. We expect this to continue for the first few months of 2017. However, with increased liquidity, we anticipate that RBI will likely reduce repo rates in February, unlike its conservative call in December.

It will nudge banks to offer lower rates of interest to prop up housing demand. The government may be inclined to announce during the budget a reduction in income tax rates or an increase in the tax free slab. By March or April, demand for housing should start picking up, although it will take a few more months for normality to return. Meanwhile, expect launches of new projects to be very limited due to the lack of demand. Further, the implementation of RERA norms will result in a short period wherein developers will wait to see how the clauses are interpreted by the authorities.

Expect a short period of low sales and low levels of new inventory being added to the market. Due to the fact that a large number of the unsold stock is under construction and a significant number of which is already much delayed, it is not expected to command much interest from buyers. While prices will be under stress, we don’t foresee a drastic drop in prices.

Odd properties in the secondary sale market and in the luxury segment might be available at a steep discount, but by and large prices should see a small correction.

Author: Amit Oberoi, National Director, Knowledge Systems, Colliers International India.

 

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