The real estate market will be in caution mode at the beginning of 2019. Lack of credit offtake due to NBFC crisis and the mood for the upcoming elections has slowed down the realty sector. 2019 could finally result into consolidation in the industry, where developers/investors with deep pockets, commitment to corporate governance, and transparency will sustain while highly leveraged, over-committed, non-serious players will be weeded out.
Financial dilemma and market consolidation
The current situation of NBFCs and banks have left developers in liquidity crunch as they have been the biggest source of funding for them. There is a severe cut in the funding for most of the developers. Some of the stretched developers are struggling to survive and deliver on their promises. If such financial crisis continues for the next 3-6 months, it will definitely result in more distress inventory in the market. It is highly possible that the developers will be forced to reduce rates in the primary markets. With this sentiment of the financial market, the highly congested real estate sector in India is estimated to consolidate. This consolidation will surely flush out all the bad elements from the real estate market, and it is expected to be a more transparent and promising market for foreign and domestic investors.
Rise of the Co-culture & Proptech
Real estate in India in 2019 is also on the verge of diversification. Co-working spaces, coliving, student housing, and data centres are the new buzz words of the real estate market. All these asset classes are growing fast and are expected to transform the existing demand. Like fintech, we are witnessing Proptech as a revolutionizing force for the Indian realty. The focus is on improving customer buying experience and the technological developments/tools are being designed to combat the challenges of the real estate industry to add a futuristic scope to the sector. Also, the advents of chatbots, BMS, and next-gen innovations are proving to be highly efficient and beneficial in making construction faster and safer for everyone.
Commercial real estate will continue to boom
The demand for asset classes such as commercial and industrial real estate should stay on course with the onset of REIT listing and recent growth in the warehousing or industrial space. The increase in transparency and accountability has strengthened the diligence of foreign institutional investors towards the Indian real estate market. Though commercial asset class being their utmost preference, they may shift their focus from Grade-A office and retail malls to other income generating assets like warehouses, schools, hospitals, etc. due to the limited availability and supply. Interestingly, there is significant interest in vacant and upcoming commercial buildings where foreign institutional investors are looking to acquire the buildings at a discount and use their own expertise to rent them at a higher rate. This is primarily backed by the relationship and confidence that they would have their existing tenants/clients in various investments.
Affordable is still the maximum demand
In the residential segment, the affordable and mid-income housing are the only asset classes with growing demand and supply. They will continue to drive the residential market in both metro and Tier II cities. New government reforms have given a lift to the demand for the segment by increasing subsidies and affordability for home buyers. The granting of infrastructure status to affordable housing will benefit the segment further and will have a multiplier effect, thus allowing developers to explore new projects in the outskirts of the cities.
Impact of Regulations
The Union Budget 2019 announced that capital gains from the transfer of residential property can be used for the purchase of two new properties, which would spur investments in the real estate sector. However, with the exemption of being applicable until INR 2cr, it would appeal to select investors, targeting mid-and-affordable housing. Nevertheless, this change will ensure money to stay invested in real estate. Coupled with the expected reduction of GST rates for under-construction homes, there could be an increase in demand for residential real estate in 2019.
With this year being an election year and the current dilemma of financial institutions, the general direction of sluggishness in the Indian real estate sector is bound to remain over the next 6-9 months. We could expect some progress during the second half of 2019, depending on the sentiment, which shall be largely driven by the outcome of the general elections.