11 Jan 2019

1. Karnataka to push for redevelopment of old CBD buildings in Bengaluru

The government is working on an urban renewal policy to redevelop old neighbourhoods to maximise space utilisation and enhance the city’s visual appeal.

(Source: ETRealty, 04 Jan, 2019)

Research View

Characterized by robust road, rail and metro connectivity, and established social infrastructure, the CBD micromarket in Bengaluru has commercial office stock of 11 million sq feet (1.02 million sq metres). A majority (55%) of which comprise of Grade B developments. With single digit vacancy levels of around 5.2%, this micromarket has the highest commercial rental values in Bengaluru of around INR120 – 200 per sq ft per month (USD1.7 - 2.9 per sq ft per month). We believe that the government’s initiative to consider redeveloping CBD, not limited to commercial office, but residential and retail developments too is a welcome move as it will widen the scope for upgrading infrastructure and unlock the development potential in the heart of the city. Aided by higher floor space index for developers or owners so they can rebuild the structure with adequate setbacks, open spaces, parking lots, wide roads and public facilities, and will help reduce building collapses and cut traffic congestion on narrow lanes thereby easing out pressure on existing infrastructure. Currently, there is limited new upcoming office supply of 1.6 million sq feet (148,698 sq metres) expected by 2021. Although the plan is in its early stage, the endeavor provides hope to a better and efficiently planned district.

2. Under-construction flats may see a GST rate cut

The GST Council is likely to consider lowering GST on under-construction flats and houses to 5 per cent.

(Source: Mint, 02 Jan, 2019)

Research View

The GST council is considering a proposal to bring down the GST rate on under-construction flats to 5%, without the benefit of input tax credit. Currently, an 18% GST is charged on the real estate sector. After accounting for various input costs like price of land, the effective rate comes down to 12%. In our opinion, the government suggested the changes for under-construction flats as the builders are stuck with a huge inventory of under-construction apartments. This move should help revive the residential segment, which has been under stress over the past couple of years. Since most developers are not passing the input tax credit to buyers, the reduction in the GST rate is expected to be a positive move for the buyers. Additionally, the move should address the recent slowdown in the allied sectors such as cement and steel caused by tepid lending to the real estate sector. While it is likely to augment sales, its impact on affordable housing is doubted to be beneficial as expected by the industry as it currently falls under the ambit of lower output tax rate of 8% along with the benefit of input tax credit. Even if GST is slashed to 5%, denial of input tax credit as per the proposal will result in net increase in the selling price of affordable housing.

3. As NBFCs retreat, private equity funds move in to fund realty projects

Motilal Oswal, HDFC Capital, Xander and other PE funds focused on this segment find opportunity in NBFC retreat

(Source: Business Standard, 02 Jan, 2019)

Research View

The cautious approach adopted by traditional banks to fund developers after the sub-prime crisis of 2008 led the prominence of Non-Banking Financial Companies (NBFCs). Since then, NBFCs have been actively financing, underwriting, and restructuring loans to the real estate developers. However, the currently choked credit lines of NBFCs and Housing Finance Companies (HFCs) have created liquidity turmoil and opportunity for the Private Equity (PE) funds to fund developers/projects with a proven delivery track record and dependable cash flows at attractive valuations. We expect the private equity (PE) funds to continue to be active in funding projects this year with caution as the residential segment is under stress, with limited sales activity. We foresee investors/funds to pick up equity stakes in real estate focused NBFCs and HFCs with a strong business model and quality assets. After the recent sharp fall in their stocks, valuations of these firms seem attractive.


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