By Shubika Bilkha, Former Director, The Real Estate Management Institute (REMI)
The real estate sector in India from being traditionally unorganized and fragmented is transforming into a tightly controlled and regulated industry. The introduction of RERA and the GST, has set the stage for added transparency and accountability across all companies operating in and affiliated with the sector. All these measures are in the long run expected to create stable businesses and a mature industry.
The sentiment during the transitionary phase has been mixed with businesses having to change their operating model almost overnight, to consumers watching carefully as the sector adapts its practices to the new regime. Apart from RERA and the GST, additional policy initiatives such as REITs, The Benami Transaction Act, Demonetization, changes to the Insolvency Code, IND As are also expected to have a long term impact on the sector.
It has been anticipated that the real estate industry is expected to be a $180 billion opportunity by 2022. The commercial real estate sector, is expected to continue to have a positive outlookwith a growth in absorption rates in Q1 2018. While residential launches have seen a decline this year owed to excess inventory and real estate companies looking inwards to meet RERA compliance, the market expectation is that the next 18 months should see a comparative upward trend in sales with increasing consumer confidence and improved home loan financing rates, albeit on an increase in the last few months.
The Government has put an added thrust on infrastructure development and real estate. The Centre seems committed to accomplishing the ‘Housing for All’ agenda in the next few years with the construction of 20 million affordable homes. To extend the commitment to affordable housing, the Government has released the PPP funding models and is supported by the National Housing Bank (NHB) to extend credit to different economic segments at improved rates. Furthermore, the Government’s Smart City Mission and Urban Transformation initiatives are expected to give the needed boost to the Country’s overall infrastructure requirements. The Maharashtra Government announced that it was looking to invest Rs.1 lakh crores in infrastructure and the Finance Minister announced the construction of 84,000 km of highways in the next 5 years.
Capital seems to be at the heart of the concerns of developers with funding from advanced bookings drying up under RERA. Stringent policies with respect to meeting project completion timelines has increased the onus on developers to build enhanced delivery capabilities. Cashflow management, consolidations, compliances, joint developments, a focus on quality and project management/delivery seem to feature as priority items on a developer’s daily task list. The need for skilled talent in real estate across job roles has never been more heightened. Training and employee development now appear as key agenda items across real estate companies.
The recent transparency measures have however, contributed to improving investor sentiment in the space with private equity investments in real estate exceeding US$4 billion in 2017. A uniform tax structure in markets such as Indonesia, Thailand, among others has been seen to be a catalyst to increase investment. With the introduction of input tax credits, there is now an incentive for added transparency at the construction stage, an area that has been of concern to investors previously. Limited visibility on transactions and questions around the credibility of companies across the sector has often been a reason for hesitance among investors, especially with respect to equity deals.
A combination of these measures should in the long run help improve the perspective of investors and consumers towards the sector, especially in reducing the trust deficit. The added governmental focus on affordable housing if combined with the allocation of land at preferential rates, should help address some of the housing needs of our economy.
While real estate companies at the moment seem focused on offloading their excess inventory to meet their annual sales targets and align their businesses to comply with the new regime, the next few years will see the sector adopt a more professionalized and structured approach to development. This will itself help create stable scalable businesses across the sector. Furthermore, as the market metamorphoses, apart from residential and commercial asset classes, companies will start to explore rental models, warehousing, logistics and student housing to diversify their portfolio to meet investor demand for returns.