2017-The year of real estate transformation : Narasimha Jayakumar, Chief Business Officer, 99acres
The year 2017 was an eventful one for the Indian economy at large, and the real estate sector got more than its usual share of the limelight. Multiple reforms and structural changes waged a war against market opaqueness, black money, poor customer service and delayed projects. Demonetization hit the market adversely in the first quarter of the year, bringing realty transactions to a grinding halt. Subsequently, consumer sentiment, trade and funding remained subdued for the next 6 months.
Delhi and Mumbai were the worst hit while end-user driven markets such as Bangalore, Pune and Hyderabad (all cities with high proportion of white collared workers) were relatively more resilient. Sales of new homes fell to an all-time low across the sector with several developers stalling new launches.
Union Budget 2017-18 gave a fresh impetus to the affordable housing segment that was accorded an ‘infrastructure’ status. A slew of measures by the Central Government turned the tide in favour of low-cost homes and consumers. The implementation of Real Estate (Development and Regulation) Act and its adoption by various states and UTs ushered in a lot of protection measures and transparent information to consumers. Unless a project was RERA registered, it could not be sold or marketed. All developers started focusing on registration and completion of their current projects. Number of launched units fell by 33 percent YoY in top 8 cities, down by 10 percent compared to demonetization period. In H1 2017, only approximately 60,000 new units were launched in India, a far cry from nearly 163,000 units launched in H1 2014. RERA has forced several developers to fast track development of their existing projects and exercise greater care in project financing.
The announcement of the biggest indirect tax reform in the country, Goods and Services Tax (GST) also provided a progressive and streamlined approach for under-construction projects. Earlier, builders running projects in different states had to comply with state-specific VAT laws, as well as other kinds of service taxes. GST is expected to make tax collection seamless across India. Under-construction properties will be taxed at 18% which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer, thus, making the effective tax rate as 12%. Stamp duty and property tax may eventually be subsumed in later years.
The above policy changes took a toll on the sector, with H1 2017 reporting the lowest sales in the past five years and residential project launches falling to a seven-year low. On the upside, these policy rollouts increased PE investments into the Indian real estate sector. This year alone, PE funding is expected to cross the $4 billion mark.
Let’s take a closer look at how the year has been for different segments of real estate:
Liquidity and slowing capital value growth kept investors at bay, paving way for end-user driven demand. Consumers by year end feel more secure and mindful of their rights heralding the arrival of a new transparent and organised regime across the sector. Developers have realigned their businesses to comply with the rollout of RERA and GST, which is crucial in building the trust of home buyers in the market. GST – applicable at an effective 12 percent on the purchase of under-construction homes brought about a shift in the preference pattern of home buyers, who are now looking to buy largely completed projects.
While premium and luxury housing segments grappled with cash crunch and minimal demand, low-cost homes continued to see robust demand as developers shifted towards launching budget homes. Housing for all aka “Pradhan Mantri Awas Yojana” (PMAY), public-private partnership models bolstered the demand for affordable homes. In the first half of 2017, 62 percent of the new launches across top cities were recorded in this segment.
Capital values in end-user markets such as Bangalore, Pune, Hyderabad and Kolkata remained stable while Delhi and Mumbai saw moderate capital value declines.
As 2017 comes to a close, residential real estate demand is slowly picking up. There is strong recovery in all the top 8 cities. As of November 17, there are over 16,000 RERA registered and approved projects across India offering vast choices to consumers. New launches are expected to pick up in 2018.
Rental real estate
In the wake of market uncertainty (RERA & GST), puzzled homebuyers turned into tenants. Rental prices and demand saw a sudden spike from January-March 2017 onwards in top cities.
The passing of the Tenancy Bill recently assured recovery of rent, fair rental pricing and protection of tenants, further strengthening the residential rental landscape across metros. Rental will continue to grow significantly in 2018 as many young buyers would prefer to rent before they decide to buy.
Commercial real estate
Slow economic growth post GST implementation has not restricted the expansion of the commercial property market. Industry reports indicate an office space take-up of 28.9 million sq ft in the first three quarters of 2017. The third quarter alone witnessed an absorption of 10 million sq ft, four percent higher than the previous quarter. With 39 percent, the technology sector took the lead across metro cities. Banking, Financial Services and Insurance (BFSI), healthcare and manufacturing sectors closely followed in contributing towards the overall office space leasing. The share of co-working operators, too, emerged at a noticeable seven percent in total leasing volume in Q3 2017. Co-working companies such as Regus Plc., Awfis, Wework all expanded the market with more flexible and cost-effective offerings to woo young companies and start-ups.
Bangalore led the race by capturing more than one-third of the total office space leasing activity across metros. The leasing values in prime rental hubs continued to grow, QoQ. NCR, which recorded another 25 percent of the total leasing activity witnessed sustained demand. Mumbai, too, saw steady rentals despite reducing vacancy levels. The uptrend in office leasing rates is a result of the optimistic outlook in the next few quarters (economic growth is expected to rebound back strongly post GST) despite the hike in taxes under the new GST regime from 15-18 percent. 2018 looks favorable for the office market and there could be an upward pressure on rental values owing to paucity of Grade A office spaces across CBDs of major metro cities.