Vinod Behl, veteran journalist and real estate maven, writes for the readers of NRI Achievers with an insightful recap of the top trends that prevailed in the Indian real estate sector over 2015. Read on !
RECORD PE INVESTMENT FLOWS
The year 2015 could well be described as sunshine time for PE as the real estate sector offered immense opportunities which were successfully leveraged by the PE players. PE investment in the first nine months of the year stood at US$ 2.86 Billion, which was a seven year high figure since the peak of 2008. It was a record 84 percent higher than the period a year ago. The number of deals concluded till September, 2015 shot up to 61, compared to 52 a year ago.
In the wake of a long period of slow-down and the realty sector facing a debilitating liquidity crunch, PE funds really proved to be a boon and a lifeline for property developers, particularly when bank funding was hard to come by and they were banking on PE funds to complete their ongoing projects. It was a win win situation for all. While developers got the much needed funding at lower rates to refinance their debt compared to open market funding, for PE funds it was a golden opportunity to earn good returns. Leading PE funds like GIC, Blackstone, APG, Piramal Realty et al., took advantage of the weak market, joined hands with some developers to build land banks, besides investing heavily in office real estate that gave the highest global rental return of about 10.5 percent. They also seized the opportunity to collaborate with NBFCs for high value real estate deals and for hedging risks in a slow moving market.
However, developers in smaller towns could not really seize the PE opportunity as PE funds only focused on the top half a dozen cities, especially highly stressed NCR for safe investments with better returns.
INVESTMENT IN OVERSEAS PROPERTIES
The long drawn-out domestic slump in real estate with high rate of home delivery defaults putting home buyers investment at risk prompted many high net-worth individuals and other high-risk appetite investors to look for better opportunities abroad. Especially as overseas property investments ensured safety of investment and offered good returns over medium to long period.
Dubai, after facing a slow-down is back in the reckoning and investors from India made most of the opportunity. Among the foreign nationals investing in Dubai real estate, Indians topped the list, clocking transactions worth US$ 13 Billion till November 2015. In the US also, Indians made record investment. London too emerged as one of the hottest overseas real estate destinations with Indians emerging as the largest investors buying high-end properties. Singapore, Malaysia and Australia were other sought-after overseas destinations for real estate investments by Indians who comprised businessmen, persons with their children studying abroad besides HNIs.
Prevailing uncertainty in the domestic real estate market prompted investors to look for greener pastures. What further triggered foreign property investment was RBI’s decision to double the outward remittance limit for an individual from US$ 125,000 to US$ 250,000 per annum, especially as with pooled remittance by family members, it was much more easier to afford premium properties abroad.
SLUMP IN NEW LAUNCHES
Year 2015 was characterised by a big slump in new launches. The festive season, which is otherwise known for providing immense opportunities to property buyers – offering a range of newly launched properties at attractive prices – saw a mere handful of launches by few developers. The biggest reason for this big decline in new launches to the tune of over 50 percent was the abysmally slow sales in the recession-hit market and large inventory of unsold homes. NCR and Mumbai Metropolitan Region (MMR) were two top property markets in the country which had the highest unsold inventory. At the end of September, 2015, there was 1,98,000 unsold units in NCR, whereas the unsold inventory figure in the MMR touched 1,85,000 units.
This year, builders focused on completing ongoing projects and clearing their inventories. In the wake of high unsold inventory and low sales, they were vary of launching new projects, fearing that it might lead to a situation of oversupply.
In the wake of severe liquidity crunch and other allied reasons, the year 2015 witnessed large scale project delays. These long project delays resulted in high numbers of distressed projects. According to an Assocham survey, on an average real estate projects faced delays of about 33 months. The statistics showed that over 75 percent of 3,540 live projects with outstanding investments of more than 14 lakh crore remained non-starters as of 2014-15. Over 1,000 projects registered significant delays. With bank funding drying up and debt-ridden developers finding it hard to service their debts leave aside funding stalled projects, this provided a big opportunity to some PE players and bigger and financially sound developers to acquire distressed projects for profits.
While some smaller developers who were under distress to complete their projects struck deals with financially sound developers to tide over the crisis, there were others who were sitting over land banks but did not have either the resources or the expertise to execute the project, they too joined hands with such developers.
There was a high demand for ready-to-move-in or living-ready homes in 2015. This was due to the reason that in view of the large number of stuck projects with long delays, home buyers/investors did not want to risk their investment in under-construction properties. Besides uncertainty about the safety of their investment, they also feared that due to construction delays, they would end up paying both EMIs and rent. Another big advantage that the home buyers saw in living-ready homes was that unlike under-construction homes, one is sure of the quality and amenities of a finished product and before signing the buying agreement, one can ensure that he is buying for what he is paying.
A good inventory of such properties was available in different projects in different cities, offering ready-to-move-in apartments and villas. Many developers organised special property fairs/home carnivals of such properties, offering them at attractive prices. Even HDFC Realty organised an online festival of such homes, providing a platform for bidding properties with good response from home buyers. The reserve price of each property was 10-20 percent lower than prevailing market rates. Some developers further sweetened the deals with EMI waivers, low upfront payment of 5-10 percent and discount on properties.
SECONDARY MARKET TURNS ATTRACTIVE
High property rates coupled with high interest rates deterred home buyers from making investments in 2015, resulting in weak sales. Not many developers offered upfront discounts on properties sold through them. So while the primary residential real estate market remained muted, the secondary market that offered attractive discounts turned out to be a big draw this year. Good properties were available for resale from brokers/resellers and investors at attractive prices. So much so that in some cases, properties in resale were cheaper by as much as 20-30 percent. Even investors were desperate to sell properties, offering to exit at about 20 percent discount on the primary market price. The investors resorted to distress sale due to stagnant prices and delayed project deliveries. It was a win-win situation as while investors could exit their now dud investment after booking marginal profit, for home buyers, it was a golden opportunity to make most of the situation to save substantially on home cost.
In a year that saw real estate developers struggling to sell properties in a recession-hit market, they took many innovative marketing sales initiatives to push sales. The developers came up with attractive payment plans, the most popular of which was a subvention plan with moderate upfront payment and EMI waiver for 2-3 years, though some developers offered waiver till possession. The cash- strapped developers were so desperate to push sales that some of them offered properties at an all-time low upfront payment of 5 percent. Some developers added additional sweeteners by way of interest waiver on EMI, bearing as much as 5 percent of home loan interest, with home buyers paying only about 5 percent interest rate.
The year also saw the rise of property portals, as developers resorted to online property sales in a big way. Leading developer body CREDAI tied up with Housing.com for a virtual home expo offering 300 properties. There was also an online auction platform for homes by HDFC to offer attractive pricing to buyers. In one of its kind of initiative, Tata Housing tied up with Facebook sell leisure homes in Goa.
Developers also deployed other tactics to lure home buyers. There was this bait of assured returns on buying property. Some developers were offering delayed delivery compensation. Bharat City came up with a novel idea offering free apartment on rent in its project in Ghaziabad on investing in phase 2 of same project. In order, to make homes affordable, Noida based builder Amrapali, in association with Investor Clinic, came up with a special scheme for serving/retired government employees, offering homes in Greater Noida at as low as INR 2,250 psf. There were others who in order to beat price, came up with compact sized homes in different size options. Tata Housing came up with unique ideas of ‘One Nation, One price’ for its Value homes and offering a free room for its luxury projects.