The real estate sector that had faced some really turbulent times this year, is now left staring at another challenging year ahead, following the disruptions caused by the government ushering in reforms like the Real Estate Regulation Act (RERA) and demonetisation. But all this may in the end augur quite well for real estate in coming times, for amidst all this prevailing uncertainty, the new year may well see the Indian realty sector firmly getting on to a path of transformation and consolidation, and moving towards more stability and some healthy growth. An NRI Achievers’ report ...
The year 2016 had actually started on a promising note for real estate, as the sector had experienced a smooth start. But much against the the expected revival, some subsectors – especially residential real estate – faced headwinds in terms of weak demand and muted sales in the backdrop of large scale delivery defaults, developer-buyer face offs, unaffordable prices and high interest rates. The introduction of RERA stoked the fires further by adding further confusion to the prevailing chaos and finally towards the end of the year, demonetisation badly hit the struggling sector, with the year coming to a really painful and bumpy end.
It had proved to be a really gloomy year for the housing market. The ever-widening trust-deficit between developers and home-buyers added to the woes of residential real estate, especially because a rather large number of developers ended up not delivering their homes on time. The top seven cities in the country have over 1.5 million units delayed between 14- 30 months, with one fourth of them in NCR. And due to this lack of trust on the buyers’ side, home-selling became extremely difficult. Even those who did take a buying decision, preferred ready-to-move homes in order to secure their investment. By the end of Q1, 6.6 lakh units across top 8 cities remained unsold, with NCR topping with 2 lakh unsold units. Even the festive season couldn't be of much help, as demonetisation struck a body-blow even as sales had just started to pick up.
Demonetisation will adversely impact those real estate developers who follow a business model with large cash components. Downward pressure on prices will be likely as these cash-strapped developers will be compelled to liquidate their inventories at discounted rates to generate cash flows. But on the other hand, demonetisation will, however, have a positive impact on home buyers – especially buyers of affordable homes who invest through home mortgage and do transactions through cheque. And going forward, demonetisation will bring in more transparency in real estate transactions and bridge the gap between primary and secondary market prices. While the residential sub-sector was floundering, commercial real estate in contrast saw healthy demand (26.4 msf by 3Q 2016), with a total yearly pan-India demand expected to touch 34.2 million mark, driven by sectors such as manufacturing, logistics and FMCG. Gaining further strength, commercial realty is likely to see a higher demand of 38- 40 msf in 2017 – with cities like Chennai, Hyderabad and Pune driving the growth.
The theme song of the year was affordability, with affordable properties clearly dominating the property landscapes across cities. With developers increasingly taking to affordable housing in response to rising demand, about 59 percent projects were launched under this segment. Developers have also resorted to creating compact sized homes to make them more affordable. And considering that the residential real estate was still facing lot of stress, the government, in line with its 'Housing for All' mission, also put its entire focus on affordable housing, and developers were incentivised by way of a 100 percent service tax waiver for affordable homes of sizes up to 30 sq mts in metros and 60 sq mts in non metros via the 2016 budget. But to promote timely delivery, the tax benefit was linked to completing construction within 3 years. There was a rebate of INR 50,000 per annum on housing loan interest for first-time home buyers in the affordable segment, with a loan amount not exceeding INR 35 lakh and property value not exceeding INR 50 lakh. Rental housing also got a boost with a HRA hike – up from INR 24,000 to INR 60,000.
There were many positives in the otherwise dull and difficult year. It was a watershed year in a sense that it was a year of reformed, regulated and reoriented realty. It was a year that provided a protective shield to home buyers by way of passing legislation like RERA, promising a transformed and transparent realty with fair transactions. The passing of Goods and Sevices Tax (GST) Act was also a positive move, a move towards simplifying the tax system and making it more predictable for investors. The year also saw the putting in place of disclosure norms for REITs (Real Estate Investment Trusts), along with detailed norms for public issuance of REITs. The abolition of the ‘Dividend Distribution Tax’ paved the way for making REITs financially viable for retail investors. In order to help the ailing construction sector tide over the crisis, reforms were introduced to speed up resolution of disputes and ensure that construction companies’ investments do not get stuck in arbitration. Further, amendments to the ‘Benami Transaction (Prohibition) Act’ were made to introduce stringent rules and penalties for benami transactions – that is, transactions carried out in fictitious names. These initiatives, there is no gainsaying, will go a long way in regulating the sector and making it more attractive for investors.
Notwithstanding the multiple bumps faced in 2016, in the net, the positive measures have put the sector firmly on the path of long-term sustainable growth. Though 2017 may well start on a tepid note due to the massive demonetisation-remonetisation disruption, a tax-friendly budget coupled with rationalisation of property prices, lower home loan rates and implementation of RERA, GST and Benami Act, may improve demand and significantly push up sales, paving the way for a more organised, regulated, reliable and investor-friendly real estate.