Their optimism is based, in the main, on two steps that the new NDA government took this year; namely allowing Real Estate Investment Trusts (REITs) and permitting foreign direct investment (FDI) in construction.
Brotin Banerjee, managing director and chief executive officer, Tata Housing Development, told Financial Chronicle, ”From the point of few of the government policies, the year stood out. The new government took some landmark decisions like relaxing FDI norms in the construction sector, providing easier and cheaper loans by granting low-cost housing infrastructure status, allowing REITs for commercial real estate. The reduction of excise on cement and steel has managed to offset rising input costs. The government is also intent on passing the real estate regulation bill through parliament, which will help in protecting the rights of consumers and investors. Factors on the demand-side are fundamentally positive, although some micro markets are going through routine corrections. The spurt in urbanisation has driven the demand for housing in tier I cities but a shift is also visible towards tier II & III cities like Pune, Nashik, Pantnagar, Rudrapur, Patna, Chandigarh, Ranchi, Jaipur, Indore, Baroda, Surat, Mangalore, Mysore, Coimbatore, Trichy and Bhubaneswar, amongst others.”
The NDA government has kept its gaze constant on this crucial segment, aware of its potential to kick start growth by establishing smart cities and achieving housing for all by 2022. Developers believe that with the approval of REIT in September 2014, FDI in construction will result in better investment flows, and announcement of smart cities and housing for all, will cumulatively trigger growth in the real estate sector in the brand new year.
Rajeev Talwar, executive director, DLF told Financial Chronicle, “The government has taken the right steps to bring back demand in the real estate sector. 2015 should be a good year and we expect demand to revive both in commercial and residential segments.”
Talwar believes already there are signs of marginal improvement in the sector as compared to a year ago.
Being capital-intensive, funding has emerged as the single-largest challenge facing the real estate sector in recent times. The global economic crisis has considerably reduced funding options available to developers, who have been constantly looking for alternative sources of finance due to reduced deployment of gross bank credit to commercial real estate and housing from 10 per cent in FY10 to 8.3 per cent in FY14.
The global financial downturn in 2008 resulted in a significant shift in the funding scenario with investors becoming increasingly cautious.
Along with a decline in the total quantum of investment, the average ticket size of deals in real estate trickled down from $140 million in 2008 to $30–$40 million after the financial downturn.
Another notable trend was that investments became skewed towards project-level rather than the entity level.
Points out Randhir Kochhar, partner, Ernst & Young, “High office space yields, coupled with an ever-increasing visibility on Indian REITs, have led to investors building sizeable portfolios of high-quality rentable commercial spaces. This has led to sovereign wealth funds partnering with developers, operators and managers to create/acquire such assets. Direct investment in the Indian real estate industry has evolved due to increased allocations to real estate as an asset class on account of increasing real estate and sovereign debt yields.”
In September 2014, the Securities and Exchange Board of India (Sebi) notified the final guidelines for REIT. The guidelines require the finance minister’s approval for tax concessions to make REIT attractive and at par with similar norms in the rest of the world.
“Several developers are waiting on the sidelines to list their commercial space stock. According to industry estimates, India has 200 million sq ft REIT-ready space. It will also provide an alternative route of finance,’’ Kochhar said.
REIT is currently open for office space, but developers of malls are anticipating extension of REITs to shopping centres, which will boost development of malls in the country. In addition, relaxation of FDI norms may encourage foreign single-and multi-brand retailers to set up shop in India and create a significant demand for retail space.
The other step expected to set cash registers ringing is to allow FDI in construction. FDI inflows in construction, townships, housing and construction development, have been declining since FY12 due to the country’s weak economy and regulatory concerns. FDI in construction development declined to $1,226 million in FY14 from $1,332 million in FY12, according to an E&Y report.
The Union cabinet has approved the proposal of the department of industrial policy and promotion (DIPP) to relax existing performance-linked conditions relating to FDI. These include the following: Built-up area to be reduced from the existing 50,000 sq mt to 20,000 sq mt and minimum capitalisation has been reduced from $10 million to $5 million, with a three-year post-completion lock-in period; projects with a commitment of at least 30 per cent of the total cost toward low-cost affordable housing exempted from requirements relating to minimum built-up area and capitalisation, with a three-year lock-in period. Developers say all these steps taken by the government are bound to boost growth.
The only important step remaining to be taken is to reduce interest rates on home loans. “Once the home loan rates start softening, the real estate sector will witness a full-fledged recovery. Buyers are sitting on the fence waiting for the home loan interest rates to decline, which we expect should happen this year,” states Boman R Irani, chairman and managing director, Rustomjee Group.
“While the new government has set the wheels in motion by initiating some sound proposals to promote affordable housing, more needs to be done on the policy front to improve investor sentiments and reduce regulatory hurdles. As ever, implementation is going to be the key to achieving the vision. The country needs a detailed affordable housing policy with easy finance options and inexpensive land banks. Tax incentives should be provided to developers and customers to make housing affordable for both in the long run. Furthermore, while affordability is the main focus, the location and quality of projects cannot be compromised, since this would make projects unsustainable in the long run although they could be affordable in the short term”, Karnik of Ernst and Young says. That’s a valid point.