After a turbulent run in 2016, it’s time to evaluate how the real estate sector fared during the first half of this year.
Don’t worry, our annual report is coming up as well! Last year’s demonetisation drive had shaken up the sector and the after effects were felt in the first half of this year as well. However, several positive developments on the policy front in the form of RERA, GST, REITs and the amendment of the Benami Transactions Act, 1988, have aided recovery and revived investor as well as consumer confidence.
Here’s a look at 10 landmark policy initiatives and trends that dominated Indian real estate and are expected to have a long-lasting effect on the sector:
Real Estate Regulatory Act (RERA)
The RERA Act, covering both residential and commercial sectors, was passed in March 2016 and was expected to be a game changer for the real estate sector. The actual implementation of RERA begun with some states such as Maharashtra creating their own regulatory authorities. Here’s a look at some of its key features:
- Compulsory registration and mandatory disclosure of project details
- Developers to open escrow account for all sales proceeds and use it to account for all payments of a particular project
- Ban on project launches without securing the necessary regulatory permissions
- Punitive action against developers for not complying with disclosures
- Compulsory selling on carpet area basis
- Quick redressal to aggrieved homebuyers in 60 days
- Stringent punishment for defaulting developers
The Act is expected to promote transparency, build consumer confidence and also usher greater foreign investment into the sector. However, the impact of RERA will be realised once more states come forward to set up their own authorities and implement it in spirit.
Goods and Services Tax (GST)
One of the biggest tax reforms of the post-Independence era, GST is expected to bode well for the real estate sector. GST is only applicable to under-construction properties through work contracts taxed at 12% (excluding stamp duty). At the same time, the provision Input Tax Credit (ITC) offsets tax liability and neutralises any tax impact.
Currently, there is a cumulative tax burden of 25-30% on construction material, whereas post GST, goods are taxed at 18-28%.
Benefits of GST:
- A single nation tax, subsuming all other indirect taxes
- Higher efficiency in logistics due to free movement of goods at state borders
- Reduction of compliance/administrative expenses borne by developers
- End of double taxation, checking any related addition to cost
- ITC to lead to digital transactions, curbing flow of black money
- Clear breakup of the actual cost for better price clarity
Developers’ bodies fear that as stamp duty has not been subsumed within GST, it may push up home prices. However, with full ITC available on construction materials, the effective GST rate will be less than 12% as against the current real estate transaction taxes that range between 12-15%.
Real Estate Investment Trusts (REITs)
All decks are being cleared to make Real Estate Investment Trusts (REITs) in India a reality. REITs are similar to mutual funds and allow a large number of small investors to invest in real estate. They pool capital from investors to purchase and manage income-yielding real estate assets or mortgage loans and can be traded on major stock exchanges like normal stocks.
Benefits of REITs:
- Investors get a chance to participate in commercial real estate’s growth
- Developers get much-needed liquidity through a new source of capital
- Implementation is expected to make the sector more efficient and transparent
- Enable banks to free up their balance sheet by reducing loan exposures
- Formation of REITs is expected to encourage the creation of big-ticket institutional-grade buildings
Real estate sector experts are looking forward to the first REIT listing by the end of this year as it will serve as a reference point for others to follow. This is crucial at a time when commercial real estate transactions are expected to pick up in the wake of an anticipated upswing in the economic activity.
Benami Transaction (Prohibition) Amendment Act
The amendment of the Benami Transaction (Prohibition) Amendment Act, 1988, is aimed to curb the entry of unaccounted money into the economy. The Amendment Act came into force on 1st November 2016 to prohibit benami transactions. Going forward, all real estate transactions shall be in the name of the actual owner who is paying for the property from his known sources.
The amendment seeks to clearly define benami transactions and also establish adjudicating authorities and an Appellate Tribunal to deal with such transactions. It also states the penalty for indulging in benami transactions. The Act should provide much-needed clarity in ownership of property, resulting in transparency and increased investor confidence.
Government push for affordable housing
Against the backdrop of a massive urban shortage of about 20 million homes, the Modi government came up with the ‘Housing for All by 2022’ Mission.
Launched in 2015, it focuses on affordable, low-cost, and EWS (economically weaker section) housing. This year’s Union Budget had the following schemes and incentives to promote the affordable housing segment:
- Much-coveted infrastructure status granted to affordable housing
- Developers can enjoy cheaper sources of funding, including external commercial borrowings (ECBs)
- Affordable housing promoters will get five years for project completion
- Tenure for long-term capital gains for affordable housing reduced from three to two years
- Qualifying criteria for affordable housing revised to 30 square metres and 60 square metres on carpet rather than the saleable area for main metros and non-metros respectively.
In another positive development for the affordable sector, a new Credit Linked Subsidy Scheme (CLSS) for the mid-income group was announced in March, with a provision of Rs 1,000 crore.
The spate of government initiatives has boosted developers’ confidence.
With regulatory and government support and increasing urbanisation, more and more developers are finding the segment lucrative.
Co-working offices are trending in commercial real estate
India is home to thousands of startups, small businesses, and millennials who are seeking new work environments. In this scenario, co-working has come up as a popular business model that is redefining office spaces. Co-working spaces are in great demand in metros as they provide the necessary support, infrastructure, networking opportunities, and office facilities to entrepreneurs who are just starting out.
More and more companies are opting for co-working spaces as they offer 20-25% cost savings compared to working in conventional office spaces. The trend of co-working spaces is more than a flash in the pan and has already begun to disrupt traditional office setups. As this concept gains popularity, the total space leased by co-working operators in the major cities could expand to 7–9 million sq ft by 2020.
FDI in retail real estate
The retail real estate market in India is on a growth curve, with the government considering Foreign Direct Investment (FDI) in multi-brand retail.
According to experts, the retail segment attracted an investment of over $700 million in 2016, which is expected to rise by 20% this year. The proposal to allow FDI in retail is expected to come with certain riders to ease the transition to foreign investment. Foreign retailers will have to spend at least $50 million on storage and logistics infrastructure and employ 1,000 people for every $100 million of investment. They will also be expected to source 30% of their products from smaller companies.
This year has also witnessed the announcement of 100% FDI in marketplace e-retailing creating fresh ripples in the e-commerce industry. This development, which will boost domestic as well as foreign players, will also enable new players to enter the e-commerce space.
It will also allow an integration of both offline and online trade.
Institutional investors eyeing warehousing and logistics real estate
As the e-commerce industry opens up, the demand for warehousing and logistics real estate is also expected to escalate. Unlike the demand for office spaces, this additional requirement will be spread fairly evenly across India, including Tier 2 and 3 cities.
Policies allowing 100% FDI in warehouses, food storage facilities and declaring some zones to be tax-free has made the sector lucrative to investors. The last few quarters have witnessed a flurry of investment activities from foreign investors in the logistics and warehousing sector.
Logos and Assetz Property Group will be investing $400 million to develop and manage specialised logistics and industrial parks. Another major foreign player, the Singapore-based Ascendas-Singbridge, has entered India’s logistics and warehousing market through a partnership with Firstspace Realty.
An investment of $600 million over the next 5-6 years will be channelised for the development of logistics and factory spaces in Mumbai, the NCR, Pune, Chennai, Bangalore, and Ahmedabad.
With industrial corridors like the Delhi-Mumbai Industrial Corridor (DMIC) and the expansion and improvement of the road network, things are looking up for the industrial and warehousing sectors. The current thrust on manufacturing and initiatives like ‘Make in India’ are also expected to further strengthen and re-configure the logistics sector.
Review of residential real estate market
In the aftermath of demonetisation, buyers’ sentiment stayed cautious during the first half of the year. Yet, mid-segment projects with realistic pricing enjoyed fair success in both the primary and secondary markets. With the implementation of RERA and consumer activism, developers have been compelled to focus on completion of existing projects.
Here’s a snapshot of how the residential market fared across five major cities:
| Bangalore: |
Although sales volume reduced moderately, Bangalore was one of the major cities to be least impacted by the demonetisation move. The city’s residential market remained a preferred choice amongst institutional investors as several leading developers attracted private equity funding for their upcoming projects. |
| Chennai: |
The residential market remained subdued in terms of both new launches and sales as buyers’ sentiment remained weak. However, cheaper home loan interest rates and increased developer focus on completion of projects are expected to boost buyers’ confidence. |
| Hyderabad: |
High growth in office leasing activity leading to increased residential demand, robust infrastructure development, and competitive pricing has positioned Hyderabad as one of the country’s most dynamic residential markets. The steady growth of the IT sector continued to drive demand for the residential market during the first half of the year. |
| Mumbai: |
Increased floor space index (FSI) and the development of lots instead of individual buildings have provided momentum to the redevelopment of old projects and affordable housing projects in the city. Experts forecast a marked increase in the affordable segment inventory in the second half of the year. Demand for quality housing in areas with good connectivity and social infrastructure is expected to revive in the mid-segment housing. |
| Pune: |
The city bore the brunt of demonetisation, resulting in reduced demand and sale of residential units. However, proposed infrastructure developments, including the Pune Metro and initiatives taken by local developers to gain buyers’ trust should usher in a favourable time for buyers and developers alike. |
Review of commercial real estate market
Steady lease rentals, high absorption levels, low vacancy levels, and global investor interest have kept India’s commercial real estate sector buzzing during the first half of the year. Unlike the fragmented market for residential properties, the commercial sector fared much better. Backed by large investors, leading developers are steadily building Grade A office space in key cities. Here’s a look at how the commercial market fared in major cities:
Bangalore: Known for its buoyant office market led by the IT/ITeS demand, the city registered moderate activity in the commercial space sector in the first half of 2017. This was primarily attributed to the dearth of ready office spaces that deterred the expansion plans of potential occupiers. With the current absorption pegged at 3.25 million sq ft for the first half of 2017, Bangalore remains the most active office space market in India.
Chennai: The office market here has traditionally been driven by the IT/ITeS sector, but the first half of the year witnessed the emergence of the BFSI sector. The sector’s share of transactions increased substantially due to two large leases by Wells Fargo and HDFC Bank, amounting to over half of the space transacted by the sector.
Hyderabad: Low supply of quality office space has not been able to keep pace with the demand for quality office space in the city. This has pushed vacancy levels to a new low in most micro markets. Low vacancy continues to be a challenge for the Hyderabad office market in the coming quarters as Grade A supply is unable to match occupier demand.
Mumbai: H1 2017 witnessed the highest supply of new completions over the past several years. The new supply of office supply has increased to 7.6 mn sq ft during H1 2017, a jump of 54% year-on-year. This new infusion of office space has caused a significant increase in vacancy rates by 22% across the Mumbai Metropolitan Region (MMR).
Pune: Even as co-working has emerged as a major trend in metros, it has witnessed considerable interest in Pune. Companies like Awfis and Smartworks that provide co-working space have taken up space in markets like Baner, Nagar Road, and Hadapsar. Such co-working space providers have taken up as much as 1,28,000 sq ft of office space during H1 2017 and are likely to grow in the coming quarters.
Conclusion
At the end of the first half of the year, it’s safe to say that the real estate sector is cautiously headed towards recovery and growth. The positive impact of the government’s policies and reforms has been reflected in the over 50% increase in the BSE Realty Index this year.
Despite these positive signals, the sector is faced with the challenge of successfully implementing RERA, GST, REITs and Housing for All by 2022 to fully realise their potential. The sector is also in need of new reforms such as fixing the flawed Land Acquisition Act and introducing a Single Window system to promote ease of doing business. Experts believe that the government must execute its reforms and complete the unfinished agenda to ensure that these initiatives bring visible changes on the ground.
