Indian Real Estate – an Outlook for 2018-2019
Indian real estate is going through a major transformationin the recent years. Some of the big decisions and new policies of the Indian Governmenthave affected the real estate sector in big way, albeit in positive or negative manner. Few of the policy changes introduced by the government, such as demonetization, RERA, and REITs in 2016, followed by GST and FDI in 2017, have made huge impacts on Indian real estate sector. Apart from this, there are various other reforms anticipated by the expertsin Indian economy, which may come into forcein the coming time.However, the new legislation and trends that have come up in the real estate market have the power to reshape the Indian real estate sector for a long term and year 2018 can be a starting point towards the Indian real estate growth story.
Looking at the positive aspects of the reforms, there is a big possibility that years 2018-19are going to be the bumper years for the Indian realty market. The transformation of market has attracted the eyes of domestic and foreign investors, and there are various positive trends observed by the experts, which point towards a more pro-active, positive and growing Indian Real Estate sector. Listed below are seven major positive trends in the Indian Real Estate market, which shows that there is great depth in the market and the so-called revival of real estate in India has already started.
- Global capital flow into Indian real estate:
One of the major signs of revival for Indian property market, investments by global investors has increased recently, with various international property funds and investors acquiring strong positions in Indian realty space. As per World Investment Report 2016-17by the United Nations Conference for trade and development, India has been ranked fourth in terms of FDI inflows, which shows strong interest by the foreign buyers and investors in the Indian markets. Improvements in India’s overall credibility with transformation of regulatory framework has built up an attractive destination for both global and Indian investors. Thanks to improvement in transparency, NRIs and foreign investors find country’s real estate market more reliable than ever before. Thus far, Indian real estate has attracted USD 32 billion in private equity and various other foreign investors are willing to invest in various sectors in India. As per Economic Survey of India, Indian Real Estate sector witnessed significant improvement attracting a total Foreign Direct Investment of USD 257 million in the second half of 2017 only. Looking at this trend, the expectations from private equity is high in the coming years and it is projected that 2018 and 2019 will be even bigger years for FDI investments in India.
- Developers will revamp their business models
From year 2000 to 2016, because of lack of strong regulations of Indian property sector, developers used to launch many projects at the same time and there was no guarantee of completion of projects on time. There are numerous instances where investor’s hard earned money went down the drain, simply because the developer is highly over-leveraged and could not complete the project. Now, with the enactment of RERA Act (Real Estate Regulation and Development Act, 2016), a deadline has been fixed for the projects to be completed, which will force developers to re-zig their business models. The developers will require to bring more transparency as well as accountability in their processes, and do a lot more to increase consumer confidence in the project. Also, other legislative reforms such as The Goods and Service Tax (GST) Act 2017 as well as The BenamiTransactions (Prohibition) Amendment Act 2016, will have a major impact on the business models and work ethics of developers. This also means that most of fly-by-night developers will be out of market and Indian real estate will have more reputed and serious property developers. This will bring in more confidence of domestic and foreign investors into the market, which may result in higher and sustainable demand in the long run.
- Ever increasing housing demand
Although past few years have observed comparatively lower transactions in the residential sector, housing demand in the country is quite high, thanks to its ever-growing population size. In India, there is an estimated shortage of around 40million houses (urban and rural). In addition, population growth of 1.3 per cent per annum, favorable demographics, rise of concept of ‘nuclear families’, increased migration to urban areas, fiscal benefits, rising income/aspirations, etc. could lead to another 10 million demand for housesper annum. However, in the recent times, most of the property developers focusedon luxury to mid end housing only, whereas much of this demand is in the affordable housing segment. Moreover, with time, the definition of affordability also has changed and with ever increasing land prices, high finance rates, construction cost and stringent development regulations, affordable housing was not at all profitable option for real estate developers. This required some impetus from the government for developers to focus on affordable housing segment.
With the government nod of infrastructure status to affordable housing in Union Budget 2017-18, this sector is expected to grow at a high pace. The affordable housing segment is expected to be the next big growth driver of the Indian economy with property experts predicting a phenomenal growth rate of over 30% in the medium term. Developers may now haveoptions for diverse and cheaper sources of funding, including external commercial borrowings (ECBs), which eventually can lower the borrowing costs of developers, who should pass on the savings to the buyers and investors. New reforms also amended the size of affordable housing units in big cities, which is more in line with the markets. Moreover, banks may also be willing to lend these projects at attractive interest rates, which will result in easy and cheaper financing options to end users as well. With this in mind, various property developers and builders in India are gearing up to develop affordable housing projects, which is expected to improve the market sentiments in the time to come.
- Commercial market shots
One of the major leader of property sector, commercial office market, is turning out to be the frontrunner in witnessing positive changes in the market owing to various legislative revolutions. RERA, REIT, demonetization, GST, make in India and various other reforms have given numerous positive shots to commercial real estate market, which has started springing back towards high growth curve.
- REITs:With the government making way for REITs (Real Estate Investment Trusts) in Indian realty market, the commercial office market has already started bouncing back in Mumbai, Bangalore, Delhi and Pune. With major market players such as Blackstone, Embassy and DLF making fast in-roads for REIT model in India, the trickle down impact on other realty players in anticipated in 2018-2019, which may result in improvement in other commercial office markets of the country with higher investment returns to its investors.
The REIT potential in India is huge, with around 229 million sq. ft. of office space currently being REIT compliant. As per industry experts, even if 50% of this space is listed in the next few years, it will be mammoth $18.5 billion worth of REIT listing. Moreover, India’s stock of Grade A commercial assets is also increasing with more and more developers are looking to contribute to this sector and REITs acting as a sure-fire growth catalyst. The long term results should show investments in other markets such as retail, industrial and hospitality, which is expected to improve the overall market sentiments.
- Co-working spaces:Indian office sector is moving into ‘hybrid’ spaces or co-working culture, looking at the strong demand for flexible working spaces in India. The rise of numerous start-ups in Indian markets has paved the way for this market, which is turning out to be a big boost for the commercial office sector. Co-working spaces are popping up across Indian metros as well as Tier-II cities, providing start-ups with flexible working options at affordable rents. Presently, there are more than 100 operators in this space across India, though there is still very limited supply of co-working spaces available. This sector is slowly moving to become a big success story, with various other countries also following the same model.
- Industrialization and Trade: Apart from various other factors, improvement in industrialization and trade opportunities in the recent past are also fueling the demand for commercial office space in various cities in India. Moreover, with recent changes in FDI policy, demand for warehousing industry is expected to increase many-folds in 2018-2019, which will have a positive impact on other sectors including commercial office market.
- Tourism and hospitality industry
Tourism in India was always a big revenue generator for the Indian economy and one of the key driver for creation of jobs in various cities and region in India. It is a critical and economically important industry in India, which has started to show signs of revival in the recent years.
As per World Travel & Tourism Council, tourism in India has generated USD 230 billionin year 2017, which is equivalent to 9.4% of the nation’s GDP. Apart from being the main GDP contributor, India Tourism has supported 41.622 million jobs, almost 8% of its total employment. The sector is predicted to grow at an annual rate of 6.9% to USD 490 billion by 2028 (9.9% of GDP), which should result in good demand and high growth for the hospitality industry. Apart from leisure, religious and business tourism in India, medical tourism is also increasing at a high growth rate, thanks to economical and quality medical services available in the country. In October 2015, India’s medical tourism sector was estimated to be worth USD 3 billion, which is projected to grow to USD 7-8 billion by 2020.
All these changes are reflecting in the present trends in hospitality industry. It is observed that 2016-2017 was a great year for hospitality industry in India, with overall ARR clocking at approx. USD 90, with average hotel occupancy observed at 65.6%. Although these figures are much lower than the 2007-08 results, the steady improvement suggest a strong outlook for the hospitality sector, which is showing all signs of revival and expected to grow in mid to long run. Consequently, various international and domestic hotel and hospitality investors have started scouting for right investment opportunities in various cities in India.
- Alternative asset classes
It is quite heartening to know that it is not only the residential, commercial and hospitality sector, which are showing revival of trends. Instead, various alternative and new asset classes have emerged in the Indian real estate sector such as short term stays, specialty hospitals and medical institutes, schools, student housing, aged care facilities, etc. These emerging sectors are showing great signs of high growth in the recent times and promises to push the sector further up with induced investments by various domestic and foreign investors.
- Market consolidation
In the past few years, owing to slowdown of realty sector, comparatively few sales and lack of financingoptionsin India has led to various developers over-leveraging themselves. This means that most of small time developers may either have to sell off their assets or enter into JV with big and more reputed developers to save them from this financial mess and deliver their projects. With this consolidation of property development market on the cards, the highly overcrowded real estate sector in India is expected to become a lot leaner and meaner. With consolidation happening by ways of joint developments and joint ventures between landowners and/or small developers with bigger, better-organised players, smaller developers being bought out by larger players, and struggling developers cashing in their land banks by selling them toplayers with stronger balance sheets and appetite for growth.
This may be a lengthy process for the time being, however, the signs of this process are prominently visible in various markets in India. Several small builders with half-baked projects are already looking for investments and rescue from big brothers, with many more sitting on the fence to gauge the initial results. This consolidation will surely flush out all the bad elements from the real estate market and it is expected to be more transparent, level playing and promising market for foreign and domestic investors.