Year of maturing
If one were to go by the headlines, the real estate sector in 2016 has been characterised by many trials and tribulations ranging from a slump in sales, to an overhang in inventory, slowdown in tier-1 markets and financial stress among the developer community.
While we cannot deny that the past 12 months have been difficult, we believe the entire industry cannot be painted with the same brush. In fact, there have been many pockets of opportunity which define the market environment today: 1) End user demand has been brand elastic rather than price elastic (tier-1 developers, where the buyer is assured of quality, execution and delivery timelines will continue to sell well). 2) The industry has witnessed some degree of consolidation with smaller developers entering into reverse joint development agreements with larger brand names in order to drive sales. 3) Pricing and velocity have, therefore, remained largely stable / range-bound assuming the basics (location, approvals, flat size, master plan etc are in place). 4) Most tier-1 developers have been able to access appropriate forms of financing from banks, PE and non-banking financial companies alike, with funding structures now more customised than before; and lastly. 5) The industry has seen an emergence of newer verticals such as commercial, logistics and even retail being actively funded by institutional and retail investors alike.
As the year turns to herald in 2017, we should factor in the dual impact of both demonetisation as well as Real Estate Regulatory Authority. We feel that 2017 will witness a further maturing of the sector even as developers and fund managers will be forced to institutionalise themselves. Assuming that buyer sentiment is also given a boost with an inevitable fall in interest rates as well as widely anticipated concessions in tax, demand for real estate is likely to return with those that have been waiting on the sidelines willing to transact again. Developers, too, are waiting for this turn in sentiment and have been focused on creating an execution and delivery track record for the past couple of years. At the same time, offshore institutional investor interest and appetite for India is at its highest and aided by the move towards more stringent governance standards, 2017 is likely to witness more participation by such investors across asset class (residential equity, logistics, commercial etc) and in multiple structures (joint venture, fund, fold co etc). In conclusion, 2017 could turn out to be a very interesting year for real estate investments. Those developers that have established brands are likely to emerge stronger and perform even better as sentiment turns positive. On the flip side, the rest of the developer community will find it harder to survive as all stakeholders, including buyers and finance providers, adjust to operating in a more regulated environment.