The in­vest­ment cli­mate looks gloomy, but there are rays of hope

THE IN­VEST­MENT CLI­MATE LOOKS GLOOMY, BUT THERE ARE RAYS OF HOPE.

Business Today - - REAL ESTATE - The writer is Chair­man, ANAROCK Prop­erty Con­sul­tants BY ANUJ PURI

In­dian real es­tate sec­tor has wit­nessed a sig­nif­i­cant trans­for­ma­tion over the past decade, which has been fur­ther ac­cel­er­ated by the gov­ern­ment’s re­for­ma­tive steps to usher in Ac­che Din. Whether or not that has hap­pened as per ex­pec­ta­tion is de­bat­able. But, yes, a new reg­u­la­tory en­vi­ron­ment is be­ing cre­ated with the im­ple­men­ta­tion of sev­eral dis­rup­tive poli­cies. The Real Es­tate (Reg­u­la­tion and De­vel­op­ment) Act (RERA), 2016, Goods and Ser­vices Tax (GST), Real Es­tate In­vest­ment Trusts (REITs), Be­nami Trans­ac­tions (Pro­hi­bi­tion) Amend­ment Act, 2016, and Prad­han Mantri Awas Yo­jana have all hap­pened in the last four years. And they are ush­er­ing in greater trans­parency, ac­count­abil­ity, fi­nan­cial dis­ci­pline and ef­fi­ciency, which will have pos­i­tive im­pact on the realty sec­tor.

The mar­ket size of the realty sec­tor is ex­pected to touch $180 bil­lion by 2020 and is poised to grow at the rate of 30 per cent over the next decade. Ac­cord­ing to the In­dian Brand Eq­uity Foun­da­tion, the num­ber of peo­ple liv­ing in ur­ban ar­eas is slated to in­crease from 434 mil­lion in 2015 to 600 mil­lion by 2031. The hous­ing sec­tor alone is ex­pected to con­trib­ute around 11 per cent to In­dia’s GDP by 2020.

Realty in In­dia is the fourth-largest sec­tor to ben­e­fit from FDI eq­uity in­flows. To­tal FDI in­flows into the sec­tor stood at $24.67 bil­lion be­tween April 2000 and De­cem­ber 2017, which was 7 per cent of the to­tal FDI eq­uity com­ing into the coun­try dur­ing the pe­riod.

As for pri­vate eq­uity (PE) in­vest­ments, the first quar­ter num­bers of 2018 look pos­i­tive with the over­all PE fund­ing in­creas­ing by 15-17 per cent from the pre­vi­ous year. How­ever, a steady fall in ap­pre­ci­a­tion and per­sis­tent gloom in the res­i­den­tial prop­erty mar­ket caused PE in­vestors to shift their fo­cus to­wards other as­set classes.

Right now, of­fice projects are wit­ness­ing max­i­mum in­sti­tu­tional in­vest­ments. Driven by rapid em­ploy­ment gen­er­a­tion and the pos­si­bil­ity of first REIT list­ings, Grade A of­fice projects, IT parks and even lo­gis­tics cen­tres are cur­rently yield­ing the kind of re­turns that pre­vi­ously made the res­i­den­tial as­set class so at­trac­tive to in­vestors.

Of­fice real es­tate at­tracted con­sid­er­able PE in­vest­ments in 2017 and the trend con­tin­ues this year. Also, the prom­ise of In­dia’s first REIT list­ings is a good draw for liq­uid­ity in­fu­sion. In fact, it will re­sult in com­mer­cial prop­erty play­ers in­vest­ing more time and re­sources into the com­mer­cial prop­erty as­set class. On the other hand, the on­go­ing slug­gish­ness in the res­i­den­tial realty mar­ket con­tin­ues to work against it, es­pe­cially as PE play­ers are now wary of the rein­vest­ment risk. It means com­mer­cial real es­tate will elicit the bulk of in­sti­tu­tional in­vest­ment in­ter­est over the mid-term.

The gov­ern­ment is also keen to make the res­i­den­tial as­set class more at­trac­tive. In­dia needs about $4 tril­lion in in­vest­ments over the next five-six years to ful­fil var­i­ous gov­ern­ment schemes out of which the ‘Hous­ing for All’ ini­tia­tive alone is likely to bring in $1.3 tril­lion by 2025. How­ever, with the rise of non-per­form­ing as­sets and the RBI iden­ti­fy­ing the sec­tor as a ‘ high-risk’ busi­ness, banks are leery of too much ex­po­sure, which paves the path for PE, fi­nan­cial in­sti­tu­tions, pen­sion funds and sov­er­eign wealth funds.

In re­cent times, PEs and other in­sti­tu­tions have con­trib­uted nearly 75 per cent of the to­tal fund­ing com­ing into the sec­tor. But PE play­ers are now con­duct­ing thor­ough due dili­gence and only in­vest­ing in ‘clean’ and vi­able projects by es­tab­lished de­vel­op­ers with re­li­able track records for com­pli­ance and com­ple­tion. This is where RERA and GST are play­ing a sig­nif­i­cant role as the weed­ing-out mech­a­nism, which will only leave ro­bust play­ers and thus at­tract in­sti­tu­tional fund­ing in the fray.

Over­all, it has been a messy ma­tur­ing process, mostly be­cause old and in­cred­i­bly messy busi­ness prac­tices have to be cleaned. Judg­ing by the lev­els of pain and con­sol­i­da­tion the process has caused, it is doubtlessly ef­fec­tive, and we may yet see Ac­che Din in realty.

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