Will real estate recover on investor interest?
The real-estate headlines are, however, the growing interest shown by foreign investors in leveraging a rapidly growing servicesdriven economy powered by IT, ITES, BPO, financial services and retail trade which in turn has spurred the demand for office space, shopping malls and warehousing
Scarcely a day passes without news regarding the plans of private equity or sovereign wealth funds, especially from Singapore, to invest millions of dollars in India’s real estate sector to develop office or retail space. This flurry of development might suggest that this sector, whose market size is pegged at USD 180 billion by 2020, is experiencing a robust upswing in its fortunes. This is only partially true as it is recovering from a slump, a period during which it was disrupted by demonetization in November 2016, the Goods and Services Tax in 2017 and the Real Estate (Regulation and Development) Act, 2016.
In terms of volume, the housing or residential segment accounts for 80 per cent, office accounts for 10-12 per cent, retail is 3 per cent while warehousing, logistics among others accounts for the remainder. The protracted downturn in its fortunes was felt most acutely in the housing segment, despite strong fundamentals of faster growth and rising incomes of the 300million middle class. Notwithstanding housing demand, the middle-class dream soured as launches and sales of housing units plummeted during the current decade, according to Knight Frank.
The residential real estate industry ran aground as there was huge unsold inventory, thanks to developers who focused on wrong apartment ticket sizes. The problem was also that some unscrupulous developers who took advances from prospective apartment buyers and siphoned off this money to other ventures. There were also difficulties in land acquisition and limited credit from crisis-ridden non-bank finance companies. Around 560,000 units launched before 2013 worth INR 4.5 trillion across seven major cities in the country seriously ran behind delivery time lines as a result.
For the first time this decade, a ray of hope was the rise in launches and sales of residential units on a year-on-year basis in 2018. This receiver is expected to continue this year as well, thanks to government regulations like RERA to impose greater accountability on developers and initiatives like Housing For All by 2020 and infrastructure status granted to affordable housing. The GST rate on housing has been reduced to stimulate demand. The policy thrust on affordable housing has improved buyers’ sentiment and accounts for a significant share in recent launches/sales.
The real-estate headlines are, however, the growing interest shown by foreign investors in leveraging a rapidly growing services-driven economy powered by IT, ITES, BPO, financial services and retail trade which in turn has spurred the demand for office space, shopping malls and warehousing. Foreign investments began to flow into this sector following the relaxation of rules in the property sector in 2005. They have invested a cumulative USD 24.9 billion in India’s townships, housing, built-up infrastructure and construction development products from April 2000 to December 2018 according to the Department for Promotion of Industry and Internal Trade. Singaporean funds like GIC Pte Ltd, Temasek Holdings Pvt Ltd and CapitaLand Ltd have significantly increased their exposure to India’s property market, logistics, warehousing and urbanization projects of late. A story in the Mint newspaper described them as the new landlords in the country. GIC has two joint ventures with domestic realty giant DLF with investments of USD 1.7 billion.
Ascendas-Singbridge with Sembcorp is developing the new state capital Amravati of Andhra Pradesh. Such investors bring in expertise in market analysis, facility management and state-of-art building construction capability. They will bring in best practices and greater transparency in the real estate sector.
The flood gates for foreign investments will open up once financial vehicles like Real Estate Investment Trusts (REIT) take off. REITs provide a similar structure for investors buying into real estate, especially office property, as mutual funds enable investments in stocks. Such instruments help the development of a public market for an illiquid asset, lower capital costs and help in bringing about greater transparency in the market. The successful listing of India’s first REIT - Embassy Office Parks - backed by Blackstone Group LP is sign of the changes that can transform real estate into a more organized industry. But a sustained boom cannot come only from record levels of office and retail space absorption; it will come when housing recovers to drive its dynamics.