2015

Something to look forward to in 2015

12:30 AM

Something to look forward to in 2015


The outlook for 2015 indicates balanced recovery, improved consumer sentiment and increased investments into the realty sector

2014 has been fruitful for real estate and construction sectors. All through the year, beginning with the government’s first budget, there has been some or the other incentives being announced for the sectors.

While budget announcements included sops such as approval of guidelines to set up real estate investment trusts (REITs) and allocation of funds to boost affordable housing in India, towards the end of the year, the norms for foreign direct investment (FDI) in the construction sector were formalised. The Union Budget 2014-15 also allocated funds for the creation of 100 smart cities. Around mid-year, the government also eased the lending for affordable housing under priority sector lending. All these measures will have a direct impact on growth of real estate and construction sectors in the long term.

Possible outcomes of these measures

Announcement over REITs: The announcement and subsequent listings of REITs will help the market to attract more investors. Very soon we shall witness a number of established firms signing up for the listing of REITs on the stock market. If implemented, REITs will benefit retail investors, who will then be able to invest small amounts of money into completed real estate projects instead of risk prone under-construction properties. This would increase liquidity into the system.

Creation of 100 smart cities: While the target is long-term, the development of smart cities is in line with government’s vision of ‘Housing for all by 2022’. The creation will not only bring more supply in the residential segment, but also create more jobs and lead to economic growth in certain regions. In the long run, based on the success of these smart cities, development of smart cities can be replicated around emerging cities where infrastructure and housing development is still lacking.

Ease of lending for affordable housing: The Reserve Bank of India, in order to encourage infrastructure development and sub-sectors such as affordable housing, has relaxed norms of priority sector lending by announcing exemption for long-term bonds from mandatory regulatory norms. The ease of lending announced for affordable housing will prompt many small and mid-scale developers to enter the market with their projects. This would result in increased housing supply.

According to the notification of the government on FDI in construction sector, foreign investment rules in the construction sector have now been relaxed, making it easier for investors to enter the market, sell assets or transfer their stakes and repatriate proceeds before the completion of a project.

The new rules, proposed in the Union Budget, include reducing the built-up area requirement for foreign direct investment (FDI) in construction projects to 20,000 sq mt from 50,000 sq mt. The minimum capital requirement has also been reduced to $5 million from $10 million. The investor will be permitted to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage. This would enhance the investor and private equity investment into the construction sector and would especially strengthen the residential real estate space.

What is expected from 2015?

While the government has continuously been supportive of establishing a favourable business environment, the economy has played its own role in shaping real estate and construction space around us. All through the year, the economy has struggled on account of rising retail inflation and uneven business environment globally. Mindful of the consequences, the Reserve Bank of India (RBI) has been keeping a tight vigil on its monetary policy. Indicating a further stimulus for growth, the current scenario will change in the year 2015, as the RBI will cut the interest rates by 50 basis points next year.

RICS’ outlook for the year 2015 indicates a balanced housing recovery and improving consumer sentiment. This will help real estate companies to borrow more from the market and institutional investment and finance companies. Thus private equity investments will increase in the real estate space leading to increased supply from current levels of existing projects.

Momentum in the housing sector was generally subdued in the first half of year 2014. It got some push with various subvention schemes being introduced in later part of the year. While new launches were few, sales were reasonably low during the entire year. According to industry estimates, inventory in some parts of the country was as high as 50 months.

RICS believes that there will be a pick-up in new home sales across all key regions leading to more supply in the Rs 30-50 lakh housing segment in the coming year. This holds true also because development firms will turn their attention to completing the existing projects stuck or delayed in the past two to three years. And most new age buyers are now looking for housing in this price band. In line with the recent correction or stagnation in prices, builders will keep the prices of new homes reasonable and will strive for more sales by bringing in more subvention schemes and lucrative deals in the first half of the year 2015.

It is also expected that the housing rental market will remain stable and continue to prosper in the coming year.

While commercial real estate (CRE) has lagged residential real estate in 2014 in terms of supply and demand, there is a huge opportunity for companies doing CRE. As opportunities within the evolving industry are abundant, there is also a great scope for allied industries due to the demand for quality CRE. Companies offering end-to-end solutions for offices, companies offering services related to establishing ready-to-move-in spaces will prosper due to the rising demand for quality offices.

Indications from economic front will boost the growth in information technology (IT) and information technology enabled services (ITES), banking financial services and insurance (BFSI) and manufacturing sectors resulting in significant demand for office space. Together, these three sectors occupy more than 75 per cent of the total office space in India.

The events of the recent past such as announcement of REITs, awarding of new bank licenses, development of smart cities, growth of industrial and retail sector will push for more growth and increased supply of new stock across commercial as well as housing segments. Of all the development firms, some of the large CRE firms have been waiting for an opportune moment to list their stock on bourses under REITs. Hopefully year 2015 will see such announcements from a number of firms wanting to enter the market at higher valuations. This would galvanise the private equity investment into the CRE. With rates coming down next year, it is likely that development firms in CRE space will benefit hugely.

It is expected that supply and the number of large scale transactions in CRE space will generally improve on account of demand for quality space. Retail segment will especially show more progress on account of entry of foreign brands looking to tap on the young consumers in India.

There is a strong need for the Indian market to transform everything from the way transactions are done to the way real estate development is undertaken. Overall economic indicators suggest that that market is in need of a more aggressive expansion on both residential and commercial real estate fronts. Development firms need to focus on execution of the existing projects. Thus there is a huge opportunity for innovative building technology to enter the market at this stage.

Property buyers can strike a better deal in coming months as the market is abundant with discounted deals and offers in the Rs 30-50 lakh category. While appreciation in rates can happen only after the revision of interest rates in early 2015, coming year will be a balanced one for the real estate market.


by Sachin Sandhir
(The writer is Global Managing Director - emerging business and MD - South Asia, RICS)

Source :- Financial Chronicle

You Might Also Like

0 comments