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In a major move to stimulate the country’s ailing real estate sector, the government has decided to set up a `25,000-crore alternative investment fund (AIF) to revive about 1,600 stalled housing projects. These include over 4.58 lakh unfinished units across major cities in the country. According to Union Finance Minister (FM) Nirmala Sitharaman, the AIF will be a special window to provide priority debt financing for completion of projects in the affordable and middle-income categories.

The government will act as a sponsor with its `10,000-crore initial contribution to the corpus while the remaining `15,000 crore will be contributed by SBI and LIC. The fund will be managed by SBI Cap. The open-ended fund is expected to swell over time as several sovereign and pension funds are expected to join in. The AIF will be kept at an escrow account and its disbursement will be in a phased manner, according to the requirement of each project in a time-bound manner.

In a significant shift from the earlier stimulus package announced last September, where projects declared as non-performing assets (NPA) and those which were undergoing insolvency at the National Company Law Tribunal (NCLT) were kept out of the AIF consideration, the new scheme allows projects declared as NPA and or those under insolvency purview in NCLT for financing from the AIF. However, those which have already got orders from NCLT for liquidation will not be considered. The funding will be possible only if they are registered under the Real Estate (Regulation and Development) Act or RERA.

The move is expected to bring relief to home buyers as well as developers whose funds are stuck. Following a steady economic slowdown, India’s real estate sector is facing a hard challenge. The note-ban in November 2016 followed by introduction of RERA in May 2017 and the rollout of the Goods and Services Tax (GST) two months later, had affected the realty market. The liquidity crisis in the NBFC sector has also played its role.

While the new scheme has been welcomed, the cap on floor area and pricing has created confusions as there are possibilities that some apartment blocks may have flats which won't be part of the eligibility list. Besides, since RERA registration is a precondition to come under this scheme, developers in states such as West Bengal, Arunachal Pradesh, Nagaland, Meghalaya, Sikkim and Lakshadweep will not be eligible to get benefit from the scheme as RERA has not been implemented in these states.

Current scenario

According to the latest survey by industry bodies like FICCI, NAREDCO, and property consultant Knight Frank, the Current Sentiment Index (CSI) of real estate stakeholders in India has gone down to 42 in the July-September quarter from 47 and 62 in the preceding two quarters.

Despite the measures taken by the government earlier, to boost liquidity and revive the demand, the current sentiments of the real estate stakeholders in India has dropped to a "level previously seen during the heightened uncertainty period of pre-election in the first quarter of 2014 and the demonetisation period (41) in the last quarter of 2016", the Real Estate Sentiment Index Q3 2019 report said.

It adds that the outlook for the coming six months has also turned 'pessimistic' for the first time since the inception of this survey, a clear indication that the sector is under immense pressure. However, sentiments toward the commercial real estate sector have remained steady, with the outlook for the new office supply strong for the coming six months.

Measures announced by the FM to sort out the supply side challenges last quarter were mostly focused on affordable housing segment, leaving out the vast majority of non-affordable offerings from the announced benefits. These measures have not helped in infusing confidence among the stakeholders, as the real challenge lies in demand side, where end users are unwilling to make home purchases owing to lack of financial confidence. The supply-side sops will not be enough till the time demand is revived by putting money in the hands of the consumer and his confidence is restored.

The fall in the confidence level was, however, not confined to buyers alone. Even the investors appeared uncertain. According to a recent report by FICCI and property advisory firm Vestian, titled ‘Real Estate Investment in India, 2019’, liquidity crunch, delayed projects and reduced buyer interest have created a lull in the residential market, thereby resulting in slackened investors’ interest. The value of investment in the residential segment has declined to around $450 million in the first six months of 2019 as against $1.2 billion in the same period last year.

With rising demand, the commercial real estate market has remained the most preferred segment for investors during the period of 2015-2019. The segment has been steadily accounting for the maximum amount of real estate investment since the second half of 2016. The report attributed the trend to availability of good commercial space and reasonable rentals coupled with lower vacancy levels in major cities in the country.

Real estate’s place in the economy

A buoyant real estate sector is important if India has to sustain a higher growth trend. The sector is the second largest employer after agriculture and is projected to grow at 30% over the next decade. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations.

The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. According to a CREDAI and CBRE report, the sector is expected to reach a market size of $ 1 trillion by 2030 from $ 120 billion in 2017 and is estimated to contribute about 13% of the country’s GDP by 2025.

The last half a decade has seen implementation of key structural reforms and the government has regularly addressed the issues relating to the realty sector. During the first quarter of this year, the government lowered GST rates on affordable and other housing segments to prop up demand. In the last Budget, the threshold of tax benefits on home loan interest payments too was hiked. Apart from these regulatory reforms, the RBI has also steadily cut the policy rate to make funds cheaper for both home buyers and developers. After the last October’s cut, the repo rate stands at 5.15% and reverse repo rate at 4.90%. In a bid to reduce the cost of funds, the RBI has cut repo rate by 135 bps in five successive steps starting from February 2019. This has considerably lowered the EMI obligations of home buyers.

The real estate sector, with high growth possibility, is one of the prime destinations of foreign investors too. According to the Ministry of Industry and Commerce, the construction development sector in India has received foreign direct investment equity inflows to the tune of $ 25.12 billion or 6% of the total inflows during April 2000 to June 2019. Construction infrastructure development sector received another $15.3 billion FDI during this period.

Residential and office space market

Reflecting the confidence of the investors in commercial real estate, the office space market across the top cities has continued to grow. According to the report ‘India Real Estate: Residential and Office H1 2019’ by Knight Frank, the supply of office space increased to a decadal high of 23.9 mn sq ft, recording a 31% in the first half of 2019 compared to the same period last year. Transaction level too recorded decadal high of 27.4 mn sq ft – up by 26%.

Bengaluru hits historic high in both transactions and supply during this period with transactions touching 8.3 mn sq ft and supply 7.6 mn sq ft. The IT/ITeS sector recorded the biggest transactions accounting for about 35% of the total in H1 2019 compared to 18% in the same period last year.

At the other end, the share of banking, financial services and insurance (BFSI) in total transactions declined to 13% from 18% in the previous period as NBFC and banks with higher NPAs curbed expansion plans and liquidated non-core assets.

“The strong demand scenario in the office market kept the vacancy stable at 13% in the first half of 2019, compared to a year ago. Southern markets recorded single digit vacancy rates, with Bengaluru showcasing the lowest vacancy rate at 4% in first half of 2019,” the report added.

The story of residential sector was, however, different. Residential sales increased only 4% in the first half of calendar 2019 compared with the same period last year, according to the Knight Frank report. It has to be noted, residential sales increased by about 25% in the first half of 2018 compared to the previous year (JLL-CREDAI Report). And if residential launches grew 21% during this period, they were largely in the affordable segment, which attracted government incentives. About 51% of the launches in the residential sector were in the under `50-lakh segment and 78% under `1 crore.

Mumbai residential market recorded the largest sales volume with 33,731 units sold in first half of 2019 while the NCR saw a double-digit growth in sales at 10% during the same period. Bengaluru has continued to be an attractive market with 28,225 units sold during this period – up 9.4% from the corresponding numbers of 2018.

Kolkata saw a fall of 30% in the total units sold. “This is primarily due to the procedural delays caused by the West Bengal Housing Industry Regulatory Authority and the pronounced dependence of developers on the distressed NBFC sector,” the report added.

Unsold inventory across top eight markets recorded a decline of 9% in the first half of the current year. While Hyderabad saw a decline of 67% in unsold inventory, Mumbai was the only market to record an increase, with the inventory overhang increasing by 14%.

Higher demand of commercial space augurs well for the economy as this would mean more offices, more jobs and greater economic activities. More jobs would increase the number of eligible home buyers. And this is probably more important; FM’s new scheme once again has targeted the supply side of the sector while the demand side holds the key to its success. After all, developers would build houses only if they can sale them.