A spate of construction activities, backed by the govern-ment’s push for affordable housing and infrastructure growth, is indicating the revival of India’s real estate sector. The sector is witnessing high growth with the rise in demand for office, as well as, residential spaces. The market size of the Indian real estate sector is expected to reach $180 billion by 2020 with the housing sector's contribution doubling to 11.2% of the GDP.
The country’s real estate industry is in the midst of a major transformation. Home buyers and home developers are looking forward to a great year in 2018. The previous year was a roller-coaster for the sector with too many things happening. The effect of demonetisation was still visible in 2017. The Union Budget 2017-18 introduced the “Housing for All by 2022” policy, which came with a number of benefits like availability of prime land parcels, access to funds, and fast approvals for incentivising affordable housing projects.
The government later introduced the Real Estate Regulatory Act (RERA) to bring transparency between buyers and sellers. This Act raised the interests of home buyers and confidence among the consumers. Mandatory registration, strong penal-ties, and complete transparency are some of the key features of RERA. The introduction of the Goods and Services Tax (GST) aimed at dismantling the multiple tax system has helped to improve the sentiment of foreign investors.
A Credit Linked Subsidy Scheme (CLSS) for the mid-income group with a provision of Rs. 1,000 crore in 2017-18 was announced even before Budget 2017-18. Extension of tenure of loans under the CLSS of Pradhan Mantri Awas Yojana (PMAY) was increased from 15 to 20 years, and the Budget also increased allocation to PMAY from Rs. 15,000 crore to Rs.23,000 crore in the rural areas.
Backed by these policy changes, 2018 has begun with a lot of promises. The introduction of Real Estate Investment Trust (REIT) and the possibility of receiving Private Equity (PE) investment have eased out the financial needs of the sector. Private equity investments in Indian real estate increased 15% year-on-year in January-March 2018 to Rs. 16,530 crore. Private equity investments in real estate are estimated to grow to $100 billion by 2026 with tier-1 and tier-2 cities being the prime beneficiaries.
Interestingly, soon after the REIT funds became a reality in India Embassy Office Parks, a joint venture between US private equity major Blackstone and Embassy Group, filed its offer documents with Sebi late last September to raise around Rs. 50 billion through the country's maiden REIT listing. Once listed, India will join the league of other countries such as the US, UK, Singapore and Japan which have vibrant REIT markets. In square footage term, this will be the biggest office REIT listing in Asia.
In addition, the government has provided relaxations in FDI-related norms for the construction development sector. A hundred percent FDI is permitted in the construction development sector (which includes development of town-ships, construction of residential/commercial premises, roads and bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional-level infrastructure and townships) and industrial parks. Minimum area and capitalisation requirements have been removed. Hundred percent FDI is permitted in three categories of stabilised assets, namely, townships, business centres, and malls/shopping complexes.
The policy change has had an impact on the flow of foreign funds to the sector. India was ranked fourth in developing Asia for FDI inflows, as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. The uptrend continued in 2017 also; the sector received $ 387 million FDI inflows in 2017 – up by nearly four times from $ 106 million in the previous year. It received a total $ 24.83 billion FDI between January 2000 and March 2018. Only the service sector, software and telecommunications, received more FDI during this period.
Sale of office space and residential units
Backed by these developments, the sector is witnessing encouraging growth across assets class with returning confidence in the market. While investment in leasing space and its demand have been rising, residential and retail market sales and investments have again started.
This is important if India has to sustain a higher growth trend, the realty sector has to contribute its own part. 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.
The first half of 2018 saw significant improvement in sales velocity for the residential sector, which picked pace, recording a rise of 25% per year compared with the same period of last year. This can be attributed to two large factors, firstly returning buyers’ confidence on account of implementation of RERA in most states and stable capital values which have started to show an upward trend.
Mumbai recorded the highest sales volume totalling to over 13,600 units– up by 11% over the same period a year ago. Bengaluru followed closely with 13,300 units, although the rate of increase was only 2%. Pune saw a marginal increase of 2% in sales volume but its sales volume touched the 10,000-mark. Both these markets saw steady trends closely mirroring the market activities from H1 2017. Kolkata topped the growth chart in sales to record a rise of 280%, albeit on lower volume.
The corporate leasing activity rose by 54% in H1 2018 com-pared to the same time last year. Companies leased around 8 million sq. ft. more space as compared to the same time last year taking the total gross space leased in the H1 2018 of the year to about 24 million sq. ft. Cities that contributed the most to this growth were Bengaluru and NCR, with a share of 26% each in the gross leasing volumes during this period.
Tier-2 and tier-3 cities
What is important is that the demand for commercial space in tier-2 cities is growing steadily. The latest report of the international real estate consultants JLL India ‘Fuelling the Retail Revolution – The Paradigm of Emerging Cities’ in association with the CII National Retail Summit, 2017, identified 20 cities including tier-2 cities such as Lucknow, Jaipur, Chandigarh, Kochi, Patna, Bhubaneshwar, Indore and Nagpur among the leading cities, as the next retail destinations in the country.
According to the report, the retail sector in tier-2 and tier-3 cities has witnessed a much higher investment of $ 6,192 million between 2006 and 2017 as against $ 1,295 million that came to Tier I metro cities during the same period.
Factors like the lack of available space in retail malls in metro cities, increasing lease rentals in metro malls, and high land prices in tier-1 cities have made it difficult for retailers to own real estate in these cities. According to the report these factors have become a deterrent for expansion and growth of malls in big cities.
Making a strong case for tier-2 cities, the report says that factors like international airport connectivity across cities such as Lucknow, Kochi, Bhubaneswar, and Nagpur to name a few, rising levels of disposable income have prompted various global and local brands to plan their expansion plans in these cities.
Entry of global players will help the sector to achieve higher growth but for this, the government needs to play a major role both as an administrator and an ally in the development process. As such, the sector is still plagued by market uncertainties and traditional inhibitions. The real estate market in India continues to remain unorganised, fragmented, and mostly run by small players with local presence.