India has become a land of business opportunities and is gaining recognition globally. Due to rapid urbanisation, rising household income, and the emergence of nuclear families, the growth in the real estate sector including the residential, commercial and retail segments, has escalated rapidly. Real estate in India is the second largest employer after agriculture and is slated to grow at 30% over the next decade. The Indian real estate market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 % to the country’s Gross Domestic Product (GDP).
The growth in the real estate
In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2%.The real estate sector mainly depends on the growth of the corporate sector and the demand for office space as well as urban and semi-urban accommodation. The real estate sector maily consists of housing, retail, hospitality, and commercial properties. In April-June 2016, India’s office space absorption grew 46% year-on-year to over 10.2 million square feet, primarily led by Delhi National Capital Region (NCR) and Bangalore, which accounted for almost 50% of the total space take-up. On the supply front, over 7 million square feet of fresh office space was added during April-June 2016, led by Hyderabad and Mumbai, accounting for more than 65% of the total supply of fresh office space across leading Indian cities.
Dr. Samantak Das- Chief Economist & National Director- Research Knight Frank India said, “Crystal gazing of the real estate sector is very difficult. The impact of demonetisation was very negative on the residential sector. There was a notional revenue loss of `22,600 crore to the real estate industry, though for a short-term period due to demonetisation. There has been a 45% decrease in sale in the last three months of 2016. But if we look at medium and long-term impacts, the real estate industry is expected to have a positive growth. If RERA becomes a reality by 2017, then it will have an extremely positive impact on the real estate sector. It will bring a lot of transparency as banks will be interested to lend money at a competitive rate.”
Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun. Mumbai is the best city in India for commercial real estate investment, with returns of 12-19% likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR).
Retail, hospitality and commercial real estate are growing significantly, providing the much needed infrastructure for India’s growing needs. Private Equity (PE) investments by domestic and international investors in the Indian realty market declined 30% year-on-year to $ 2.5 billion across 48 deals during January-September 2016.
The nation has shot to the top of the list of preferred destinations for realestate investment in the eyes of major institutional investors. According to Thomson Reuters, real estate is the fastest-growing sector, set for growth of 7.0% next year after this year’s projected growth of 7.2%. This is ahead of China’s 6.7% growth rate in 2016, expected to further slacken to 6.3% next year.
The Budget 2017 proposed several positive measures to strengthen the structure of the Indian real estate sector. The facilitation of capital gains taxation norms has triggered a wave of happiness for realtors and property buyers alike. The tax period for capital gains has been reduced to two years from three years. This means that lesser capital gains tax will be in the offing for those intending to sell their property after a span of two years of purchase, as against three years previously. Also the nominal tax on ready but unsold inventory is to be charged after one year. This means that the person holding the land in a given real estate project will have to pay ‘tax on gains’ once the entire project is completed and not before.
To stimulate the rural housing sector in India, `230 billion ($3.4 billion) has been allocated under the Gramin Pradhan Mantri Awas Yojana (GPMAY). In line with their aim to promote affordable housing not only in cities but also in rural areas, the government intends to complete 10 million homes by 2019. Buyers of affordable housing got a boost with the announcement of interest subvention of 4% and 3% on loans up to `0.9 million ($13, 318) and `1.2 million ($17, 758) respectively. The proposed deduction of the income tax rate to 5% for taxpayers having income less than `0.5 million per annum ($7,400 million) will increase the disposable income of the common man which will, in turn, raise spending power and increase investment in the affordable segment.
In August 2015, the Union Cabinet approved 100 smart city projects in India. The government has also raised FDI limits for townships and settlements development projects to 100%. Real estate projects within the Special Economic Zone (SEZ) are also permitted 100% FDI. In Union Budget 2015-16, the government allocated $3.72 billion for housing and urban development. The government has also released draft guidelines for investments by Real Estate Investment Trusts (REITs) in the non-residential segment.
The government has brought into force the Real Estate (Regulation and Development) Act, on May 01, 2016, which is aimed at making necessary operational rules and creating an institutional infrastructure for protecting the interests of consumers and promoting growth of the real estate sector in India. The Securities and Exchange Board of India (SEBI) has allowed Foreign Portfolio Investors (FPI) to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III alternative investment funds (AIFs), and also permitted them to acquire corporate bonds under default. Prime Minister Narendra Modi approved the launch of Housing for All by 2022 programme. Under the Sardar Patel Urban Housing Mission, 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy.
According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of $24.19 billion in the period April 2000-March 2016. Fosun International Limited, a Chinese international conglomerate and investment company, plans to enter the Indian real estate market by investing $1 billion through real estate private equity platform. Quikr, an online classifieds platform, has acquired real estate portal Commonfloor.com for $200 million in a stock-cum-cash deal.
Goldman Sachs bought shares worth `255 crore ($38.02 million) in Vatika Hotels Private Limited, a company owned by real estate and hospitality firm Vatika Group. Brookfield Asset Management, the Toronto-based investment behemoth with more than $200 billion in assets, has entered Mumbai with a major purchase. It has spent $1 billion for 4.5 million square feet of commercial space in a city suburb. That is the largest commercial purchase ever made in Mumbai.
“With the government announcing to focus on affordable housing, banks will be much more interested to lend money to these projects. Affordable housing has been given infrastructure status and this is likely to attract institutional funding at competitive rates. We will now see change in the residential market. Developers will get more funding from banks at a competitive rate and the profits will not be taxed. With the GST becoming a reality, the overall economic growth will be robust. The real estate sector in India by the end of this year will see a good traction in terms of sales value. It will see a robust growth,” added Samantak Das.
A major challenge faced by real estate development firms is that national banks in India consider real estate investments a high-risk asset. Also, several restrictions imposed by the central bank have limited the exposure of banks to the sector. There is no single source of finance that is able to the entire lifecycle of a project. Alternative sources of finance are limited and expensive, leading to higher costs of properties. This is typically passed on to consumers, who usually take the double hit of high home loan rates and increasing capital values, resulting in subdued demand in the sector.
The timely execution of projects and building a portfolio of quality assets will be a major factor in attracting investors to the sector and bringing down lending costs. Banks need to ensure that the realty sector does not bear the brunt of being a high-risk one. Lending institutions and development firms should work together with the government and ensure that the industry is not devoid of its most basic need to grow, which is finance.