Time for a realty check

Year in review

Although the realty market witnessed a slowdown in India, Bangalore was ranked third, being a popular property hotspot, trailing behind Mumbai and Delhi. As the financial crunch deepened in the West, many intending international builders put their entry into India or expansion plans on hold. The downturn had a significant impact on the IT sector too, adversely affecting the high-end residential segment.

Allowing 100 per cent FDI in realty projects through the automatic route, bringing down the area for developing integrated townships from 100 acres to 25 acres, allowing for full repatriation of original investment after three years and the Urban Land Ceiling Act 1976 being increasingly repealed by larger number of states were few of the prominent happenings in  2009.

The year also witnessed the entry of Real Estate Investment Trusts (REITs) in India, which cater to capital requirements of real estate sector and enable real estate companies with easy access to funds. The other highlight included, allowing minimum capital investment of $10 mn and $5 mn to wholly owned subsidiaries and joint ventures respectively.

Shift to affordable housing
The ability to weather a major international crisis relatively unscathed, augurs well for Indian realty. Domestic demand stepped up even as there was a slowdown in multinational spends. “The focus shifted from high-end offerings to affordable housing (housing under Rs 40 lakh), not only for property seekers but developers too. They realised that real demand lies in this particular segment and it makes sense to concentrate on the same,” explains Aditya Verma, VP & Business Head of Makaan.com.

Given the massive housing shortage in India, there is an immense opportunity for real estate players to plan affordable and mass housing projects next year. But, the demand-supply gap in the affordable housing sector is quite high. Banks have reduced their interest rates on quick loans and prices for steel and cement have gone down considerably for developers to launch these projects. Uday Dharmadhikari, CEO of Usha Breco Realty says, “Developers are changing focus to providing homes for the common man. Recent reports have stated that the affordable housing supply will reach 2.1 million units by 2011.”

Government intervention
One of the biggest advantages for the Indian realty market was the government showing signs to regularise the industry and infuse some credibility in the system.
“The proposed real estate regulation may cotain a lot of highly debatable
clauses but the intention behind it is appreciable,” says Samir Chopra, Director of RE/MAX India.

The government has introduced many progressive reform measures to unlock the potential of the real estate sector. The stimulus package announced by them coupled with the Reserve Bank’s move allowing banking institutions to pay special attention to the real estate sector has impacted is a good sign.

“I believe real estate developers had time for introspection and learned to be more cautious. In truth, the low that we experienced since 2008 did not last too long. Value engineering and balancing of costs were the positive outcomes. 2009 was good for many of us to take stock of how to handle a crisis in the industry. It also taught us that a dip in the cycle comes about once in 3- 4 years. Planning and monitoring was so relevant,” says Koshy Varghese, Managing Director, Value Designbuild Private Limited.

Samson Arthur, GM (India) – Quinn Group adds, “the government has introduced many progressive reform measures to unlock potential of real estate sector. The stimulus package announced by government coupled with Reserve Bank of India’s move allowing banks to provide special treatment to real estate sector has impacted Indian real estate sector in a positive way.” 

Slump in market
Owing to the economic recession worldwide, the Indian commercial real estate market has seen a significant slump in demand during the past one year. The total absorption in 2009 till date has been estimated as approx 3 million sq ft, which is almost 50% lower than, what was recorded during the corresponding period in 2008.

The transactions during the last three quarters
have seen rental values in various micro markets drop considerably. For the builders segment, it was a disappointing year, with many projects being abandoned or delayed. “It is the customers who suffered as many projects were not completed on scheduled and builders were unable to compensate their clients in any form,” says Anil Rego, CEO and Founder of Right Horizons. The de-notification and stalling of several planned SEZs around the country has raised questions whether such developments are a viable investment option. 

“It remains to be seen whether SEZ development will take off once the economy is back on the growth path,” says Pranab Datta, Vice Chairman & MD of Knight Frank India Pvt Ltd.

Organising the industry
According to FICCI, India’s commercial and residential real estate is expected to grow at a rate of 30 per cent next year. According to Jitendra Jain, CEO & MD of Neev Group of Companies, 2010 will see the launch of many affordable housing projects.

He adds, “The rates of prime residential area will start picking up and commercial backlog will be absorbed in the latter-half of 2010 leading to launch of more commercial projects.”
“With a high projected growth rate of the Indian economy coupled with the development of infrastructure, investor confidence is relatively high.

Additionally, with price rationalisation taking place across property segments, the residential market is expected to lead the pack for the realty sector’s recovery by mid 2010,” opines Sachin Sandhir, Managing Director and Country Head of RICS India. As for Datta, passing of the Real Estate Regulation Bill is the need of the hour. “The Bill institutes a centralised regulation body in the sector as it will infuse efficiency and transparency into India’s real estate sector. The key components of the bill include the advocacy of a developer rating system and provision of micro-finance organisations.”

Looking ahead
Focus on quality of project execution – from design to vendor management including payments – should be closely monitored and conformed to avoid time and cost overruns. The coming months will see consolidation in an industry that is on a journey towards equilibrium price discovery, resulting in a win-win for both the developer and the end-user.

“Although, developers may not get the high margins that they were used to, we are positive that they can still make money through higher volumes and a faster cash cycle,” avers Ravinder Reddy, Director of Marketing Bharathi Cements.
And for those who delayed their real estate purchases in this year, 2010 maybe a good time to take the plunge.

“However, there will be moderation in real estate price growth.  Hence, one needs to be a little cautious about the interest cost since many people buy a house through bank funding.  Take a well informed and calculated decision as you invest in real estate this year,” advises Rego.

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