Mumbai: The year 2015 may well turn out to be that of turnaround for the sagging real estate sector with global investors showing renewed interest. Industry sources as well as bankers believe that the spike in foreign direct investment (FDI) in the real estate after the government relaxed regulations in October this year could change the overall scenario and help companies with huge debt.
The easing of interest rates expected next year is also likely to spur demand and help reduce the soaring inventories, both in residential as well as commercial segments. What's more, new rules for Real Estate Investment Trusts (REITs) are also expected to improve liquidity for developers by offloading their income yielding assets.
Deepak Parekh, chairman, HDFC Ltd, told dna, "The glut in the commercial property segment will continue but the residential property market may see an encouraging growth with the flat of Rs 45 to Rs 1 crore getting sold faster than they did this year with the economy expected to pick up. FDI in the sector will also bring in more capital."
The change in the FDI rules has already begun rewriting the script. For instance, the Singapore-based wealth fund GIC with over $100 billion of assets under management recently announced its plans to buy a controlling stake in Mumbai-based real estate firm Nirlon for around $200 million. Earlier this month, GIC had entered into a joint venture with Indian firm Vatika Group to develop two residential projects in Delhi's suburbs.
"GIC is confident of India's growth potential over the long term,"Loh Wai Keon, co-head Asia at GIC Real Estate, had said in a statement.
Under the new rules, the minimum built-up area for projects in which foreign investment is allowed will be reduced to 20,000 square metres from the earlier 50,000. For serviced plots, there is no minimum land requirement now compared to 10 hectares earlier, while the minimum capital investment by foreign companies has been cut from $5 million to $10 million. Under the earlier rules, the government allowed 100% FDI in real estate development but with strict riders, including a lock-in period of three years during which the investment cannot be repatriated.
Inventory build-up in the sector has been a major concern. According to Liases Foras Data, home sales in the top six cities saw a 25% fall in September 2014 quarter compared to the preceding quarter recording the lowest sales since 2009. The inventory level which has been a major concern also rose to 8,15,000 apartments from 7,65,000 apartments in the first quarter ended June 30 2014. Chennai and Bengaluru witnessed the maximum hit on home sales.
Some developers believe that prices may correct in 2015 for demand to pick up. Bharat Mody, president of Hubtown Ltd, said, "New FDI regulations will bring in additional capital which will help developers reduce their debt by getting equity partners. This will help clean up balance sheets and in rolling out new projects. The new year will also see location specific price corrections.
For example, if in a specific micro market say, Chembur in Mumbai's suburb, there are 15 to 20 ongoing projects, only 2-3 prime locations will be able to demand a good pricing. In other locations prices will have to made attractive for the units to be sold.
Anuj Puri, chairman and country head, JLL, said this inventory pile-up may ease with developers focusing on the affordable segment. Anuj said in a report, "In the second half of 2014, many large developers who in the recent past concentrated on the mid-to-high segment due to better margins were seen eager to play the volume game and entering into affordable-segment projects in the deeper suburbs. This heartening trend began the ground work on bridging the wedge between demand and supply in our major metropolitan cities. Since developers are sitting on close to 30 months of unsold inventory in the mid-to-high-end segment, we also saw an increase in cash flows because of the new focus."
Real estate funds floated by India Infoline, Motilal Oswal and HDFC, among others, have all raised money in the last six months but lack of deployable projects has been a concern. Quality transactions are not happening in the sector which is resulting in slow deployment.
A senior official from a leading corporate house which has also raised money from HNIs said," Even my company is sitting on a corpus without deployment. The next year, 2015, is a make or break year for us. If things do not turn for the better, many players will be forced to go out of business."
Some developers, however, find the demand for housing on the positive side, particularly in tier II and tier III cities. Brotin Banerjee, MD and CEO, Tata Housing Development Company, told dna, "The spurt in urbanisation has been driving the demand for housing in tier-I cities but a shift has also been witnessed towards tier II & tier-III cities like Pune, Nashik, Pantnagar, Rudrapur, Patna, Chandigarh, Ranchi, Jaipur, Indore, Baroda, Surat, Mangalore, Mysore, Coimbatore, Trichy and Bhubaneswar, amongst others."
"Relaxing FDI norms in the construction sector, providing easier and cheaper loans by granting low-cost housing infrastructure status, allowing Real Estate Investment Trusts (REITs) for commercial real estate. The reduction of excise on cement and steel has managed to offset the rising input costs," Brotin said.
But taxation and the corruption will continue to be a dampener even in 2015 unless the government reduces taxes in the budget.
Niranjan Hiranandani, head of Hiranandani group, told dna "FDI in real estate, incentives for affordable housing will give a big push to the sector. Taxation, particularly service tax on buildings under construction but excluding finished units (ready-for-occupation), is a ridiculous decision. The government is taxing the home-loan funded buyers at the lower end and not those buying apartments in one go – basically the poor is getting taxed not the rich. Service tax on under-construction building has to go because that's an anomaly. Secondly, after tobacco and liquor, housing is the most taxed industry in India as almost 33% of the cost of an affordable house goes into (direct or indirect) taxation."
Corruption for project sanctions eats into the cost of the project. So this needs to be curbed, say industry watchers.