Mumbai: The Union Budget 2015 may have disappointed most stakeholders in the real estate sector as the finance minister did not announce any measure to benefit either demand or supply in the sector. Moreover, the proposed increase in service tax will also affect the market. The only positive thing that came out of the budget for real estate was the tax clarification on real estate investment trusts (REITs). But market participants remain hopeful and have a positive outlook for the year.
In fact, the outlook is positive for the Asia-Pacific region as well. A CBRE South Asia Pvt. Ltd report stated: “Thanks to rapid urbanization, demographic growth, an expanding middle-class and increasingly wealthy households, economic growth in Asia-Pacific region will remain ahead of the world average in the coming year.” It will translate into stronger demand for high quality property—especially suburban retail malls and residential housing. Advisory firm Oxford Economics projects an economic growth rate of 4.4% for the region, versus 2.9% globally. CBRE estimates the overall investment turnover in Asia-Pacific to increase by 5% year-on-year to $118 billion in 2015.
In India, too, improved economic conditions and government measures to provide better infrastructure and housing are expected to have a positive effect. According to numbers released in February, gross domestic product (GDP) growth was 8.2% and 7.5% in the last two quarters of 2014. For the current financial year, the government expects GDP growth at 7.4% compared with 6.9% in the previous fiscal year. “Government proposals to relax guidelines for foreign investment, implementation of REITs, and increased funding for affordable housing and infrastructure projects, these are all expected to offer the much needed impetus,” said the report. Apart from these, increasing demand for information technology and back-office space, emergence of new segments such as e-commerce, and special economic zones will also play a big role.
However, unavailability of funds at lower rates of interest continues to plague real estate developers in India. “...silver linings for 2015 are the likely commencement of REIT-led investments in India’s commercial real estate; new workplace strategies; and rising rents in supply-deficient core markets”, said the report. Any effect brought in by REITs on the real estate market will, however, take a long time to materialize. Anuj Puri, chairman and country head, JLL India, said, “REITs will take at least 3-4 years to become an influencing instrument in the Indian real estate sector. However, it will definitely gain popularity among developers and investors over mid- to long-term.” Once REITs come into existence, commercial real estate developers—particularly large and listed names—will get access to cheaper funding. Retail investors, too, may benefit. “It will provide a new investment route to small investors who are looking for a way to become a part of the real estate growth,” said Puri.
While commercial real estate is expecting to see much action, residential housing may lag. Any benefit coming from introduction of REITs is likely to remain confined to commercial real estate. While developers in the residential segment may not see REIT funds coming their way, other factors may play out in their favour. “The housing market is likely to see a shift from luxury towards affordable housing projects, with affordable price points hopefully leading to higher absorption levels. Developer emphasis on clearing inventory levels and meeting construction deadlines is seen as an encouraging step for the segment,” said the report.
Lower interest rates on home loans is one such factor that homebuyers as well as developers are waiting for. While the Reserve Bank of India reduced repo rates by 25 basis points in January and March each, expectation is high that it may go for a further rate cut.
If that happens, and lending institution pass on the benefit to home loans, potential homebuyers who have been sitting on the fence are likely to take a buy decision.