Sanjay Dutt, Exec MD,South Asia,Cushman & Wakefield
With stable pro-business government at the Centre and improving macro-economic conditions, there has definitely been an uptick in aggressive acquisitions by foreign funds in Indian real estate assets during the last year, which is an indicator of renewed interest in the sector, according to Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield.
Excerpts of his Interview with Sandeep Pattnaik of Gharabari.com
Q.1. Cushman & Wakefield is a Real Estate Consultant par excellence. How do you see the Indian realty market among other BRICS countries?
Ans. With stable pro-business government at the Centre and improving macro-economic conditions, we believe that the Indian realty market is poised for high growth in the future periods. As per Fitch report, India is the only BRIC country, where growth will accelerate, to 8% in FY16 and 8.3% in FY17, based on the revised data series. With high growth expectations, there has definitely been an uptick in aggressive acquisitions by foreign funds in Indian real estate assets during the last year, which is an indicator of renewed interest in the sector. With increasing capital requirements and in anticipation of bettering macro-economic conditions, global funds are likely to increase their investments in the next few years. We also anticipate more partnerships and joint ventures (JVs) among developers, landowners and investors.
Besides, we are hoping for some tangible reforms in the Indian real estate sector. Firstly, we expect the Real Estate Investment Trusts (REITs) to be a significant game-changer that will boost investments in the sector. Although REITs have received the nod from the government, it would take a while for them to get listed. Secondly, the proposed Real Estate Bill is expected to provide a much-needed respite to the realty sector by bringing in more transparency in this fragmented space that would further attract investments.
Q.2. What is your observation on the proposed Real Estate (Regulation and Development) Bill, which has already invited criticism from quarters?
Ans. If the proposed Real Estate Bill comes through, it will bring in transparency and regulation into the sector as it attempts to weed out illegal practices and boost investor confidence. We believe that the Bill may phenomenally change the way in which funding of housing development has been approached for a very long time. Stringent regulations will ensure the launch of only those projects that are well funded. Apart from protecting end-user/homebuyers’ interests and bringing in credibility to the developer and broker communities, we also see this working positively in terms of attracting investments from domestic and international funds that have been skeptical towards investing in Indian real estate, largely due to lack of a regulator to enforce accountability and transparent practices.
The flipside of the amended Bill comes in a provision that makes it mandatory for developers to put aside 50% of the money collected from buyers during pre-sale of homes and use that only for funding the construction of the project. This provision will lead to higher project costs for developers at a time when a chunk of the developers are reeling under high debt. As a result, developers may have to seek debt or equity routes to fund their projects, which may not always be successful and financially feasible.
Q. 3. Residential property prices see no signs of receding across metros. What is your outlook on that?
Ans. Capital values of residential projects have appreciated between 5-13 % in various submarkets of the top eight cities, on a year-on-year basis. The rise in prices has however, tapered from the previous years and there is a renewed sense of urgency amongst the developers to clear unsold inventory at competitive rates.
Subdued housing demand conditions over the years led to higher focus on mid segment offerings which attract maximum home buyers. Currently, there is a mismatch in the demand-supply dynamics due to which in some micro-markets we are seeing a glut. Consequently, though quoted capital values do not reflect any corrections, actual transactions are either taking place at lower rates depending on the payment terms or developers are offering substantial discounts in the form of free parking, no registration charges, no stamp duty, freebies such as interior fit-outs, flexibility in payment terms through schemes such as 20:80, etc.
We believe that the subdued transaction activity may persist for a few more quarters until specific demand boosters such as substantial decrease in interest rates on mortgages, increase in tax exemptions, etc. are introduced. Moreover, we also expect that developers will look at ways and means of decreasing the overall ticket sizes of apartments to make them more affordable.
Q.4. Union Budget 2015 has given a REITs a boost, and a lot of players are now keen to be listed in exchanges. Then how it will impact the commercial real estate sector in the Country?
Ans. REITs will provide a new source of funds to Indian developers that are saddled with high interest rates and debt. However, REITs can only be a game-changer in the Indian real estate sector if there is more clarity in terms of the taxation. The industry is concerned about capital gains tax, stamp duty on transfer of assets, dividend distribution tax (DDT) and minimum alternate tax (MAT) in terms of REITs. Once these issues are clarified and REITs begin listing, we expect a phenomenal growth in the Indian real estate sector in terms of both quality developments and massive fund infusions.
Q. 5. Industry is optimistic about rate cut from RBI by another 50-75 bps during the current fiscal year 2015-16. What is your observation? Still there is much spread lies in Interest rates in India compared to other Asian countries, the reason why destinations like Singapore, China is more attractive for investors to invest. What is your view?
Ans. We believe that the RBI has taken a practical approach and has cut rates twice this year, by a total of 50 basis points. This move has instilled hope and confidence in the real estate industry that recovery in housing sales may be just around the corner. Given the current market situation, this would help to revive buyers’ sentiments and improve residential sales across the country. Housing developers have been anxiously hoping for interest rate cuts to spur buyers into making purchase decisions. The move will build the confidence of developers and buyers alike that there are more rate cuts in the offing, provided of course, that the inflation remains under control.
Major banks can already be seen passing on some share of the lower lending rates to their customers. If interest rates are made lower, it will be a morale-booster for the sector which is otherwise seeing subdued activity.
Q. 6. C&W is also into Investment Banking biz. What is the prospect, given capital market witnessing a bull run? How the scenario is different from the earlier bull run happened during the 2004-07 period?
Ans. Investments are certainly looking up as compared to the past few years. With renewed global investor interest, many developers that were earlier struggling to raise capital have been able to do so in the recent past. However, the fund deployment pattern seems very different from 2004-07 period. This time the funds are adopting a very cautious approach and investing only in core, stable and rent-yielding assets being developed by developers with a proven track record.