Major factors that impact Real Estate in India
Major factors that hit Real Estate sector
1. Demonetisation- shook up the older ways of working (Cash transactions), moderate taxation and more tax payers and increased compliance. Prior to 2016, there was element of Cash of 40-60% of value which used to propel real estate boom as Property was considered as Safe Investment to hide the cash earned through fraudulent means like Corruption, money laundering, black money, illegal money etc. Post 2017, Cash element has substantially reduced particularly in posh areas in metro cities has State Government has hiked Circle rate or Reconer rate. At many places, Circle rate is higher than fair market value creating problem for Buyers and sellers due to stringent income tax provisions like 50C etc.
2. Frequent Raids by Income Tax & ED (Enforcement Directorate) for many old & controversial cases and also used to target political opponents & those criticising government policies. Many of these people are Real Estate Developers or Investors or political backers.
3. Speculative investors are making a beeline out of real estate as an investment category due to problem of virtually no “Cash” and falling rental yields.
4. Benami Transactions (Prohibition) Act, causing scare amongst many HNIs as large property transactions attract attention of Enforcement Director for possible case of money laundering or property being sold by Benamidar (who may not be able to substantiate his purchase from his known sources of income) as most of them may be staying in chawals or far flung localities and they may not have filed their Income Tax returns for years.
5. The Insolvency and Bankruptcy Act, led to huge delay in finality of many cases resulting in freeze in many Real Estate properties, impacting supply. Many lenders to these projects have discovered that loan was far in excess of current market value and Builders have abandoned the project.
6. RERA-The Real Estate (Regulation and Development) Act, closing many loopholes so far used by many shady Builders resulting in stalling of many projects.
7. GST-Problematic implementation of GST has resulted from confused implementation of GST on Real Estate transactions with a result many Builders suffered losses in terms of huge tax liability and Input tax credit being denied.
8. Funding Issues post Credit Squeeze due to IL&FS episode. Most Banks and NBFCs have stopped lending money on Real Estate projects due to NPA issues and strict guidelines from RBI.
9. Interest Rate volatility: In falling interest rate market, many builders are stuck with high cost borrowings making project un-affordable
10. Politics and political uncertainty
11. Crumbling Infrastructure-Water, Roads, Traffic, Sewage, Waste Disposal, Environment,
12. Generational change -older structures to be less desirable.
13. Natural disasters and climate change such as floods, earthquakes impacting stability
14. Overcrowded real estate sector leading to customer apathy
15. Long delays in judiciary resulting in many properties blocked in prolonged litigation
16. Wrong & delayed policy decision making process at Government levels (Central Government-Environment clearances, State-Reservation & De-reservation, FSI, Premium, and Local Municipal Authorities-Delay in project approvals and CC/OC.
17. Anarchic land laws blocking release of more land for development creating supply constraints leading to artificially high property prices.
18. Very poor enforcement of Contract obligations leading to many foreign parties staying away from investing in large projects.
19. Non-Performing Asset mess in Real Estate sector constraining availability of finances from Banks & NBFCs which results in delay in execution of projects and customers not getting possession for very long time.
20. Corruption & poor enforcement of law with involvement of Politicians, underworld and bureaucracy
21. High transaction costs like very high (1.00%) Registration Costs, very high stamp duty levied by state government and sometimes multiple times on the same transactions.
22. Spike in cost of building materials like Steel, Cement, bricks, furnishings etc. resulting project cost going up and making project unviable.
Important mega trends in Real Estate
1. Consolidation of small Developers (Weaker and Family Owned)) to large Developers (Strong & Corporatized), Developers will need to revamp their business models, Cash Elements reduced or absent.
2. Selling after OC, increasing customer confidence but it adversely impacts cash flow of Builders.
3. Large Developers are increasing their project size and are ignoring small projects.
4. Branding, marketing, use of Celebrity endorsement is making real estate market like FMCG
5. Faster, Quicker construction with use of Technology, Machines and Greenery
6. Specialisation amongst Real Estate Developers, You can`t be everywhere, choose your market. Market Segments-Commercial, Luxurious, Middle Income, Affordable, Redevelopment, Slum Rehabilitation, Metro cities, Tier 2/3 cities etc.
7. Thinking out of Box- Rental Housing, Retirement Homes, Student Housing, Working Women accommodation, Airbnb, Studio apartment etc.
8. Co-working spaces are popping up across Indian metros as well as Tier-II cities, providing start-ups with flexible working options at affordable rents.
9. Entry of Organised Developers, many large corporate houses are entering market, many of them are listed in SE bringing transparency & governance.
10. REITs- Real Estate Investment Trusts will have an important and long-term impact on Retirement Funds getting deployed in large property rental markets requiring long duration.
11. Short Term Rental Investing-few months or few weeks for project related needs.
12. Government`s push for Affordable Housing, 100% deduction in profits for affordable housing construction, Service tax exemption on construction of affordable housing, Interest subsidy for first-time home buyers,
13. Innovative structuring & Schemes like 20:80, 5:95, REITS, Reverse Mortgage, New Source of Funding (not done by traditional banking channels), Assured Return (say 21%), Funding for costly approval process, Land etc.
14. FDI in Real Estate, much more equity gets infused into the sector by the larger PE investors in large projects at prime location
15. Development outside India like Dubai, Singapore, London etc. giving more options to investors and comparison with domestic products.
16. Impact of Technology-Block Chain, Artificial Intelligence, Robotics, Smart Cities etc.
17. E-commerce and logistics-Technology is continuing to disrupt, and how we are buying things change, there is concern of retail sector volatility, including the rise of e-commerce and logistics that support warehousing, Cold storage and delivery of goods
18. Disruptive technology, it’s an evolution,- increased demand for connectivity, smart homes fully integrated with 5G technology, use of Robots and ready factory made slabs in place on site slabs etc.
19. Reactiveness from Government-State, Central & local as regards anything in Real Estate as it is main source of corruption opportunities for personal gain by decision makers & politicians resulting in sudden hike in approval costs, shooting up costs with associated delays. In old time, Builders used to face problem from organised crime syndicate and they used to get threatening calls for ransom from Dubai.
20. Organised Broking and use of technology. In good days many brokers used to get block bookings syndicated with large Investors, however with use of AI & Social media, direct & focused marketing opened up new vistas for sale.
21. Generational change and demographics-There are 4 new groups influencing real estate are Millennial (born in 21st Century), Baby Boomers (born between 1946 and 1964.), Gen X (born between 1965 and 1979/80 and is currently between 41-56 years old) and Gen Y (born between 1981 and 1994/6. They are currently between 25 and 40 years old) and each of them look at Real Estate in a different way. Recently we have seen the Rise of 18 Hour Cities (a mid-size city with attractive amenities, higher-than-average population growth, and a lower cost of living and cost of doing business than the biggest urban areas) as many people are looking to relocate here due WFH or Work from Remote areas concept with use of technology & communication technologies.
22. Migration of population from Rural to urban, City to Suburban, skilled and unskilled labor pool demand & movement is resulting in disruption in Real Estate market in India.
23. Energy-24/7 availability putting power cuts as past, more & more roads, express ways, Fly overs, bye passes is providing opportunities to people to move away from costly center of metro cities to suburbs, outskirts areas & nearby cities.
24. RERA- will enforce hitherto unprecedented transparency and accountability requirements for developers into the system, and do a lot to increase consumer confidence. REIT listing- prominent private equity funds such as Blackstone will likely be the first mover
25. Equity investment - or the lack of it - will play a deciding role. Thus Real Estate Developer having tied up with PE or large fund houses provides assurance to buyers of timely delivery & governance standards (so far missing from old generation Builders).
26. Change in arbitration norms for construction companies as any disputes can be resolved very fast instead of getting stuck in Courts for decades.
27. Millennials do not want to buy a “Home” or not in hurry to buy leading to drop in demand
28. Formalisation of Rental arrangements for migrant labourers in metro cities. This will eliminate slums in time to come improving living condition for poor.
29. Huge demand being created in Hospitality sector (Hospitals & Hotels) due to awareness on health and families taking frequent vacation during holiday seasons and long weekends and impact of Corona pandemic.
30. Introduction of model property rental code would bring transparency in rental market in cities as Landlords were reluctant to give their property on rent to small people and used to prefer large companies only. This will open up avenues for Property rental companies who could be funded by REITs, similar to markets in USA & Singapore.
Impact of Corona virus on the Indian real estate sector
From halted construction activities to a mass exodus of migrant workers, the years 2020 & 2021 were the watershed years in the history of economic downturns. From negligible home buyer inquiries and site visits to incessant curbs on the construction activities, the crisis caught the real estate sector unawares. After a series of lockdowns and restrictions, the country started to get back on its feet by September 2020 and we have second wave from March 2021 with a possibility of third wave going forward.
1. Substantial lower demand in retail space as buying has shifted to online
2. Commercial Office space demand has reduced and many companies have reduced their office area due to prolonged Work from Home and/or Work from anywhere.
3. Demand for Small houses are increasing due to various incentives given by Government and Banks
4. Due to WFH and study from home, many HNIs are looking at larger size homes as they require extra room/s for office & study.
5. Many people are moving their residences from closer to Central Business districts to remote suburbs, which are cheaper
6. Youngsters & Millennials, who were earlier opting for rented houses are now looking to buy houses as many housing societies have put severe restrictions on residents staying in rented apartments out of fear. Many Societies did not permit odd hour entries or entry of maid servants or cooks.
7. Investors in Real Estate Sector have exited due to uncertainties prevailing in real estate sector
8. Many people are contemplating moving out from Metro cities to smaller towns as their job or work profile does not require regular attendance to office and they can remain connected through technologies and attend meeting on a digital platform
Conclusions: Real estate investing can be a rewarding long-term investment. Despite challenging market conditions, there are real estate investment opportunities in residential properties, commercial properties, industrial real estate as well as vacant land that you can consider in 2021 as we look to see back of Pandemic with mass vaccination.