Declining new investment to derail real estate growth
High inflation, large budget deficit, slow pace of regulatory reforms, and no investment are weighing down on the business sentiments of India
India has been experiencing major investment only in Tier-1 cities, and for the last 5 years Tier-2 cities too have seen investments. However, there is rarely any new investment in recent times. According to ASSOCHAM, new investment into the real estate sector has plunged 55 per cent during 2012-13, attracting just Rs. 42,000 crore as against Rs. 92,000 crore in 2011-12.
Demand and supply gap“There is huge gap between demand and supply,” said Sharvan Kumar Govil, CEO, RFA (Real Estate Specialist & Financial Advisor), Rudrabhishek Enterprises. “As on date, major delivered projects have remained vacant and major properties are unsold. People, who have bought real estate assets, have started trading in resale market, creating a virtual demand in major cities across India. Inventory overhang, virtual investor-driven market, fall in sales, higher construction cost, slow pace in construction, and lack of affordable housing have led to sharp decline in new investments. Also, poor political governance has led to lack of industrialisation. Energy and infrastructure are major causes for drop in real estate investment.”
According to Rohit Poddar, Managing Director, Poddar Developers Ltd., “Real estate as an asset class is a derived demand. The GDP has seen a sharp decline from 8-9 per cent to 5 per cent. The demand for real estate has also declined; in fact, it has been sluggish for almost 2 years.
”Mr Poddar added, “There are unsold inventories across all the asset classes in real estate, causing downward price pressures. In fact, the timeline for approval in most major markets has become much worse.” There is a liquidity crunch with most developers. To alleviate this financial situation, developers can either go to banks or raise private equity money.
Shakthi Vairavan, CEO, MMRF Realty and Infrastructure, said, “A reason for the decrease investment can be attributed to the overheated economy with high land prices and very high inflation in the country. As a result, the RBI has reduced its lending exposure to the real estate industry. And due to inflation, there is an escalation in interest rates which has affected customers from investing currently.”
Surge in Gujarat and KeralaStates like Gujarat and Kerala have seen a huge surge. Gujarat has seen an increase of over 700 per cent in investments, and similarly Kerala has seen over 500 per cent in investments when most other states are falling behind. Mr Vairavan explained, “The primary reason for growth in Gujarat can be attributed to its economy and good infrastructure if not the best in the country. This infrastructure will be further boosted by the proposed Delhi Mumbai Industrial Corridor (DMIC) which will cover over 60 per cent of Gujarat.”
While the expansion will bring in more liquidity within the system, new developments under the expansion will also generate employment for millions. – Sachin Sandhir, MD, RICS South Asia
The privatisation of Kochi International airport as well as upgrade of port have brought wonders to the real estate industry in Kerala which is against privatisation. Another reason for the growth in Kerala is its huge population who want to invest their hard earnings in this sector as the returns are very high in real estate. Mr Vairavan added, “Due to the exposure to foreign cities, they have become more conscious of living standards, and the same have been offered by the builders in Kerala at a much affordable price.”
Mr Poddar said, “First, the GDP growth in Gujarat has been higher than several other states. Second, there is political stability; the business environment is predictable along with fast execution for approvals for projects.” There has been general euphoria in Gujarat.
The government should work hard to remedy its recent image as “harassing” overseas FDI investors as we need FDI money in general and also in this sector
– Rohit Poddar, MD, Poddar Developers
According to Mr Govil, the reasons behind the growth of Kerala and Gujarat are better industrial policy and concentration toward local infrastructure, energy and creating SEZs. Major real estate assets in these states were target only for end users in middle class and upper-middle class. Both the states were concentrating on development of energy, infrastructure, industrial policy, etc.
Actions to improve situationIn the past couple of years, the real estate industry has had marginal returns and seen cash crunches. Mr Vairavan reasoned, “A major reason for this is the cash crunch partially created by the RBI by raising norms for lending to the real estate industry. However, as the inflation has been cooling, the rates have started to come down which should be beneficial to the real estate sector. This will help the developers borrow at a lower rate of interest.”
A reason for the decrease investment can be attributed to the overheated economy with high land prices and very high inflation in the country.
– Shakthi Vairavan, CEO, MMRF Realty and Infrastructure
Mr Poddar believes confidence has to be instilled in the customers. He added, “It is very important to have the regulator in place working efficiently and effectively and not another ‘approval body’ that causes additional pain in the already cumbersome approval cycle.”
He suggested that approval cycle should be made into a single window. Certain sectors of real estate like affordable housing should be declared as having infrastructure status. The government should work hard to remedy its recent image as “harassing” overseas FDI investors as we need FDI money in general and also in this sector.
In order to improve the situation, the government need to increase construction activities, reduce repo and inflation rate, build investor confidence by creating energy, higher affordable housing supply, and real estate regulatory body.
Dealing liquidity crunch“The FDI policies need to be relaxed to attract investment in real estate sector,” said Mr Vairavan. “Foreign investment is not only required to meet the high capital requirement of Indian industry but also enhance the competitiveness of Indian companies through access to global designs, better practices and technology. Government’s initiate to open retail is a welcome move to the real estate sector.”
“Problems such as lower sales, cash flow crunch, expensive loans, high cost of labour, and inflation are putting builders into a situation where they are unable to meet the delivery timelines,” Sachin Sandhir, MD, RICS South Asia, said cautiously. “In such a scenario, developers should focus on execution and delivery of ongoing and pending projects. This will not only bring more revenue to otherwise-cash starved firms but will also ensure timely possession to millions of homebuyers.”
However, Mr Govil believes that the procedures for dealing with the liquidity crunch for project developers and buyers are reduction in cost of capital by reducing interest rates, subsidy for developers and buyers catering to affordable housing, policies to attract foreign investors into real estate, and ethics in real estate related transactions.
Impact of FDI in real estate sectorThe decision to allow FDI in retail is good news for the real estate industry which is finding it difficult to sell its inventory in these tough times. Mr Vairavan explained, “There will be a big increase in commercial space requirement by foreign companies like IKEA, Walmart etc. This in turn will create a huge employment opportunity, and these employees will also invest in the residential market.”
Currently, the demand for commercial spaces is less compared to residential spaces. FDI will reverse the fortune for demand in commercial spaces which will also have a positive effect on residential spaces.Given India’s CAD, FDI is important across all sectors of the economy. As there is liquidity crunch in the real estate sector, it is all the more important to have policies in place that enable FDI money to enter this sector and have a harmonious experience, enabling local developers to have another source of fund, especially the ones that take a longer terms than nationised banks. According to Mr Poddar, “Other than being an important financial tool, FDI money also brings international experience in executing medium- and large-scale projects to high standards, thereby enriching the Indian market.”
“The opening up of the real estate sector for FDI in 2005 resulted in transformation of the investment sentiment in the country,” Mr Sandhir said excitedly. “Post recession, domestic as well as international domestic funds have exited projects giving healthy returns to investors. Most of them are in their third or fourth investment cycle. They would continue to strengthen the sector by providing the necessary equity to developing firms that are now facing problems such as cash flow crunch, high cost of labour, and expensive loans.
In the recent past, relaxation in FDI policies in multibrand retail will open up avenues for foreign retailers who are looking to expand their presence in the country. It’ll also help developers, who would want to be a part of this growth. “While the expansion will bring in more liquidity within the system, new developments under the expansion will also generate employment for millions.” Mr Sandhir concluded with hope.