CII Conclave on Real Estate Demands Volume Based Business

At the CII Conclave on Real Estate, Most residential participants were from Mumbai but some large core asset developers from Bangalore and Noida also participated in commercial discussions. Key takeaways were,

Construction activity in India has increased over 2.5X since 2009 to US$240 bn. The ratio of construction which was nearly 50:50 between residential and commercial (offices, malls, hotels) is now skewed towards residential (around 86%). This, along with higher supply of high ticket projects are contributing to the current slowdown.

Residential: There is a clear shift towards this sector by organized developers across markets. While demand drivers remain strong, too many developers are focusing on premium projects while demand is at the lower end. Despite general perception, there is little ready-to-move-in inventory available across key metros. But going forward, we believe there will be more inventories in the ready-to-move-in projects for sale, as (a) supply increases, (b) size of projects are increasing and (c) projects available are much dearer than a decade back.

Government policies: There is no change or improvement in policies at the local level unlike announcements made by the central government. Announcements on REITs, ‘Housing for All’ did not move to the implementation stage in the past year. Some office developers believe the first REIT could come in the next 12 months, but land and taxes remain the biggest hurdle for private participation in ‘Housing for All’.

Affordable housing: There is a disconnect between central and state governments on affordable housing, as land is a state subject. 34% taxes on land and construction are unlikely to lure private developers to affordable housing. We have already pointed this out in our past notes. We continue to believe that giving higher FAR / FSI for projects and making EWS / LIG unit construction compulsory should be the major policy decision to be taken.

Most participants believe larger, organized developers will perform well as smaller developers struggle. We hear such discussions usually during down cycles. As real estate is a low entry barrier business new participants enter the market near the peak. Eight of 10 developers present in the market since the ‘80s continue to operate, and have increased their scale of operations.