Market slowing down, managing repayments and construction the key

The Real Estate market has slowed after showing steady trends for two years on volumes. In Bangalore too, local issues drove negative sentiment, but organized developers held on to their volumes. Gurgaon remains an aberration for large developers as well - sales remain weak. We expect launches to drop further as developers look to sell from ongoing projects. We don’t expect new launches form listed developers in Mumbai and Gurgaon over next two-three quarters, while Bangalore might report launches in certain pockets.

Any potential fall in pricing is unlikely to boost volumes as sales usually don’t pick up in a falling price environment. But we don’t expect a major correction in pricing in the western and southern metros as prices have remained stagnant for the past three years and affordability has been improving in certain markets. Transaction prices are usually 80-85% of the quoted prices for the past three years and could see some discounts / offers.

Slower volumes worry us more than drop in pricing, as lower volumes will reflect in lower collections resulting in slowing construction and servicing of liabilities. Market-wide volumes could correct over the next 2-3 quarters, by 10-30%. This will delay projects of several unorganized developers further, as availability of credit is limited to organized developers.

Real Estate Industry in India - Shift towards Transparency

Real estate industry is at a cusp and there is clear shift that is happening for positive in the long term.

Looking ahead, there is a tectonic change that is going to happen to the industry, for which we feel that the next three to five years are going to be a different scenario for the real estate space in India. The Real Estate (Regulation and Development) Act, 2016 (RERA) coming into place, is a historic event in itself, an era whereby the industry is going to get institutionalized, which will make it consumer friendly along with enhanced transparency. The Benami Transactions (Prohibition) Amendment Act (PBPT) will ensure that undeclared money which was chasing the real estate industry will be impacted. Third is the Land Act
which is currently under discussion, and is long drawn, but when it happens and whatever time frame it takes, will eventually give a huge supply to the industry.

With consumers becoming more technology savvy, the online real estate platforms are pushing the industry
towards a consumer‐driven market. In the downward interest rate regime, we have already seen rates coming down from 11% to 9 % and the anticipation of another percentage drop seems perfectly plausible.

India can’t be much different from any other country. REITs as an assets class is the requirement of specific set of investors for long term; these investors look for a mix of both ‐ regular returns and a reasonable level of capital appreciation. Majority of the foreign capital in last 3 years has been pumped into the commercial real estate space to lock Grade‐A space.

All markets move in cycles, and the real estate market is no exception, where we have already witnessed the down turn. Post 2008 and more so post 2010, we have seen a general uptick for the industry followed by another bout of sales slowdown, untimely deliverables. A correction phase began almost three years ago, in the residential space, while the market almost bottomed out in the commercial space.

Real estate being a cyclical industry, we should consider investing with a long term horizon of 5‐6 years, and going forward we see better returns than other asset class. We feel this is the correct time to be in the sector, when you have all the regulations coming into place, with expected inflows of institutional capital in the sector, a low interest rate regime, backed by a robust and growing Indian economy.

Excerpts from Aditya Birla Real Estate Fund CEO M. Yadav

Real Estate Price Correction Inevitable for Industry Sustainability

The Indian real-estate demand will fall meaningfully as lack of currency slows down the black economy: NIPFP estimates black money is 40% of real-estate demand. Real-estate as the favoured repository of black wealth is the reason India’s rental yields are the lowest among major economies despite high interest rates.

Given its large contribution to GDP globally, falling real-estate prices have either accompanied or driven a recession. India may also see a sharp slowdown, as first slowing transactions and then falling prices affect construction. Falling prices would thus affect discretionary consumption as well as borrower health, with its own downstream implications.

Like many other effects of demonetisation, falling real-estate prices for India can help the economy over two to three years. India needs more housing stock, and its construction can boost output and create jobs: this was stalled by high clearing prices. However, for now we do not expect investors to look through the impending weakness, particularly as the slowdown in demand could be protracted by a buyers' strike. Eventually when prices have corrected by, say, 20% and mortgage rates have fallen by, say 2 percent points (implying EMIs fall by ~15%), the cost of ownership could actually be down by nearly ~35%.