(Anuj Puri, Chairman – ANAROCK Property Consultants)
As we embark on the final lap of this calendar year, it is appropriate to take a quick glimpse of what has happened in the Indian real estate sector during a highly tumultuous 2018. Given RBI’s alternatingly cautious and proactive stance towards managing the overall economy, it remains to be seen if 2018 will bring any further surprises for the real estate sector. If not, we can expect fairly steady sailing until the end of the year.
2018 So Far
Year 2018 brought with it a new ray of hope for the residential sector, with both sales and new supply gradually picking up across the top 7 Indian cities - Bengaluru, National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Chennai, Kolkata, Pune and Hyderabad. As per ANAROCK data, the new launch supply across the top 7 cities in first three quarters of 2018 stood at nearly 1,39,700 units approx., increasing by nearly 18% against the corresponding period in 2017.
Housing sales have also witnessed a jump of nearly 8% in the first three quarters of 2018 as against the same period in 2017. While we are still far away from historic peak levels, the positive impact of reformatory changes like RERA and GST has been making itself felt.
Indian real estate is grudgingly adjusting itself to an unaccustomed market environment - one of transparency and efficiency. In fact, as per ANAROCK’s recent Consumer Survey, 81% of respondents feel that Indian real estate has become more efficient and transparent.
From a point of view of market traction, commercial real estate definitely retained its status as the most buoyant sector, both in 2017 and 2018. With the IMF pegging India’s economic growth at 7.3% in 2018, this segment gained – and continues to gain - traction across major cities. Demand for Grade A office spaces is growing and vacancy levels are declining in prime locales.
Simultaneously, India’s first REIT listings are a sure-fire draw for liquidity infusions into the office sector. In fact, REITs will cause commercial property players to focus even more on this segment to cater to the sustained demand from occupiers across the IT/ITeS, BFSI, manufacturing and co-working sectors.
In terms of retail real estate, about 85 malls are in the pan-India deployment pipeline over the next 5 years. Of these, over 30 new shopping malls accounting for almost 14 million sq. ft. are expected to open shop in the top eight cities in the next two years. Low vacancy levels and high rentals in Tier I cities have also kick-started faster expansion of organized retail in tier II cities, including Coimbatore, Lucknow, Ahmedabad, Mangalore and Chandigarh.
The NBFC Crisis
The ongoing NBFC crisis has, for all intents and purposes, hijacked Indian real estate’s growth story over the short to mid-term. It will not only freeze funds to the real estate sector but also impact private equity (PE) funds flowing into the sector. That is because PE players will become extra cautious in lending to developers, become more selective, and engage in extremely deep due diligence before making any plays in the currently tense market environment.
Private equity players will prefer last-mile funding, meaning for projects nearing completion. In the short term, funding for greenfield projects will cease to exist. This will inevitably impact new launches across cities.
PEs have been seen to be more focused on commercial real estate and commercial real estate developers have also historically shown a marked preference for private equity. However, PEs will definitely increase their risk premium now. Moreover, the residential sector’s vulnerability to the NBFC crisis is not limited to curtailed funding for developers alone.
As a result of this crisis, it can be expected that home loan interest rates will see a slight rise in the near future, primarily brought on by the dearth of funds. Non-banking housing finance companies will also be a lot more cautious about disbursing loans and will be conserving liquidity till the market returns to normalcy. This can reasonably be expected to put an upward pressure on home loan rates. Along with the formal banking system, NBFCs that provide home loans to individual homebuyers will tighten their norms around home loan disbursements.
The absence or scarcity of home loans to homebuyer could exacerbate the already protracted slowdown in residential demand in the short to mid-term. All in all, the NBFC crisis has rattled the real estate industry to the core – much more than the disruptions that recent policy implementations brought on - and now consolidations will galore. Only the fittest will survive this perfect storm.
A Peek at 2019
The NBFC crisis will surely have a fallout effect on the early part of the coming year. However, current trends in the Indian housing market and ANAROCK data indicate that there can be a 15-18% increase in the number of new residential launches in H1 2019. The resultant supply would be anywhere between 96,000 to 98,600 units. This calculation is basis the fact that new residential units across the top 7 cities increased from about 75,970 units in H1 2017 to almost 83,520 units in H1 2018.
Despite the teething pains of game-changing policies like RERA and GST in 2017 and