About the great journey of realty in 2016

There is never a dull moment in real estate. The year 2016 began promisingly in comparison to 2015, but isn’t likely to end that way. Policy developments by the government, which have led to unpredictable disruption in the short term, are projected to augur well for the industry as a whole in the long run. On the global front as well, developments like Brexit and the US presidential election are expected to have their bearing on the Indian real estate sector. The year will go down as a watershed year in the history of Indian real estate.

Where we stand

The residential property market witnessed improved sales in the first six months of 2016. Barring Delhi-NCR, other markets did well in that period. Mumbai and Bengaluru led the way, and the manner in which markets rebounded gave us the feeling that the year would end on a high note. The overall positive sentiment was attributed to political stability, regulatory environment, enhanced infrastructure, strong investments, approval to the goods and services tax (GST) bill, and amendments to Real Estate Investment Trusts (REITs).

Just when the industry was gearing up to meet the deadlines set under the Real Estate (Regulation and Development) Act (RERA) and GST, it received a jolt in the form of demonetisation of the Rs.500 and Rs.1,000 currency notes with immediate effect. While the broad motive behind this announcement was to curb fake currency notes and abolish unaccounted money, the impact can be felt across the economy and sectors. This move created a real dent in the real estate sector, pulling back the last quarter trend of residential sales substantially across cities. Consequently, sales are at a historical low.

Another imminent change that will impact the sector in the days to come is the partial implementation of RERA. The Act lays down the broad parameters for functioning of the real estate sector and since land is a state subject, the Act required states and Union Territories to come up with governing rules by 31 October 2016. RERA, once implemented, will increase transparency, which in turn will bring back buyer confidence. The real benefits would be that the buyer will be ensured of a dedicated governing body, timely project completion, and complete information on the project and amenities promised. Developers, on the other hand, will have to adjust to the new environment and more specifically, change their business model while adhering to stricter compliance norms. However, as of date, only Maharashtra and Delhi have come up with and notified the draft rules.

On the global front, no other individual has managed to gain public limelight like Donald Trump—president-elect of the US. From the regular media jibes, to bringing back jobs and his bellicose views on immigration, Trump’s portentous rhetoric haven’t gone down well with industries and investors, especially companies that have major businesses overseas. Traditionally, the US has been one of the biggest investors in India. The fact that the technology sector has an undeviating connection with the US, may mean appalling effects on India’s real estate domain if the US outsourcing policy changes. We need to wait until the new government there formalises its policies, including on outsourcing, to understand which way the wind blows.

Earlier this year, the UK voted in favour of Brexit. This was an unexpected outcome that translates into a complete shift of business policies. The European Union (EU) is a rather protectionist market and several Indian business entities choose to invest in the UK, with a view to get unrestricted access to the European markets. The scale of this effect, especially in the medium to long-term, will depend on the outcome of negotiations on the UK’s exit.

Outlook 2017

All of the above mentioned factors put together point towards a subdued beginning for 2017. With enquiries, walk-ins and sales drying up as a fallout of demonetisation, the first two quarters of the coming year will result in a substantial slowdown in sales.

With consumers in a wait and watch mode, demand could be subdued due to a mindset that property prices may reduce along with lower home loan interest rates. Likewise, tax benefits in the forthcoming Budget will be another factor that could hold back demand for property in the initial quarters of 2017. Since buying a house is often a discretionary need, the real estate sector could be the slowest to recover from the impact of demonetisation.

By May 2017, RERA will be implemented. The after effects of demonetisation coupled with legislations like GST and the benami Act, will further increase transparency and reliability within the sector. This will also boost institutional fund flow at competitive rates, which will enable the sector to come out of the woods.

To conclude, the impact of demonetisation is a transient one and the economy will undergo structural changes for the first three quarters of 2017. Enterprises are expected to streamline their business processes and implement international best practices to adhere to the upcoming changed business environment. The end of 2017 is most likely to see the initiation of a robust and sustainable growth trajectory for India’s residential sector.

Author: Shishir Baijal, chairman and managing director, Knight Frank (India) Pvt. Ltd

Credits Live Mint

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