The green shoots of recovery are visible in the Indian economy. Policymakers have been pro-active in initiating reforms to strengthen the various sectors to augment gross domestic product, or GDP, growth. The initiatives of the Central government have helped the Indian economy get global attention, bringing optimism to various sectors, including real estate. This has led to lot of investor activity since last year. The first half of 2016 saw private-equity investments of $2.86 billion, a rise of 55 per cent over the same period last year.
The government’s initiative to regulate the unorganised housing sector through the Real Estate Regulatory Authority (RERA) Act, earlier this year, was a watershed event for the sector. While the Act would go a long way in safeguarding home-buyers’ interest and ensuring transparency, the sector is likely to see a marked shift brought about by consolidation in the coming years. Fly-by-night developers or those with low repute would find it difficult to sustain as they would be under increased scrutiny, not just by regulators, but also home buyers. Rise in joint development agreements and mergers & acquisitions would ease the stress in finances of companies by giving an impetus to investors to plough in funds into a more structured/organised sector.
Better regulation, transparency and organisation due to the new law could provide investors more opportunities. For example, the provision for depositing 70 per cent sales proceeds into an escrow account, while ensuring timely construction, will limit debt and diversion of funds for other projects. However, developers which rotate funds received from one project to another could face difficulties in acquiring additional land and execute new projects if their capital is locked up in a single project, leading to short-term liquidity constraints.
RERA has the ability to bring about a change in the sales model in the residential sector. At present, developers are dependent on funds from home buyers at the pre-launch/launch stage. However, over a period, funding from private-equity channels, banks or partnerships could steer development of projects. As the industry matures, developers will do substantial construction before they expect majority of sales to come through.
The RERA Act would lead to a paradigm shift in the coming years. However, implementation is the key, and the government needs to ensure that approval hurdles are minimised. Certain provisions such as single-window clearance and time-bound approvals at the local level are a must to increase the ease of doing business for developers.
Besides RERA, a slew of reforms will make the outlook of the sectors stakeholders more optimistic. For example, listing of real estate investment trusts will allow increased ownership of commercial projects by organised landlords, resulting in more transparent business practices, benefitting occupiers immensely. Implementation of the Goods and Services Tax and relaxation of foreign direct investment norms will have a trickle-down effect, ensuring greater accountability. The future of the real estate industry on a whole will depend on faster implementation of projects and delivery as per schedule, while enabling momentum in demand. While the macro-economic indicators are in favour of revival in demand, it is equally important to increase the ability of people to buy real estate through measures such as lower interest rates for mortgages and reduced taxes on purchase.
Author: Anshul Jain, Managing Director (India), Cushman & Wakefield
Credits Business Today