Wrap-Up and Crystal-Gazing Into 2015..!
by Mr. Anuj Puri,
Chairman & Country Head,
JLL India
The
year 2014 has been quite fruitful for the real estate sector in terms
of business sentiment, although the real effect of many of the policies
and amendments announced in 2014 will take effect only in 2015.
Starting from Union Budget FY2014-15, where affordable housing was
considered on par with infrastructure, to relaxation of rigidities in
the Land Acquisition and Real Estate Regulatory Bill, India’s
new Prime Minister has been offering the India real estate sector
consistent doses of energy.
The
winds of change are now blowing more perceptibly. Inflation, including
the house price component, has now been reduced to the lowest level
in recallable history. Property buyers are back in force in most cities
as enquiries have rebounded, and developers are finally reading the
writing on the wall more accurately and coming in with the kind of
supply that is relevant to demand.
Meanwhile
multinationals that were hesitant to foray into the Indian market
because of the uninspiring political environment are now dusting
off their plans for India and getting their entry vehicles back in
gear. Going by the recent reports of recruitment agencies, many more
jobs will be created in 2015 - especially in the IT/ITeS, manufacturing
and services sectors - and the demand for homes
will increase visibly. Also, REITs are hitting the market at long last,
and only a few details need to be sorted out before they get the
funding wheels spinning.
 |
| Anuj Puri, Chairman & Country Head, JLL India |
2015 will definitely be a good year for the real estate sector on three counts:
· Economic activity is gradually picking up, and the Central Bank anticipates GDP growth to reach 6.5% y/y in the next financial year (FY2015-16). Corporate India has already made it clear that there will be more hiring of talent to help tackle rising business activity. Put together, this means a rise in jobs and incomes, which in turn is very favourable for both residential and commercial real estate.
· The market has witnessed a re-orientation and developers are now largely focusing on affordable homes. This will go a long way, though definitely not all the way, in bridging the existing wide gap between demand and supply of affordable homes.
Residential Real Estate...
During
the year 2014, new launches of residential units saw a consistent fall
every quarter as a consequence of the subdued demand and high
prices. While this was largely the case with high-end projects, the
affordable housing segment definitely began to gain favour. This segment
was firmly lodged under the priority schemes of the government and
central bank, and buyers were seen finding comfort
in investing in such projects given the smaller ticket sizes and
improving connectivity in the suburbs of the major cities.
In
the second half of 2014, many large developers who in the recent past
concentrated on the mid-to-high segment due to better margins were
seen eager to play the volume game and entering into affordable-segment
projects in the deeper suburbs.
This heartening trend began the ground
work on bridging the wedge between demand and supply in our major
metropolitan cities. Since developers are sitting
on close to 30 months of unsold inventory in the mid-to-high-end
segment, we also saw an increase in cash flows because of this new
focus.
Completions, Net Absorption & Unsold Inventory – Residential...!
In
2015, developers will become more earnest about right-sizing and
right-pricing their offerings. Smaller, yet better-designed and more
efficient
homes will define the residential real estate market in 2015, and
selective corrections in some of the over-priced cities will help bring
about faster sales for stagnated supply of larger configurations.
Townships will become more prevalent, and the supply
of luxury homes will moderate to align with the slow demand dynamics
for these offerings.
A
large portion of the total unsold residential inventory is in the
under-construction projects, while completed projects have only moderate
vacancy. Home buyers looking for ready-possession property will
therefore find limited room for negotiations when compared to buyers who
can wait for some time to get possession.
The attractive schemes that
were doled out by developers in under-construction
projects during the festive season of 2014 are likely to continue into
2015.
2015
will see home buyers benefiting from reduced borrowing rates, increased
developer-focus on affordable homes, largely stable prices, and
better job and income prospects.
Affordable
housing will clearly be the flavour of the season in 2015. While the
ruling government at the Centre and the Central Bank have clearly
spelled out their intention to push for affordable housing, it is the
State governments which will need to take the implementation initiative.
The recently concluded elections have clearly indicated that better
governance, planning and good implementation
are factors on which performance will be evaluated, and affordable
housing is an important yardstick for sure.
While
affordability will always be a subjective term that assumes different
meanings in different markets of India, every city does have its
own affordability threshold and benchmark. Developers active in each of
the primary cities are now fully aware that they must address the
demand for affordable housing in their cities, and stop focusing
excessively on high-end and luxury offerings.
Affordable
housing is in itself not a difficult format to deliver; the challenging
part for many developers will be to align this format with
their existing brand image without impacting it. Quite a few prominent
developers already have a budget housing strategy, but they have evolved
this strategy over time and ensured that the creation of such projects
becomes a natural extension of their brands.
For the newer entrants who have so far focused exclusively on
higher-end housing, the process will begin only now – and for all but
the die-hard firms that will not budge from their ‘creamy layer’
orientation, the process is unavoidable.
Coming
anywhere close to negating the affordable housing gap altogether would
take about two decades of focussed supply – and going by previous
market learnings, it is unlikely that developers will retain their
current focus on affordable housing once the economy picks up
sufficiently to make higher-end housing desirable once again.
However,
as long as the current momentum and orientation prevails,
we will at least see some good headway being made on this front in
2015.
Commercial Real Estate...
Over the past few years until 2014, the supply of office real estate was higher than demand by 4 to 10 million
sq ft. Our reading is that developer had been too optimistic in their anticipation of a revival in economic activity.
Though
office real estate prices failed to recover from the after-effects of
the financial crisis up to late 2014, we did see the beginning
of a gradual turnaround. This can be attributed to the fact that
commercial real estate developers began to strategically reduce the
incoming supply to a new-normal level of occupier demand in the range of
27 to 30 million sq. ft. each year. This helped bring
down the vacancy rate to 17% from more than 18.5% just a year ago.
In
2015, demand will remain in this range, marginally improving from the
level seen in 2014. However, with the rupee weakening to below INR
62/USD at the current time and India’s GDP growth likely to strengthen
further, the positive risk to this forecast of a sharp uptick in demand
cannot be ruled out though.
Interestingly,
while office real estate have not recovered fully from the fall in
prices post GFC (unlike residential) there is significant
room for upside in the event of a positive change in business
sentiment. In fact, such an improvement was already seen after the
general elections and is already reflecting in year-end office market
leases. The trend of moderate-to-healthy leasing activity
will continue in 2015.
Pan-India New Completions, Absorptions and Vacancy – Office
Retail Real Estate...
In
2014, the retail real estate sector was one of the biggest casualties
to market conditions that increasingly favoured the online retail
community, with the exclusion of well-managed and leasehold organised
retail malls. Strata-sold, poorly-managed, badly-located retail
properties lost lustre as more retailers chose to avoid them.
2014
also saw a few of these malls either converting into Grade B office
space or reeling under the compounding effect of rising vacancy rates.
Vacancy in poorly-built and operated malls was as high as 20%, while
good quality malls were relatively better off with about 10% of vacant
space.
The ecommerce frenzy that has been taking India by storm over the
last two years was at its peak during 2014,
and now poses a serious challenge to physical retailers and mall
developers. The situation is compounded by the absence of adequate
regulation on ecommerce in India currently.
However,
a handful of mall developers have risen to this challenge by
identifying key transitions that could help them sail through. The
measures
they have undertaken include a revamped tenant mix, adoption of the
mixed-use format and delivering theme-based shopping experiences. These
practices are now common in overseas markets, and Indian retail malls
will be seen adapting to them more rapidly in
2015.
Pan-India New Completions, Absorptions and Vacancy – Retail
Real Estate Capital Markets...
2014
saw gradual growth in demand for Indian real estate, particularly after
the general elections in May. Concurrently, fund raising activities
picked up, and this momentum will continue in 2015 as well. We will see
less of one-way investments and more of partnerships between investors
and developers and other land owners.
Joint
venture and club funding will become the preferred mode as 2015
progresses. With the improvement of the economic situation, Pune,
Chennai,
Hyderabad and Kolkata will start attracting sizeable investments along
with the top three metros of Mumbai, NCR and Bangalore.
This will be a
notable change from dynamics seen in the past, wherein only these three
cities ruled the roost. In fact, we will see
Grade A commercial properties in tier 2 and tier 3 cities appear on the
radar of investors, though a full-on focus on these opportunities will
probably not take place in 2015.
Attractively-placed
office assets and high-demand residential categories, especially
well-located mid-income projects, will continue seeing
considerable investments in 2015.While investors may continue to show
limited interest in retail real estate, we will see increased interest
in the hospitality sector as compared to previous year.
REITs
got a green signal from the government in 2014, and this will help ease
the pressure on the balance sheets of cash-starved developers.
However, the listing of new REITs will be slow and steady. While REITs
will succeed over the longer term, they need to pass through the
challenging phase ahead for them over the next two years.
Real Estate Regulation...!
On
the regulatory front, Indian real estate will continue to faces a fair
share of problems in 2015.There are currently still a number of vital
regulations and initiatives related to real estate that have been
gathering dust on bureaucratic tables. These need to be fast-tracked and
implemented in 2015, because they are crucial for the real estate
sector's growth and graduation from opaqueness to transparency.
While many believe that there is little done by the currently ruling government for the real estate sector, there
is a positive sentiment underway owing to small but significant steps taken in the right direction by the new government.
In
the recent past, two landmark policies that were introduced by the
central government were the Land Acquisition,
Redevelopment and Rehabilitation (LARR) Bill and the Real Estate
Regulatory Authority (RERA - yet to be ratified). However, after almost a
year of these two bills being introduced, there has not been much
progress. This is largely due to tough clauses included
in both these bills, which were actively debated throughout 2014. Some
of those clauses were seen as limiting the ability of the industry to
function smoothly.
The
newly-elected government has astutely identified the limiting factors
within the two bills and attempted to
rectify them rather than introduce new regulations that would merely
add to the burden of ‘lip-service’ reforms. In that sense, the present
government has done its homework before taking up the task of resolving
issues of the real estate sector.
Once finalised, the revised bills will appear more investor-friendly and create a favourable environment for developers,
buyers, and investors to operate in 2015as the key changes mooted in the two bills are:
-
Land Acquisition, Rehabilitation and Resettlement Act (LARR)...!
The
single-biggest hurdle that the entire real estate sector will face in
2015 is related to land - the very foundation stone of all real estate.
The finite and all important commodity of land is caught in a
regulatory stranglehold that we hope to finally see loosened in 2015 –
especially given the incumbent government’s vision of establishing 100
Smart Cities, which gives rise to serious questions
about feasibility. The creation of these 100 smart cities will entail
significant volumes of land - massive, contiguous land parcels.
In
the manner that the new government has envisaged, these smart cities
will essentially be brand-new municipalities on the peripheries of
our major cities. With its avowed commitment of launching 100 smart
cities, the government is de facto also making itself responsible for
making the required land available. How exactly will this happen?
The
LARR (Land Acquisition, Rehabilitation and Resettlement) Act was
formulated and re-formulated to counter land-related bureaucracy in
India.
On the ground, it has actually done quite the opposite ad become a
deterrent for developers as well as investors to operate in the Indian
real estate and infrastructure space.
The
real estate sector is desperate to get past this hurdle. It is not just
a question of making land available for primary real estate
development;
the government has correctly identified infrastructure development as
they key to accelerated economic growth, and infrastructure is highly
land-centric.
The
modified LARR Act which was put into effect last year by the UPA
government attempted to reduce the bureaucracy involved. However, it
failed
to achieve this purpose and in fact only increased the existing
complexities. Given the new government's sharp focus on 'housing for
all', fast-tracking of infrastructure and the creation of 100 smart
cities across the country, there is very clearly a pressing
need to revisit this Act in 2015. Provisions in the bill such as the
significant rise in compensation to original inhabitants, the tedious
rehabilitation clauses and other norms need to be relaxed if it is to
serve its purpose of untangling complexities and
delivering a fair shake to all stakeholders.
·
Consent clause:
The
current legislation requires the acquisition process to go through
mandatory consent of at least 70% locals for PPP projects and 80%
consent for
private projects. This clause is difficult to implement, considering
the large number of people involved in the entire rehabilitation
process. The fact that the government is planning to renegotiate these
clauses is in itself a big positive, as one tight spot
has been identified.
·
Return of unutilised land:
It
has often been seen that when land was acquired for a stated purpose
and the land-losers were promised employment opportunities and overall
development
of the region in question, the project failed to take off for several
years. This lacuna has been identified, and the timeframe for return of
unutilised land has been proposed to be reduced to 5 years from the
previous 10 years. This is a strong deterrent
for companies or developers who plan to acquire land without having a
clear roadmap for its usage.
·
Clarity on end-usage:
There
is a need to clearly identify the purpose of land acquisition so that
intervention by the government can be put to right use. For instance,
critical
projects involving infrastructure and affordable housing require faster
clearances and may necessitate timely intervention.
·
Expertise of State governments in deciding area threshold:
The
amended Land Acquisition Act was to cover all private land acquisitions
if the minimum area to be acquired was 100 acres in rural areas and 40
acres
in urban areas. However, every city and village has different dynamics,
and these are best understood by the State government rather than the
Centre. Thus, the Act must consider giving States an upper hand in
deciding the coverage reveals pragmatism and flexibility.
·
Smart Cities beyond PPP:
In
order to meet the target of an annual outlay of INR 35,000 crores for
development of 100 new smart cities, it was obvious that private funding
was
critical. The government has invited full private funding of projects,
with government contribution largely limited to viability gap support.
The
still-pending Real Estate Regulatory Bill has been hotly contested at
every stage, and its approval has been deferred once again only
recently.
There is no doubt that it must be enacted sooner rather than later so
that the Indian real estate market becomes attractive for foreign
investors.
However, no version of this Bill that has evolved from the
various objections and arguments from the industry's
stakeholders has been universally acceptable so far. It will require a
strong and determined government to push it through.
Three recent revisions to the RERA could conceivably lead to its unilateral acceptance and consequent ratification in 2015:
This amount was from the monies collected from the buyers. This will effectively allow developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects, and will work in their favour by also allowing them to grow their land and/or project portfolio. The 50% mandate will still place enough restriction on developers to divert funds elsewhere and ensure better completion records. (However, for buyers, the concerns regarding funds diversion would be higher, and the Bill would be slightly less protectionist towards buyers.)
The limited coverage was largely without any purpose and, therefore, it currently stands rectified. Commercial projects under the purview of the bill would provide protection to investors of commercial assets, as well.
Worryingly, while the RERA initially aimed at providing an alternate
redressal mechanism, the new provisions are talking of no
recourse to other consumer forums. This can lead to pressure on this
regulatory body in terms of increases log of cases, though it will
reduce instances of multiplicity of
suits.
In
any case, the recommendations have been made by the ministry and sent
to PMO for approval before the cabinet approves it. Thereafter, it
will be tabled in the Parliament for passing the bill and making it an
act. It is unclear whether the Real Estate Regulatory Authority will
finally be ratified as a law in 2015, but the fact that hard discussions
are happening is definitely positive, and indicative
of the new government’s determination to make it a reality.
For media contact
Mr. Arun
Chitnis
Head
– Corporate Communications & Media Relations
JLL
India
Level
6, Amar Avinash Corporate Plaza
Bund Garden Road,
Pune 411001.
Tel: (020) 30930441 Fax: (020) 40196101
Mob: +91 9657129999
Bund Garden Road,
Pune 411001.
Tel: (020) 30930441 Fax: (020) 40196101
Mob: +91 9657129999
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