Decoding Indian RE
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The document discusses the Indian real estate industry, including its size and importance to the Indian economy. It outlines some of the key challenges facing the industry, such as a lack of regulation, slow sales, and loss of investor confidence. The government of India has introduced several reforms to address these challenges, including the Real Estate Regulatory Act, affordable housing initiatives, and measures to curb benami transactions. These reforms aim to revive the real estate sector by improving governance, boosting buyer and investor confidence, and making housing more accessible. The industry is expected to benefit from increased investment flows as conditions continue to improve.
Decoding Indian RE
- 2. Real Estate is a wide Industry that is empowering job creation in an Economy and providing a support to economy’s GDP. RE Industry is associated with all the other sectors in terms of the resources used by it and also for the product sales. An growing economy has healthy RE Industry while an economy facing recession, the RE Industry of such economy has to face various key challenges in terms of availability of resources, skills of developers, sales, governance, etc. In India, RE Industry is 2nd Largest employer and it is expected that it will grow at CAGR of 14%-15% for next five years. Indian RE Industry is has three verticals:- Residential/Housing Retail Hospitality Commercial Indian is a Lower-Mid Income economy, with large no. of population under this bracket. India has high inequality income due to which many people isn’t buy houses. However, GOI has always emphasize on this problem and introduces several measures so that such people can buy their own house, like Affordable Housing Schemes in PPP Model, Categorization of Affordable housing under Infrastructure to provide various benefits to developers as well as end users, applicability of RERA, amendment in Benami Transaction Act, CLSS for Housing Loans, etc.
- 3. There are lots of key challenges faced by entire RE Industry and GOI tried to ease these challenges by framing and implementing the several policies in a timely manner. Apart from the support of GOI, developers & investors has always changed their business models to adapt the circumstances and tackle the challenges of RE Industry. It is expected that Indian RE Industry will be US$ 220 Billion Industry in next 4-5 years, while housing/residential sub-sector contributes more than 6% to India’s GDP. While CAGR of Retail, Hospitality and Commercial sub-sectors are also expected to be lower than the housing, due to low demand and less beneficial policies. In the period of 2000-2010, Indian RE Industry is in bull run while during 2011-2013 market got stagnant and everyone is watching it very closely. Everyone is on cautious node and anticipating the sharper correction in the property prices. Developers seeking correction in land prices, cost of materials and lowering of interest rates. While PE investors are seeking for the good investments, as projects launched during 2008-2010 are in middle phase and newly launched projects aren’t getting expected response from the end users. Also, end users losing their confidence and awaiting for the correction in prices and lower of interest rates. Thus, it is a period where everyone is facing emerging challenges of the RE market across all the sub-sectors of RE Industry.
- 4. However, during 2013-2016, RE market is in consolidation phase and prices of units, materials and interest rates got corrected. Now developers are seeking to complete their ongoing projects and get exit from the existing projects. Launching of new projects is very low and all the developers are trying to complete the existing projects in a time box approaches. However during this period investors get attracted towards the Commercial & Hospitality projects, as it is safer bet for them. Lower sales velocity has affected the scenario but rental cash flows and long term revenue generation ability has created a confidence among them. Hence these two sectors play the story during 2015-2016 and makes the RE still attractive for investors. However, investors still investing in some of the housing projects, which have the potential to give them double digit return or may give 1.5x returns. As market goes in consolidation, it has several effects as unskilled developers and their projects goes under stress, as they are highly dependent on the customer advance for developing the projects. Hence it creates a better opportunity for some of the PE Investors who have patience to hold the investment and even for the PE Investors who are interested in buyout of the projects like Blackstone, etc. However they are very selective in such investments as it involves a higher risk.
- 5. India ranked 4th in developing Asia for FDI inflows as per the World Investment Report 2016 published by the UNCTD, in which Indian RE Sector has seen huge global capital inflows stood at US$ 5.7Billion, it was a great year in terms of PE Inflows although it is much lower than the PE Inflows happened in year 2007. Increase in global capital inflows and launch of new offshore funds by PE Firms have clearly shown that Global Investors again gaining their confidence towards Indian RE Industry with expectations of reasonable returns and 6-7 years of time frame. 2016 was a year in which investors have seen roller coaster ride, due to several factors like Brexit, US elections, China’s Yuan Devaluation, etc. However, India effectively managed all the factors even from global cues it has some macro factors like demonetisation, applicability of GST, RERA & amendment in Benami Transactions Act, etc. Now in 2017 HFY1 is going to end, we are seeing lot of changes in RE Industry, as RERA becomes applicable from 1st May, 2017 which makes lot of changes in the trends of RE Industry, as no. of projects going to complete till the end of 2017 and buyers are getting the houses after a long waiting. Buyers again getting confidence in the developers who completed the projects on time and developers are ready to launch new projects, which will providing a new investment opportunities for the PE Investors.
- 6. Till 2000, investors are very cautious on selecting the investment target in Indian RE Industry, as there are few developers with international skill set and have ability to manage the development of projects. At that time most of the developers are relying on the bank finance for meeting their funds requirement and LICHFL & HDFC Limited ae the two players financing the RE Market and holding more than 78% market share, whether it be at developer level or at buyer level. But after 2000, MNC or Private Banks like ICICI, HDFC, Standard Chartered, Citi Financial, etc. started to fund the RE Industry in terms of developer level as well as buyer level. However, in 2005, after liberalisation of FDI policy, PE Investors get into the picture & taking the Indian RE as the attractive spot of investment & raised billion of funds from Global Investors like International Pension Funds, Life Insurance funds & HNIs. Even some of the Global PE Firms setup their own counters in India to invest across several sectors of the India. However, PE fund managers find it difficult to deploy the funds and generate the assured returns, as it is difficult for them to find the developers who had delivered the projects or 2MN+ SFT area, also skilled and great developers are looking for bank finance, as the cost of funds of PE Investors is much higher than the bank’s interest rate i.e. 22% v/s 13%.
- 7. Till 2000, investors are very cautious on selecting the investment target in Indian RE Industry, as there are few developers with international skill set and have ability to manage the development of projects. At that time most of the developers are relying on the bank finance for meeting their funds requirement and LICHFL & HDFC Limited ae the two players financing the RE Market and holding more than 78% market share, whether it be at developer level or at buyer level. But after 2000, MNC or Private Banks like ICICI, HDFC, Standard Chartered, Citi Financial, etc. started to fund the RE Industry in terms of developer level as well as buyer level. However, in 2005, after liberalisation of FDI policy, PE Investors get into the picture & taking the Indian RE as the attractive spot of investment & raised billion of funds from Global Investors like International Pension Funds, Life Insurance funds & HNIs. Even some of the Global PE Firms setup their own counters in India to invest across several sectors of the India. However, PE fund managers find it difficult to deploy the funds and generate the assured returns, as it is difficult for them to find the developers who had delivered the projects or 2MN+ SFT area, also skilled and great developers are looking for bank finance, as the cost of funds of PE Investors is much higher than the bank’s interest rate i.e. 22% v/s 13%.
- 8. Hence, PE fund managers facing these challenges on the deployment of funds but some of the skilled fund managers deploys the funds to skilled developers for their quality projects. But some fund managers make bigger mistake in deploying the funds like selecting of developers, location of project or cost of funds charged. Hence it results into bigger problem for them, as their GPs/ LPs losing their confidence on the fund managers, as fund managers are unable to generate the assured returns for them and even some of them are unable to return the investments due to delay in projects. It will create a challenge for the PE fund managers from both the ends, as raising of funds is not so easy and also for deploying of funds, but after 2008-2009, PSU Banks has restrain themselves from lending funds to RE Sectors and also Private Banks, become cautious and selective in lending of funds to RE Sector, which creates a room for the PE fund mangers to lend the funds to developers at 18%-22% in form of structured finance. Even PE Fund managers lend the funds for the Land aggregation with the view to generate higher returns by utilising the appreciation of land prices. However, PE Funds still getting challenge from the NBFCs which are actively lending the funds to RE Sector whether it will be at buyer level or developer level, although cost of funds of NBFCs is much similar to the funds provided by PE Funds.
- 9. In last 4 years, PE Investors are not the only one which are funding RE Sector, as today almost no. of lender are active in RE Sector like NBFCs, MNC Banks, Pension Funds, AMCs raising offshore or onshore funds. Also, after 2013, Indian RE Industry in not getting pure PE Investments, however PE Fund Managers have used the Structure finance model or NBFCs route to invest the money into RE Sector with more of liberalised conditions, as most of PE Fund managers emphasise on the completion of project smoothly with protection of their interest. Fund managers has further sub-divided the India RE Industry into 3 types of market :- Tier –I (developed cities like Delhi NCR, Mumbai, Bengaluru, Chennai, Pune) Tier-II (developing cities like Jaipur, Ahemdabad, Punjab, Lucknow, Nagpur, etc.) Tier-III (underdeveloped cities like Agra, Chandigarh, Hyderabad, Telangana, etc.) Tier-I cities are the preferable locations for the fund managers, as here they will easily find out the skilled developers with rich experience, who have successfully delivered the projects with experience of 2MN SFT area. However, fund managers still emphasise on the structured or mezzanine finance for investing into RE sector. However, some of the fund managers have started to lend for the Semi-Urban Areas which have potential of generating enough cash flows and returns for the investors, but they will lend only to selective lenders having good Governance, Skills and experience of the local market.
- 10. Indian RE Industry has several challenges for all the stakeholders and even for them who are not the part of it. As RE Sector is the Capital Intensive Sector and it will be effected directly or indirectly with the changes in other sectors. These challenges has occurred in Indian RE due to lack of laws, rules & regulations for governing the RE Sector. Since, there is no specific laws & rules, due to which all the contractual agreements executed by the people are on general basis & everyone has his own definition & rules. Some of the key challenges are:- No Authority/ DRP- Since non-presence of any law for governing the RE Industry, there is no regulatory or Dispute Resolution Authority for monitoring and resolving the various issues pertaining to the sector. Vague/ False Promises by developers- As Indian RE Sector is amateur & most of the buyers doesn’t pertain knowledge of RE, which results in vague/false promises by the developers, even some of the buyers have become victim of the fraud and lose their all savings. Lose of end users Confidence- Vague Promises & absence of any Law to protect & safeguard the buyers, buyers has lost their confidence in RE developers & restrain themselves from buying the flats. Lack of Investors Confidence- In 2005-2009, Investors has deployed huge amount of money to several projects, but inexperienced developers and slow down of sector, has make them reluctant to invest further and even make them fear of losing their investment. Slow Sales- It is the biggest challenge for the RE Developers, as most of them are middle of the project and slowing of sales make them worry to complete the project, as they are highly dependent on the customer advances or outsiders fund for developing the projects. Slow down of Economy- It is an another factor for slow down of RE Sector, as genuine developers are also get into the problem, due to lower realisations from the buyers.
- 11. Challenges of RE Sector has become a key problem for GOI, as it is the 2nd Largest employer of India and slowing of it will increase the unemployment ratio. Also, it become a major challenge for GOI, in terms of the frauds & vague promises committed by developers with the common man & it push the panic button among all the buyers and investors. Now GOI has realised that, RE Sector is going into serious problematic circumstances and it needs a immediate rescue. Hence GOI has taken several steps to tackle & eliminate these challenges. Some of the major measures/ steps of GOI which help the RE Industry to revamp are:- Real Estate (Regulation & Development) Act, 2016- It is the biggest reform of GOI, in order to revive the RE Sector as well as Indian Economy. Everyone has realized the need of Law for governing the emerging RE Sector of India, in order to monitor and control the activities of developers and safeguard of buyers & investors. It is also the requirement of genuine developers so that, they can operate their business smoothly and get back the confidence of investors and buyers in RE Sector. As genuine, developers are in the favour of such a regulatory law & authority to resolve the small issues & make a clarity on the several points of discussion among the buyers and developers. Amendment to Benami Transaction Act- GOI has realized the need of framing stringent laws & rules and implying of penalties for the benami transactions. Indian RE is the biggest spot of benami transactions, as almost 80% transactions are carried in cash, which hides the beneficial ownership and leads to benami transactions. Indian RE has seen a sharp rise in prices especially in land prices and benami transactions are the major catalyser behind that. Credit Linked Subsidy Schemes- GOI has announced a CLSS under Pradhan Mantri Awaas Yojna for providing a interest subsidy on the housing loans for EWS/LIG/MIG residents. Govt. has taken the step for boosting the interest of buyers.
- 12. Affordable Housing- GOI has announced several benefits under Affordable Housing Projects, like no taxation, waiver of approval charges, reduced rate of interest of borrowings, etc., which will boost the developers to develop the flats under this scheme and it will ultimately benefit the buyers to get the small flats at reasonable price. Affordable Housing as Infrastructure- GOI has categorized the Affordable Housing Projects under Infrastructure segment, which will give numerous benefits to the developers in terms of cost of funds raised from banks, lower taxation, lower compliance, etc. This will boost the developers as well as reduce their cost of development which ultimately reduce the purchase cost for the buyer. Real Estate Investment Trust- GOI & SEBI has clear the route for REITs and their listing on recognized stock exchange, and its first listing is expected till Sep-2017. It will boost the Commercial, Hospitality & Retails Sector of RE Industry and also motivate the investors for investing more into commercial projects. It will be a catalyser for the Commercial RE Sector and help the developers to develop more projects with new & initiative approach. GOI has announced several other reforms for the revamp of RE Industry, regaining faith of buyers & investors in the Indian RE and creating an environment of fair practices in the Indian RE. It will surely help the genuine developers to operate their business effectively & boost the buyers, end users & investors for the come back to Indian RE. It will also improve the ranking of Indian in Global Ranking of Ease of doing business as well as help the PE Fund managers for regaining the confidence of Global Investors and to raise the funds for investing in Indian RE. It will help the developers, as it will provide them huge funds for completion of their existing stuck projects to come back on track.
- 13. As of Now, after the implementation of various reforms by GOI for revamping the Indian RE, it is becoming a attractive investment spot for the Global Investors like Pension Funds, Insurance Funds, International Monetary Funds, International Banks and HNIs to park their funds and earn a healthier return. GOI has implemented most of the reforms and its outcome is expected to visible at ground level till the end year 2017. Also Indian RE Industry is coming out of consolidation phase and most of the developers has offered possession or delivered the projects. Some of the quality developers are also ready with their new launches which will expected to be happen in next 3-4 Months and it will be a golden opportunity time for the investors to invest into these projects. As once these projects are launched, then it will generate the cash flows for the developers and developers are seeking for the lenders or PE Investors for their project. Also most of the PE Fund Managers has decided to go for NBFC route for their lending activities into Indian RE in order to compete, enhance their availability and improving the management of their investments. Some of the PE Investors has already started their operations, while some of the PE Investors are ready with the funds to deploy. So it is clearly viewed that, reforms of GOI has boosted the Developers, Investors and Buyers to come back into the Indian RE.