Real Estate Growth India 2020
Trends in Real Estate Growth in India
Real estate Industry in India – An overview
The Real estate market in India is one of the largest sectors in the world. The real estate sector contribution to the gross domestic product (GDP) has been estimated at around 6.5 to 7 percent and the sector is expected to generate millions of jobs. But the sector is seeing a dip in its popularity due to stagnation or a drop in prices.
The importance of the real estate sector
The real estate sector is the second largest employer after agriculture and experts have stated that the real estate growth in India will be around 20 percent in the next decade. The real estate sector constitutes of four sub sectors - housing, retail, hospitality, and commercial. For the past decades, the high growth of the real estate sector is due to the growth of the corporate environment, since there is a demand for office space as well as urban and semi-urban accommodations.
The construction industry in India ranks third among the 14 primary sectors in terms of direct, indirect and induced effects in the economy. It is expected that the real sector will attract more non-resident Indian (NRI) investments. The results could be in both the short term and the long term. Bengaluru seems to be the most favored property investment destination for NRIs, which is followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun.
What is the reason for stagnation in real estate market growth?
There are many reasons for stagnation; one of the primary reasons is lack of planned policies which was coupled with a booming stock market. This resulted in the creation of an illusion of robust home sales for developers in major Indian metros. The flow of large investments, significant price increases, offered a picture that there could be good returns for investors and buyers alike.
Adding more fuel, larger housing units with higher prices were built. But practically, such high priced units were unaffordable for the average buyers. For example, how many people can afford to buy apartments worth Rs2-3 crore in a country where the average household income is around Rs 40,000? With sales going down, prices of the flat began to decline, resulting in the stoppage of cash flow and construction activities have slowed down.
Effects GST and Demonetization
Besides, the stagnation of the construction industry, two main economic reforms demonetization, and GST had a huge impact on the real estate industry growth. Demonetization was implemented partly due to curb the flow of black money around the country, but it also had an effect on those loan borrowers in the smaller towns and villages. 25- 30% of transactions in this industry are done using unaccounted for money. GST, on the other hand, had an effect on the sector, though not a negative impact was felt, it failed to provide appropriate incentives to the real estate market growth.
Government Initiatives and policies
The Government of India along with the state governments have taken several initiatives to encourage development in the sector. It has initiated the ‘Smart City Project’, where there is a plan to build 100 smart cities, which is a prime opportunity for the real estate sectors. Here is a list of other initiatives:
- The creation of the National Urban Housing Fund has approved with an outlay of Rs 60,000 crore (US$ 9.27 billion).
- 1,427,486 houses have been sanctioned in 2017-18, under the Pradhan Mantri Awas Yojana (PMAY) Urban.
- Construction of additional 3,21,567 affordable houses was sanctioned under the scheme
- An Alternative Investment Fund (AIF) of ₹25,000 crores has been approved by the cabinet to revive stalled affordable and middle-income housing projects across the country.
- Relaxation of Extra Commercial Borrowing (ECB) Guidelines: ECB guidelines will be relaxed to facilitate the financing of the housing sector who are eligible under Pradhan Mantri Awas Yojana (PMAY) in consultation with RBI.
- Housing Building Advance: To encourage government servants to buy new houses, the interest rates on House Building Advance will be lowered and linked with 10-year government-security yields.
- GST Rate Cut: The government has reduced GST rates to a marginal 1% for the affordable housing project and 5% for under-construction houses.
The lower tax burden on home buyers is expected to push demand in the real estate sector which, in turn, will keep developers committed to build more affordable homes.
Way Forward
- The government must not look to penalize the developers but optimize the opportunity so that the stalled projects can be completed and buyers could get their dream houses.
- It should ensure that funding from AIF goes to genuine developers who are willing to complete the stalled project and handover the inventories to buyers in the given time frame.
- The government should focus on the framework to assess the requirement of housing at local levels and then allowing the requisite amount to be developed i.e need-based planning at the local level.
- Infrastructure status to housing segment may lead to the flow of funds at a cheaper rate and can significantly help in tackling liquidity crunch but the government needs to be cautious that fund flows to the affordable housing sector only.
- Generally, in manufacturing, we first produce, then sell and earn profits but in the real estate sector, we first sell and earn profit and then produce which leads to corruption and undelivered promises.
- In this regard, the government could also try the Singapoarian model where the government created the housing stocks and then sold it off.
The real estate sector has so much to contribute to people's lives in terms of providing shelter, employment, etc. But the problem has come to a stage where we need 1.5 crore housing units and at the same time, lakhs of housing units remain unsold.
The majority of projects are still viable and can be handed over to buyers, therefore, capital infusion to genuine developers who are willing to complete the stalled projects should be provided with the opportunity.
It is high time to strike the root cause of the problem and convert the crisis into an opportunity to create good solutions and boost the economy.
Aiming to solve the problems, the government of India relaxed the norms to allow foreign direct investment in the construction development sector. The government of India also allowed foreign direct investment (FDI) up to 100 %in this sector, which unprecedented decision in the history of the real estate industry. The Securities Exchange Board of India (SEBI) has also notified the final regulations that will govern Real Estate Investment Trusts (REITs). This trust will help small investors and developers for easy access to funds and create new investment avenues for institutions and investors. Real Estate Investment Trusts (REITs) will act as a war chest fund to real estate growth just like mutual funds are to equities.
This fund trust will provide a hassle-free and convenient way to invest in the real estate market providing diversification benefits with very low liquidity. It means the shares can be sold at low impact cost. Apart from this, a number of factors are working in the favor of real estate growth, including the need for 11 crore houses by 2022, 100 Smart City projects, focus on affordable housing and Housing for All by 2022, among others. Supporting the move, the government has declared investment to the tune of Rs 97,000 crore on the roads and the focus on rail and airport connectivity has also been increased. This helps to create additional townships and increase real estate activity in the country.
Incentives and other monetary benefits should be offered to individual and private bodies that take up Research and development activities for new building materials and technologies so that industry can deliver low cost, affordable and environment-friendly housing, and commercial structures. When it comes to decision making, the government should decentralize the decision-making process and empower local bodies in urban bodies. The approval process should be streamlined by introducing the single-window clearance mechanism backed by technology.
Finally, interest rates should be cut, which can reduce the cost of borrowing for developers. Besides, it can help in the sale of unsold inventory and support future demand.
Some recent Trends in Real Estate
According to Economic Times, the real estate sector remained stable during 2019 and is expected to revive in 2020. Some of the statistics here are proof that the real estate growth has been on the rise, even with the economy slowing down.
- Hyderabad
Prices dropped or remained flat in 2019 (% change in avg price in past 12 months): 10
Avg price per sq ft: Rs 4,500
But supply increased due to new launches… (% change in new launches in the past 12 months): 150
Number of new units launched during the year
2018: 5,404
2019: 13,495
…though sales did not keep pace with supply (% change in sales in the past 12 months): 4
Number of new units sold during the years
2018: 7,278
2019: 7,933
Prices in Hyderabad bucked the trend and rose smartly
- Bengaluru
Prices dropped or remained flat in 2019 (% change in avg price in past 12 months): 6
Avg price per sq ft: Rs 4,977
But supply increased due to new launches… (% change in new launches in past 12 months): 23
Number of new units launched during the year
2018: 27,382
2019: 33,772
…though sales did not keep pace with supply (% change in sales in the past 12 months): 10
Number of new units sold during the year
2018: 17,973
2019: 19,851
Only Bengaluru registered healthy growth in sales
Real Estate Market Forecast 2020
The Indian real estate market is expected to reach USD 180 billion by 2020. The housing sector alone is expected to contribute around 11 percent to India’s GDP by 2020. In the period FY2008-2020, the market size of this sector is predicted to increase around 11.2 percent. Retail, hospitality and commercial real estate are also growing exponentially, which will be offering the much-needed infrastructure platform for India and also support the growth of the real estate sector in India.