Real estate sector to see a turnaround in 2015
A cut in interest rates is round the corner, which should boost the demand for real estate. A government with the strong mandate has already initiated a series of reforms which should create a positive environment for growth.
By all indications, 2015 will be a turnaround year for the Indian real estate industry.
As the early days of 2015 coast along, it is clear that the Indian economy is finally turning the corner. With GDP growth pegged at 5.5% this fiscal against 4.7% in the previous financial year, reports indicate that hiring in various sectors will gather traction this year, leading to better job and income prospects for salaried employees. All this augurs well for the Indian realty industry, which was beset with muted sentiments since the feel-good factor had been missing during the past few years.
The turnaround in sentiment actually began with the election of the NDA Government via a clear mandate in May 2014. Thereafter, a series of incremental reforms and announcements augmented the feel-good factor across India, which benefits Indian industry as well as the real estate sector. Some of these measures include the incentives announced by RBI for infrastructure financing, the reduction in interest rates on home loans, incentives for affordable housing (with Rs4,000 crore being allocated for this), announcement of a framework for REITs (Real Estate Investment Trusts) and relaxation of norms for foreign direct investment in construction. The Government’s initiative in relaxing complex FDI norms will help boost sentiment, leading to higher foreign inflows and more liquidity. Cash-strapped developers will find their liquidity problems easing in 2015.
One factor consistently contributing to tepid end-user and investor interest in realty offerings has been the high interest rate regimen, which RBI Governor Raghuram Rajan steadfastly refused to lower last year, despite repeated requests from various stakeholders. But with inflation dropping to record lows in recent months, the RBI will finally take a call on reducing interest rates during the first quarter of this year.
Considering this scenario, developers are likely to come up with more offerings in the mid and affordable housing segments, rather than focussing purely on premium projects, where the margins are higher but off-take has been slower. These developments will help arouse buyer interest and trigger better sales in residential units compared to previous years. Despite sales picking up in the days ahead, prices will continue to remain stable since high inventory levels need to be reduced.
Besides the above, there are other upcoming factors that will spur demand in the days ahead. With SEBI (Securities and Exchange Board of India) notifying new norms for REITs in September 2014, this year should see the actual launch of REITs in India. REITs will help retail investors put down their money in realty ventures via a safer avenue for returns, while also helping developers improve liquidity even in testing market conditions. There are expectations that REITs could ultimately attract funds worth $20 billion. Whatever the inflow levels, REITs will help facilitate better demand.
The other real estate booster is the Ordinance on the Land Acquisition Act, which has relaxed many of the stringent norms on the consent, rehabilitation and resettlement clauses that had made land acquisition cumbersome and well-nigh impossible. This singular reform possesses the potential to spur new project developments in real estate and other industries.
Another legislation awaiting Parliamentary approval is the Real Estate (Development and Regulation) Bill, pending for quite some time. As and when finally approved, it will foster greater transparency in the sector, facilitate foreign investments and ease problems in raising capital from banks and other financial institutions.
Finally, given the Government’s focus on affordable homes for all by 2022, the creation of 100 Smart Cities and infrastructure development across India, the real estate industry has much to look forward to in 2015.