Crisil Research expects robust allocations to schemes like PMAY
State of the industry
The housing sector witnessed structural changes in 2017 on account of multiple regulatory developments at both macro (demonetisation and GST) and sector (implementation of the Real Estate (Regulation and Development) Act, 2016, or RERA, announcement of infrastructure status to affordable housing, budgetary announcements on Credit-Linked Subsidy Scheme or CLSS) and increased focus on Pradhan Mantri Awas Yojana) levels.
Interest from both end-users and investors was subdued during the year. Investor participation reduced significantly due to falling returns on the asset class given stagnant real estate prices, limited income tax benefits on let-out properties, and curtailment of pre-launch transactions post implementation of RERA. On the other hand, end users preferred to buy ready-to-move-in properties due to risks associated with the delivery of under-construction projects. While effective implementation of RERA will address this issue in the medium term, resurgence in buyers’ confidence will take some time.
With residential real estate prices across the top 10 cities under pressure, several developers offered discounts upfront, while some offered ‘all inclusive house prices’ and indirect benefits such as reduced floor charges or premium location charges. Thus, the effective price correction was 5-10%.
RERA has forced developers to focus on completing existing projects. This, coupled with sluggish demand, has resulted in fewer new launches. Lately, developers have started aligning supply to suit buyers’ affordability, such as constructing smaller studio apartments and 1 BHK units, or reducing the size of 1 and 2 BHK apartments. This strategy has worked in the favour of developers, especially post announcement of infrastructure status to affordable housing. However, such projects form a miniscule share of overall supply across the top 10 cities
Over the past few years, operating margins of real estate players have been reducing. Interest payouts remain their biggest concern due to high debt levels. Despite reducing interest rate, the gap between operating and net margins has widened on account of the increase in debt. Many developers have been refinancing their existing debt through private equity funds as banks have become cautious. Resultantly, bank credit to the sector grew at 1% in fiscal 2017 – the slowest in the past seven years
Tepid demand in the National Capital Region has led to several developers facing severe cash crunch. Many instances of defaults by developers were witnessed on payment of interest, term loan and/ or debentures. Since August 2017, several lenders have filed insolvency cases before the National Company Law Tribunal against such developers, leading to massive outrage among home buyers.
The GST applicable on under-construction residential properties is 12%. Several developers have passed on the input tax credit benefit to the tune of 3-5%, offsetting the increase in tax. In contrast, many local players have absorbed the additional burden to propel sales
CRISIL Research believes residential property demand is unlikely to revive till H2 2018, as the fundamental problem of lack of buyers is unlikely to change any sooner. We see prices hovering at current levels due to weak demand and moderation in new supplies.
CRISIL Research expects the next few quarters to witness launches in the affordable housing category, leading to a reduction in the overall ticket size. The government’s emphasis on housing for all, benefits announced for smaller units, and CLSS benefit to end users are all expected to result in rapid growth of the segment over the medium term.
Government is expected to maintain its emphasis on Housing For All through robust allocation to Pradhan Mantri Awas Yojana Urban and Gramin and to National Housing Bank (for refinancing individual loans).
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