2020 likely to see stuck realty projects getting revived by government funds; More commercial REITs to be listed as developers look to unlock value of assets to raise capital
The year 2019 has witnessed the launch of the country’s first REIT, opening up new avenues for investing in A-Grade commercial office spaces. Warehousing and co-working spaces have continued to be favoured by investors.
The maximum pain was perhaps experienced by the residential real estate sector. The ongoing NBFC debacle, the resultant liquidity squeeze and the slow pace of recovery in sales affected by overall economic scenario added to the woes of the sector until the government came to its rescue to create an alternative investment fund worth Rs 25,000 crore for last-mile funding of stalled housing projects.
In 2020, too, it is this fund which is expected to provide the much needed hope to real estate projects that have been stuck due to the liquidity crisis and facilitate completion of stuck affordable and mid-segment homes. One may also see more commercial REITs getting listed in 2020 as more commercial developers look to unlock the value of their assets to raise capital.
RERA gained firmer ground in 2019 with over 40 percent growth in project registrations. To make under-construction projects more attractive, the government slashed GST rates to 5 percent. It took a major step towards safeguarding homebuyers’ interests by banning the once-popular (but often misleading) subvention schemes. RBI reduced the repo rates by a significant 135 bps all through 2019 and mandated commercial banks to link home loan rates to it.
“All in all, in terms of policy interventions in 2019, real estate drew considerable fire but failed to display appreciable growth. The seeds sown in 2019 are expected to bear visible fruit in 2020,” says Anuj Puri, chairman – ANAROCK Property Consultants of Anarock.
“The year 2019 has been a tale of hope and despair simultaneously for the real estate sector. While it witnessed the successful launch of India’s first REIT, opening up new avenues for further investments, commercial office space continued to be the most sought after asset class. The sector saw some hope of recovery as the government stepped into to solve the liquidity issue. Overall it was a year of recovery and recuperation,” says Samantak Das, Chief Economist and Executive Director- Research & REIS, JLL.
Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com and Makaan.com, says that sales were anaemic despite help that came in the form of generous interest rate cuts and tax benefits from the RBI and the government respectively. Those measures fell short in reviving the sector with interest among buyers lukewarm because of a lack of confidence in builders and builders themselves struggling because of a severe liquidity crunch driven in large measure by the NBFC crisis.
In 2019, commercial office real estate flourished and remained the top-ranking real estate asset class. Residential continued to struggle under the funding crunch and slow annual sales growth. Other asset classes like co-working, logistics and warehousing, co-living and student housing gained traction in 2019, attracting slow but steady investments (collectively 210 million dollars).
“The year 2020 is expected to infuse growth in the sector. Like the year 2019, commercial office space will again lead, followed by retail and warehousing. On the other hand, the impetus given to the residential sector is expected to yield positive results. The special opportunity fund created by the government is likely to help the completion of stalled projects, thereby improving the buyers’ sentiment. More commercial REITs are likely to be listed as well in the coming year. More private investments will come in and consolidation, mergers within the space are likely to continue,” he says.
Agrees Niranjan Hiranandani, national president, NAREDCO. In 2020, the real estate sector will reap the benefits of structural economic policy reforms introduced with the intention of bringing financial discipline, accountability and transparency in 2019.
“The government needs to quickly undertake bold fiscal decision by enhancing focus on corrective measures for the sectors like housing and urban infrastructure, 25 percent GST rate cut temporary and slash individual tax to boost demand side of the economics. This shall bring in double digit GDP growth rate inclusive of employment generation in order to achieve $5trillion economy,” he said.Residential segment
Mid-segment to drive demand in 2020; liquidating unsold inventory to remain a challenge
In 2019, the performance of the residential real estate segment continued to be muted due to liquidity crunch, high inventory overhang, weak affordability and subdued demand. Sales traction remained slow with large unsold stock, such as Delhi-NCR, Mumbai-MMR and Pune, resulting in over supply. The maximum unsold inventory comprised of high-end, luxury units or those located in the periphery with poor infrastructure.
In its year-end assessment of the real estate sector, ICRA maintained a negative outlook for the residential real estate segment and a stable outlook for commercial real estate segment.
The liquidity crisis gave no respite to the housing sector. Private equity inflows in residential real estate remained subdued, with major PE funds focusing on the commercial segment.
In 2019, the sub Rs 50 lakh category, given the government incentives, saw maximum development and offtake. Positive trends in both demand and supply for this segment are expected to continue going forward.
Affordable housing remained upbeat in 2019 thanks to multiple government sops throughout the year. First-time homebuyers were given further tax deductions (now amounting to Rs 3.5 lakh in a year) on interest amount of home loans below Rs 45 lakh availed within the financial year 2020 end.
Of the estimated 2.3 lakh new unit launches in 2019 in the top 7 cities, nearly 40 percent or approx. 92,000 units were in the affordable segment, followed by mid-segment with a 33 percent share. The luxury and ultra-luxury segments accounted for the least share with 10 percent (approx. 23,000 new units), as per ANAROCK Research.
Housing sales in 2019 saw a modest 4-5 percent annual growth with over 2.58 lakh homes sold during the year. (Over 2.48 lakh housing units were sold in 2018) Branded developers gained ground, with some listed players performing exceptionally well on sales and commensurate revenue growth. This was because homebuyers continued to favour developers with an established track record of on-time delivery.
As per ANAROCK Research, the housing sales value of India’s top nine listed players touched Rs 108 billion in the 2nd and 3rd quarters of 2019, amounting to a 5 percent QoQ growth. However, some other big names were dragged into insolvency.
Smaller developers continued to perish or collaborate with the big players due to extreme financial constraints.
“Multiple developers fell off the grid while others still struggle to stay viable. However, strong players with healthy balance sheets - in many cases diversified beyond real estate - sailed through 2019 and recorded decent housing sales and revenue growth. Towards the end of 2019, more than 72 percent (approx. USD 47 bn or nearly Rs 3.3 lakh crore) of the total loans advanced to Grade A builders (USD 65 bn) are safe and stress-free. Grade B and C developers collectively accounted for just USD 28 bn of the total loan advances,” says Puri.
As for housing prices, they continued to remain stagnant in 2019 with a minuscule 1 percent yearly gain in MMR, Pune, Bengaluru and Hyderabad. NCR and Chennai saw no change at all, while Kolkata saw a 1 percent decline in 2019. Interestingly, between the pre-and-post DeMo period (2016 vs 2019), the end-user and IT-driven markets of Bengaluru, Hyderabad and Pune saw the maximum price increase in three years - at 6 percent, 5 percent and 4 percent respectively, says a study by ANAROCK.
Another study by ANAROCK revealed that the price gap between ready-to-move-in (RTM) and under-construction (UC) homes in the top 7 cities reduced to a mere 3-7 percent in 2019.
NCR recorded the least price difference between RTM and UC homes at 3 percent. The average prices of RTM homes were Rs 4,530 per sq. ft. while for UC homes it was Rs 4,410 per sq. ft. Pune had the highest price difference between RTM and UC homes at around 7 percent.
"Perhaps the main reasons for the reducing gap is that developers are reluctant to hike prices of ready properties amidst the overall slowdown," says Anuj Puri. "In a market scenario of limited housing sales, price hikes dampen homebuyer sentiments further. Ready unsold stock will not find many takers if prices increase.”Commercial real estateDemand for office space resilient due to listing of first REIT; Co-working, warehousing expected to grow
The commercial segment was relatively less impacted by the liquidity issues that had constrained funding in the residential realty segment. Demand for office space was resilient on the back of expansion and consolidation plans of various multi-national and domestic corporations. The segment was preferred due to the listing of the first Real Estate Investment Trust (REIT) in India, as well as the strong interest for rental yielding assets demonstrated by foreign investment funds.
Industrial warehousing and retail mall segments have also benefited from stable demand profile from occupiers and favourable investment outlook. The demand for industrial warehousing, in particular, has been driven by large scale expansion of warehousing and logistics facilities for e-commerce market places and third-party logistics service providers.
The year 2020 is expected to see a continuation of this growth story, with space take-up expected to further strengthen in the short term. Tech is expected to continue shaping office demand even as occupiers adopt newer workplace strategies to realign their portfolios by trying to find the right mix of flexibility and collaborative / incubation spaces within their core workplaces along with adding external flexible options.
“We expect flexible space operators to continue to expand operations and target secondary markets in Tier I cities and major markets in Tier II and III cities,” says Anshuman Magazine, chairman & CEO - India, South East Asia, Middle East & Africa at CBRE Office.
Aashish Agarwal, senior director (Head- Advisory Services) at Colliers International India, says that in a slowing economy with a strained liquidity environment, larger players with a diversified portfolio and sustainable debt will continue to dominate the real estate landscape. Developers with institutional partners will have the financial muscle to enter new geographies and invest in both greenfield and brownfield projects. The co-working market in India has over 350 players and 2020 is likely to see significant M&A activity in this space
The country’s first REIT has opened up opportunities for retail investors to participate in the growing commercial sector and delivered over 40 percent returns since the listing in April this year. While this should not be considered as a benchmark for future returns, investors can look forward to more opportunities in this segment, as at least two more REITs are lined up for listing in 2020. As the market matures, investors will be able to choose from a more diversified pool of assets including infrastructure, retail, warehousing, data centres, he says.
The first half of 2020 is also expected to see further supply and absorption of space in SEZ buildings ahead of the sunset date for expiry of tax benefits. As per ICRA, while the demand for office space appears to be decoupled to a large extent from the domestic macro-economic headwinds, the resilience of such demand trends may be tested in case of a sustained weakness in demand from sectors such as IT services and banking, financial services and insurance (BFSI), which currently contribute the largest share of leasing activity.
Co-working companies have been among the largest occupiers of office space in the past two years. While the interest in the space continues to be high, the increasing market scepticism about the valuations in the segment may result in some moderation in growth plans for a large number of the co-working companies.
Post the global WeWork debacle, India’s co-working boom came under closer scrutiny and raised some pertinent questions about this 'poster-boy' of Indian commercial space. However, the demand for co-working spaces in the country by entrepreneurs, tech start-ups and even big multi-nationals remains strong and growing.
“While the basics of affordability, design and flexibility will largely remain the same, every player will have to try to offer a little more than the others in order to stay competitive and attract more customers,” says Manas Mehrotra, chairman, 315Work Avenue, a leading co-working space provider.
Co-living market size is also expected to double. In 2019, the market size was 6.67 billion dollars, which is expected to grow to 13.92 billion dollars across top 30 cities. The demand for co-living in terms of beds is slated to grow from 4.19 mn to 5.7 mn and the share of private beds shall rise from 15 percent to 30 percent of the total demand in the co-living segment, as per an estimate by Cushman & Wakefield India.
In 2020, co-living segment will see faster expansion. “With large PE funds and deep-pocketed investors coming into the scene, co-living will evolve into a high-value asset class by itself. In line with this development, new facilities will emerge in high-potential metro cities like Bengaluru, Pune, Chennai, Hyderabad and Delhi,” says Suresh Rangrajan, founder and CEO, Colive.