For the discerning investor, the start of a new year offers a chance for reflection and planning, for mulling over what happened and what to do next - and few sectors have as much to contemplate as real estate.
When the story of the great Indian economic boom is written, 2017 will be remembered as a pivotal year, one where the country undertook, in earnest, the long-awaited transformation into a modern, integrated economy. While India went through a moderate slowdown in 2017, this was more due to the growing pains of an economy coming to terms with essential reforms than any underlying economic issues.
This dynamic played out within property markets as well, with essential reforms causing a temporary drop in growth in 2017.
As investors look forward, 2018 promises some green shoots of recovery in Indian real estate, where the reliability offered by new regulations aligns with the returns of past years.
Reform was on the menu for every sector of the Indian economy in 2017, from the passage of the all-encompassing GST to more sector-specific legislation like the Real Estate Regulatory Authority (RERA) Act. These regulations undeniably caused a short-term dip in growth, as businesses were faced to confront untenable balance sheets and unsustainable business models. Economy-wide statistics reflect this, with estimates placing annual GDP growth around 6.5%, down from 2016’s rate of 7.1%. However, the coming year promises to be one of growth and wealth creation, with Morgan Stanley projecting a growth rate of 7.5% in 2018, cementing India’s status as the fastest growing economy in the world.
Real estate was no exception to this dynamic, with the aforementioned RERA Act creating a liquidity crunch among developers who’d previously used funds raised for one project to finance another (a practice that often left investors in the first venture facing a cash-depleted and delayed project for years on end). GST, as well, was initially greeted with scepticism, as developers waited to see how the new tax would be levied and enforced. Add the lingering effects of demonetization into the picture, and the slow sales numbers of 2017 cease to be a surprise.
However, a cursory examination of long-term trends suggests that such a slowdown could be seen as growing pains for the industry. Foreign direct investment in Indian real estate saw a 70% increase over the previous three years, buoyed by major structural reforms in FDI norms, as well as comprehensive industry reform. The commercial and retail sectors, especially, attracted investments, with PE giant Blackstone increasing its portfolio in the country to 100 million square feet - a number that made the firm the world’s largest office landlord.
As international capital flows into the country, India’s real estate ecosystem is undergoing a transformation of its own, with the developer industry heading towards substantial consolidation and professionalization. As smaller, less scrupulous developers find their balance sheets increasingly trending towards the red, they will flock toward both the Grade-A players and institutional capital. In both cases, the quality of projects will increase and the pressure to avoid delays will mount, as institutional investors will require timely returns and household names like Sobha and Prestige will not want a stalled development to tarnish their brand.
They have plenty of reasons to keep their names in good standing; 300 million, to be precise. That’s the projected number of new urban residents India will add by 2050, as increasing urbanization and red-hot economic growth ensure a steady demand for decades to come. This growth will be marked by transparency and professionalism, as the regulations passed in 2017 are expected to streamline the entire industry. The RERA Act, for example, ensures developer transparency and provides homebuyers a suite of safeguards, while GST’s input tax credits and creation of a national market dramatically simplify real estate’s lengthy and previously inefficient supply chain.
In many regards, the real estate sector is gradually emerging as a better-regulated, professionalized industry providing homes for the equivalent of the entire United States.
When is the right time to invest, exactly? An investment in a premium residential development today is a safer investment than a few years ago, but the market has not yet fully priced in this decrease in risk. This is good news for investors, as returns will likely remain at pre-regulation levels in the short term, but investments made today are less risky than those of yesteryear.
“The first few quarters of 2018 will offer an unparalleled opportunity to earn high-yield returns without risk of prolonged delays and unaccountable developers,” says Vikram Chari, CEO of SmartOwner, India’s largest property marketplace.This dynamic is playing out across the industry, as both the government and major sources of capital are requiring developers to deliver high-quality projects on time. As the rough seas of 2017 recede into the past, investors in Indian real estate can look forward to 2018.