The Indian perception that Real Estate is amongst the Better and Safer Investments continued to stay even in the downturn. It is likely to gain faith post Election 2014. Although most Real estate companies are bogged down on all fronts, right from Curbs on Lending, Mounting debts, Increasing Interest Rates, Liquidity crunch, Employee dissatisfaction and more, the Indian Perception of “Hamara Ghar”, may bail out this Sector.
The point to ponder is that Post Election 2014, will it look up, survive or sink? Will it be another Bubble like the IT Bubble?
The Real Estate Sector has been in turmoil for some time. Factors affecting are listed below:
The first half of the last decade saw a crazy rush for Real Estate, both, at the Builder / Co level & the Buyer level. Numerous Real Estate Companies mushroomed. Rich & famous found it wise to be either invested in these Companies or their products; Residential, Retail, Commercial or other options.
In spite of a shortage of over 16-18 million houses in India, the End Users have not been the Major Buyers. Close to 55% of home buyers have been buying as 2nd / 3rd Property, meaning that the Real Consumers are still available aplenty.
Rush to own properties, led to unrealistic growth in Prices, which was boosted by the Broker Community. However, the Broker motivated artificial fillip was not going to last forever.
The growth of 20-25% during the beginning of the last decade, stagnated between 2007-10, leading to a large No of Investors getting stuck with their Investments. The first to be hit was the Commercial space; more than 35% of Commercial Properties in NCR are vacant / unoccupied. The Residential Sector soon followed, with under construction Flats being sold even at sub-prime costs.
The relief which came in 2010 lasted for 18-24 months. It once again got stalled due to Over Priced Inventory, coupled with Policy Paralysis of the Govt.
The slowdown in demand resulted in a sharp spike in inventory of late. The global recession and impending tapering of the easy money policy by the US central bank have not been auguring well for fund flows to the sector.
Projects have continued to be delayed, without much recourse for the Buyers.
The Indian Real Estate is heavily funded by unaccounted / surplus money, ie. there is a large difference between the Price of property on papers & actual cost. This had helped Indian Real Estate survive the Sub Prime Crisis & may once again be able to.
After the never ending delays, the Govt came out with the Land Acquisition Bill, the content of which are highly debatable. However, some clarity has finally come.
Regulatory Body. In the absence of any worthwhile Regulatory Body, the Builder Sharks had a field day. There are more than a lac Legal cases pending in courts against the Builders. Norms were violated & Common Man was left to fend for himself. Some Positive Judgments & Laws for the Buyers have led to cooling off of some Corrupt Practices.
For investors in Real Estate Co stocks, there were huge losses, as most real estate stocks are quoting at a fraction of their book values. However, the belief that real estate is amongst the best investment stays. What the new Govt does, will decide the revival of the investment cycle.
Expectations from Real Estate
The expectations from the Real Estate could be put in two parts; one w.r.t. the Property Buyers & second for the Share Market or the Real Estate Index.
Property Buyer’s Expectations. The Property Buyers expect the following from the Real Estate Industries:
It is largely expected that the Policy Paralysis would be over & the new Govt. would bring in Fair & Well Defined Guidelines post Elections.
Buyers should not expect continued growth rate of 20-25%. One should be fine with 15-20% growth at the max. To achieve this, the Sale price to be fixed by the Industry, should be Pragmatic, leaving space for growth for the Buyers.
Common man expects that now he will not be cheated through misleading advertisements and selling on Super area. There will be more clarity from the Builders on the aspects of Super/Carpet Areas; Car Parking Cost; Maintenance Deposits (IBMS, IFMS etc), PLC and so on.
Newspapers & Magazines like HOME FOR EVERYONE, would be of great help to Consumers in comparing Builders, thus enabling Buyers to take informed decisions.
Carpet Area is an important concern for all buyers. The Real Estate Regulatory bill, has come as a great relief for the home buyers. Buyers expect the Builders to comply with the Govt Direction on this.
However, there are many grey areas unaddressed. To address these, there is an urgently requirement of a “Dispute Redressal Mechanism” to safeguard their interest.Majority of homebuyers (more than 75%) believe that it will safeguard their interest.
The new Govt is expected to set up this mechanism. People expect Special Courts like Consumer Courts would play a major role in resolving Housing related disputes.
The masses also expect that some Sops like lower Interest Rates, specially for End users should come in.
The government must remove the service tax on under-construction properties, as this tax adds significantly to the cost of the property.
The Govt may give some concessions in affordable housing projects. We have more than 16 million housing shortage, which needs to be jointly addressed by the government, builders & other agencies. Some incentives w.r.t. taxes and excise benefits are much needed for this segment.
It is time Govt. gives Industry status to the Realty Sector. On getting industry status it would be able to raise funds at lower cost resulting in reduced sale price to the buyers.
The current income tax exemption limit (introduced a decade back), for the interest payment towards the home loan is 1.5 lakh per annum. The limit is no more adequate. It needs to be doubled, if not more.
Home buyers also want that Govt should enforce heavy penalty on developers if a project is not delivered on time.
Investors in Property Companies’ Expectations.
It is not expected that the fundamentals of the sector will change any time before 3rd Qr FY 14-15. We are probably a quarter away from when the sector bottoming out.
Interest on home loans is likely to peter off, resulting in these stocks improving.
Getting “industry status” will give it a boost mainly because of cheaper fund availability.
Most real estate stocks are available at a fraction of their book values, making them attractive with a long-term perspective. The Indian belief that real estate is the best investment remains intact, which makes one bullish on the sector.
The percentage of home owners who do not have a home loan is very low. Subsidy / support to this segment would push up demand.
It may be possible for the Govt to give subsidy on low cost / first time home buyers, which will boost sale.
The elections are round the corner. The Country has high hopes from who ever forms the next Govt. housing is one of the Three Primary needs- Roti, Kapda aur Makan. It needs to be seen if the Industry and the Govt delivers on the expectations from them. If they do, the sector will revive & it would be a Win – Win situation for all.