Year End Sentiments on the State of Affairs of Indian Real Estate By Vishal Swaika

Please Find My Reviews And Answers For A Story On The Year End Sentiments On The State Of Affairs Of Indian Real Estate And In This Regard Sharing With You my Inputs.

Q1.In terms of market transactions, how did the year 2018 fare?

Ans. The year 2017 will go down as the year of an inflection point for the realty sector as the introduction of the Real Estate (Regulation and Development) Act, 2016, promised a new era of transparency and professionalism. The real estate law promises to address the biggest issue concerning buyers – timely delivery of the projects they have invested in. Further, the grant of infrastructure status to affordable housing was a great move for the sector. The government also announced Credit Linked Subsidy Scheme (CLSS) during the year, thereby making loans available at many affordable rates, thereby benefiting both buyers and developers. Under the scheme, interest subsidy is credited upfront to the loan account of beneficiaries through lending institutions resulting in reduced effective housing loan and equated monthly installments.

The two significant developments in 2017 were GST rollout and implementation of the real estate law. Realty players faced challenges to aligning their business to comply with the GST guidelines. On the commercial front, since GST was applicable on purchase of homes and under-construction projects, homebuyers were neither opting for the completed project nor putting their purchase decision on hold. These combined factors led to declines in sales at 4.8 percent in the third quarter of the financial year 2017-18 in five of top seven cities. Some developers were therefore seen offering higher discounts to buyers. New launches in 2017 were also at a slower pace as developers were assessing market sentiment post-RERA era.
The year 2018 will be the year of consolidation in the industry, where developers with deep pockets, commitment to corporate governance and transparency will sustain their operations while non-serious players will be weeded out. Though RERA, GST, and demonetization hit the real estate industry in the short term, these reforms are bound to benefit the sector and the economy in the long-term.
The coming year will see consolidation in the real estate sector as larger players will peak in strength and smaller ones will be eroded or will align with the established ones. Owing to stringent RERA norms, it is clear that only credible developers who conduct their business with transparency will survive in the future and will be able to navigate the roadmap. This is good from a buyers perspective as one is assured of a quality product within stipulated timelines.
The recent trend in the decline of new project launches implies that the supply in the market will gradually find some equilibrium with demand, and prices will subsequently start picking up the pace gradually. In case “buying a house” features in your New Year resolutions, the current environment presents a very good opportunity to take the plunge as attractive offers are available and interest rates are at their lowest levels. We certainly hope these factors lead to more fence-sitters spring into action in 2018.
Notwithstanding the economic disruption, commercial real estate market remained robust in 2017. The office leasing market will continue to remain healthy in 2018 and beyond, reflecting strong employment growth. We expect REIT's to be launched in India in the coming year which will provide investment opportunities to smaller investors and private equity players, who are now gearing up to expand their retail portfolio across Indian cities.

Co-working spaces are also expected to see a spike in demand in the coming years as they are becoming platforms for collaboration, exchange of ideas and higher networking opportunities.
The long-term prospects continue to remain positive for the sector. As per syndicated reports, the potential employment opportunity in the real estate sector is expected to increase by more than 80 percent by 2025. The share of the real estate sector in India's GDP is expected to double by 2025. Not only will this result in an increase in job opportunities, but it will also have a cascading effect on various ancillary industries which are dependent on the real estate industry.
Increasing urbanization and the expanding urban fabric of tier II and tier III cities in the country will be the prime drivers for the growth of real estate in the future.
The real estate law has completely changed the landscape of the real estate sector. These will results into a kind of correction in the real estate sphere.  Where only a few organised players will consolidate the sector and unscrupulous players will be eliminated. India needs 25 million homes in the affordable category. The interest subsidy under the credit linked subsidy scheme of PradhanMantriAwasYojana ( PMAY) will play a major role in providing homes to economically weaker section and middle income group home buyers that to in an inclusive approach within the formal banking system.
In 2018, the demonetization impact that has started to take off will see a further southward movement which will be an encouraging business solution to be in for the developers. The higher transparency on account of RERA and further consolidation is a good sign to boost the confidence of small investor who now has an option of in investing in real estate investment Trust (REIT'S) and facilitate greater volumes of foreign investments flows.
If there is a drop in home loan interest rates then naturally this will lead to an increase in the home loan disbursement. Meanwhile, the regulators for housing finance companies, national housing banks and other industry related to real estate associations have written to the government authority to lower the effective GST rate for an affordable housing project. This move will lead to an improvement in demand for under construction homes.
several private equity and financial institutions have invested in large residential/commercial projects, and the focus has shifted towards cost and time efficiency. The trend today has moved from conventional labor-oriented approach to technology-driven approach. In other words, the industry now yearns for mechanized and modular based construction techniques, rather than age-old conventional practices. The need of the hour is constant innovation through collaboration. With the advent of the real estate law, the country has moved one more step forward towards professionalism in delivery and expectation here also is to deliver as per standards and within committed time. The year 2018 will see a huge need for a timely and professional approach to delivery, where skill-based project management approach gathers huge significance.
The real estate sector is now developing every day. Builders have gone beyond the old school brick and motor perception and companies like Isprava are now looking to disrupt the way real estate functions. By bringing technological developments in client relationships, client servicing, operational and building processes, the typical real estate builder has perished and transparent, ethical companies have created their mark. Over the years we have also seen a psychological shift in the mindset of people when it comes to the luxury segment in India. Families are now more open to buying and investing in various luxury products and services – Isprava being one. 2018 and beyond, we are extremely bullish on the future of the luxury real estate market.
By all means, 2017 has been a turnaround year for the real estate sector. The industry saw some huge progressive developments and improvements which was needed for the enhancement of the sector. It is now clear that the industry is finally turning in to a structured and organized sector. 2017 has been quite significant as the government has announced the right moves to drive the growth of real estate sector. The government initiated a number of policies which will give a much-needed boost if executed in the right method. As there is a need of approx. 20 million houses the government encouraged the participation of private players to enter affordable housing to achieve 'Housing for all' through financial or non-financial support, the government has taken a great initiative by developing the PPP model. Apart from RERA and the GST, additional policy initiatives such as REITs, The Benami Transaction Act, Demonetization, are also expected to have a long-term impact on the sector. With a tepid market sentiment over the last 2 years, combined with a host of new policy measures, it has never been more challenging to be a leader in real estate. Demonetization, Benami Property act are all steps towards increasing transparency across the real estate sector.
The Benami Property Act is expected to bring greater clarity with respect to property ownership. All these measures are in the long run expected to create stable businesses and mature industry. Also the recent move of linking the Aadhaar with all the property transactions and enhancement in carpet area, Mhada Houses are all positive steps taken for the growth of the industry which is benefitting buyers and developers too. The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 percent to the country's Gross Domestic Product (GDP). The market size of the real estate sector is anticipated to grow at a compound annual growth rate (CAGR) of 11.2% in the financial year 2008 to 2020. Commercial real estate, retail, hospitality are growing considerably, proving much-needed infrastructure for India's growing needs. The ecosystem of the property market in Indian real estate is much better now as the economy is showing sign of improvement with a stringent act that is thus leading to higher buyer's sentiments. From the inventory standpoint, developers are sitting over quality inventory which will make the wishes of the home buyers for a ready-to-move-in flats come true. The positive and brighter outlook for the year 2018 comes from the innovative reforms that took place in the real estate sector in the year 2017.
Q 2. How would you rate the government's achievements with regards to infra and realty sector?

Ans. The Big Bang reforms implemented in 2017 have brought about a significant change in the tax, regulatory and business environment in India. Post demonetization, the introduction of RERA and GST improved the transparency and accountability in the sector, thereby catching the attention of institutional investors who are now looking at Indian real estate with renewed vigor.
While we congratulate the government for these achievements, there are many more areas where reforms are eagerly awaited which will boost confidence amongst buyers. We look forward to legal reforms happening in the sector like the introduction of Title Insurance which will safeguard the interests of the buyers.
It must be noted that while the Ease of Doing Business ranking has improved to 100, India is still ranked at 181 out of 190 countries in the Ease of obtaining Construction Permits. We are in the same league as war-torn countries where institutions have collapsed. This is one area where the Government could easily implement rapid reforms. It is extremely important to deregulate and not over-regulate the sector, provide faster approvals and clearance which will boost productivity in the future.
The year 2017 was a landmark year for the real estate sector and was big in terms of news and policy level changes. With the series of reforms and structural changes in the real estate industry, demonetization got in the additional transparency which the sector required even though it came in with many challenges it further helped in alleviating issues. Later the game-changing policies of the real estate law and the Goods and Services Tax (GST) gave the necessary boost required for housing. Addition to this, affordable housing has revived the fortunes of the sector and due to which a significant surge has been witnessed. Also, there has been an evident capital flow from the Global market in India, which will further help to boost the economy. Furthermore, with the overall market has been moving towards ease of doing business and hence an expectation for potential investors has increased. The policy changes in 2017 will hopefully pent-up demand in 2018.
The real estate sector has hit the headline from past two years. The major decision by the government to demonetize the currency, the implementation of the real estate law had disrupted the industry. This has hit the sales and new launches and knocked growth temporarily. On the other hand, this initiative has boosted consumers' confidence and has brought transparency in the industry. While real estate investment trusts (REITs) did not do much as anticipated this year. Affordable housing initiative somewhere got its share with the government giving it an infrastructure status. It encouraged the developers by safeguarding easier access to institutional credit and by relieving the reducing developers' cost of borrowing for affordable projects.

Affordably-priced units have seen higher absorption in most cities. The real estate sector registered around 15-20 percent growth in sales in Sept-Oct  and 13-15 percent during May-July. In a major relief to the housing developers, Finance Minister Arun Jaitley this year has reformed the time for evaluating of notional rental on unsold stock apprehended by developers for tax purposes. This decision will now begin in only one year after project completion. The year 2017 will make its space in the books of history as one of the difficult years for the residential segment in real estate sector. The capital values in Pune, Kolkata and Hyderabad etc. rose at a relatively quicker pace. New unit launches were slower, as developers are assessing market sentiment and aligning themselves in the RERA-era. Cut in interest rate by banks have also set mood for the buyers and it has positively contributed towards the growth of the sector.
The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 percent to the country's Gross Domestic Product (GDP). Real estate has been in the near term but the government's incentive programs for affordable housing is quite big and strong and its effect is already being seen. 2018 will see a positive trend and developers focusing on execution. Consolidations & Joint developments will see a rise and the sector will be left with credible brands leading to higher consumer confidence.
Budget 2018 continues its push for the RE sector, by creating a dedicated fund for affordable housing. This will help more developers embrace this segment of real estate and create much-needed traction on the ground. Enhanced spend on Infraaggregating to 14.34 lakh cr. and monetization of assets being held in the public sector undertakings through the creation of InvITs will fast-track the agenda of improving/ creating infrastructure in the country. Also, clarification around computation of tax in case of circle rate variation is a pragmatic step by the government. 
Q 3. How has the building and construction sector performed during the year?
Ans. The year 2017 was a year of amalgamation — with the outcomes of all policy initiatives taken in 2016 beginning to take shape. Most of the initiatives are aimed at improving transparency and improving overall investor as well as end user's sentiment. The implementation of the real estate law was the most important reform that the sector has seen in recent times. The law will not only help regulate the sector and promote transparency but could also facilitate greater volumes of domestic as well as overseas investment flows. The confidence of home buyers is also likely to recover. The central has taken yet another step to improve transparency and accountability in the sector with modifications to the Benami Transactions Act 1988; with the new Act coming into power from November 1, 2016. As the impact of these regulations unfold in 2017, the sector's future growth prospects in 2018 look brighter and 2018 will be the year of expectations for both developers as well as buyers.

Transformational shift for the real estate sector

Four major developments:

RERA (Real Estate Regulation Act)

RERA has moved through the legislative contours to finally become a regulation. 
The sector had become huge in terms of a large number of transactions and its contribution to the overall GDP of the country. Lately, due to non-standardized and unregulated practices, the fragmented sector has been in the limelight for all the wrong reasons, further impacting its image. There was a dire need of a supervisory body to oversee the operations of the sector.
This Act has the impact of changing the entire landscape of the real estate sector and redefining the process of how real estate sales happen in the country. This has not only impacted the developers’ community but all the stakeholders in the sector.  Every stakeholder - right from the government, banker, PE and consumers - is unlearning the old ways of operating and getting aligned to the new systems/processes which are RERAfied.

Impact on real estate developers

The advent of RERA has created a furor among developers and there was a lot of criticism and resentment in the fraternity for this legislation. However, by and large, developers have accepted the change. It will be good to highlight the work done by organizations like CREDAI, NAREDCO, FICCI, among others,  who are constantly working with the community and creating awareness about the long-term benefits of this act. However, it’s a great opportunity for the developers to completely change the perception of all the stakeholders towards the sector and in particular, the developer fraternity.

a. Large Developers: Clearly ahead of the curve and moving seamlessly with the law.
b.Mid-size players: Excited about the opportunity and stepping up their game.A golden chance for them to raise the bar of their business.

c. Distressed set of players: Creating an opportunity of consolidation in the sector. Some of them are willing to join hands with larger players to remain in the business.
Some serious thinking and investments by the developers to realign their business verticals to ensure compliance with the new law.
The year 2017 would be etched as a landmark year in the history of the real estate sector as it has completely transformed the sector. Policy measures initiated by the government have played a pivotal role in empowering the organized real estate developers and eradicating the fly by night developers from the system.  Developers focused on execution of ongoing projects and delivering them to customers which were instrumental in reviving the customers' sentiments. The cascading positive impact was felt on the demand for real estate products in the offing.  For Alpha Corp also it was a phenomenal year as we were able to deliver more than 1,800 units spread across projects in Meerut and Gurgaon.

I certainly believe that the real estate sector is at the bottom of U-curve and the worst is behind the sector. On the backdrop of strong GDP numbers, positive sentiments and renewed commitment of developers to deliver quality real estate projects within the stipulated time period, the outlook for the sector look positive.
Q 4. What's your opinion about NBFC liquidity crisis?
Ans: NBFCs were the largest net borrowers from the financial systems in March 2018.
Non-banking finance companies (NBFCs) in India are going through a rough phase following defaults by once a bluechip infrastructure lender, Infrastructure Leasing and Financial Services (IL&FS), on short-term debt obligations. The liquidity crunch in the sector has created tensions between the Reserve Bank of India and the government. It may be noted that the government is willing to ease the liquidity crisis afflicting financial markets in the country by pushing the central bank for easier credit flow, while the RBI is arguing that the sector has access to enough money through normal channels.

Debt-ridden IL&FS, in which various corporates, as well as mutual funds and insurance firms, had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been defaulting on its several debt-obligations since August. IL&FS’ borrowing from banks and financial institutions adds to nearly Rs 63,000 crore as per the balance sheet of 2017-2018, according to the Ministry of Corporate Affairs (MCA).
There are concerns that many NBFCs could have their funds stuck in IL&FS debt instruments. Reportedly, approximately Rs 2 trillion ($27.23 billion) of NBFC and HFC debt is due for redemption by the end of December. Also, funding costs of NBFCs are likely to go up and could lead to a sharp decline in their margins.
What was the fund source of NBFCs?

NBFCs were the largest net borrowers from the financial systems with gross receivables of around Rs 419,000 crore and gross payables (loans) of about Rs 717,000 crore in March 2018. According to the breakup of gross payables, the highest funds the NBFCs received were from banks (44%), followed by mutual funds (33%) and insurance companies (19%).
Is it because of banks, the biggest lenders to NBFCs?

Banks are the major resource avenue for NBFCs. After defaults by IL&FS, both public sector and private sector banks almost stopped lending to NBFCs and housing finance companies (HFCs), adding to worries ahead of the festive season. An asset-liability mismatch in the operations of NBFCs such as IL&FS is a fundamental issue, which means that these firms raise capital from the markets for 3-5 years and lend for longer tenures – 10-15 years. Now, defaults in such a scenario will keep potential investors away from the debt instruments of companies in the space, The Indian Express reported.
On the other hand, when the interest rates are rising, margins of NBFCs came under pressure and raising capital became tough. According to banks started cutting exposure to NBFCs since April 2018 in the wake of the huge bad loan, which led to a 4.6% drop in their exposure to the sector.
What did the RBI do to provide liquidity?

Last month, the RBI announced to inject about Rs 40,000 crore into the system in the month of November through the government securities to meet the liquidity demand ahead of the festive season. In October, the central bank had already injected Rs 36,000 crore through open market operations. On the other side, the sector and the government are pushing to open a special liquidity window to meet the funding needs of the sector. However, the banking regulator was of the view that such a move could be misused as it will have to provide funds to every company approaching it for funds, saying there is adequate liquidity available for the industry. Meanwhile, the State Bank of India also proposed to buy good quality assets worth Rs 45,000 crore from NBFCs.
Going forward, NBFCs from here

The ongoing liquidity situation for NBFCs may remain tight. Also, there could be higher borrowing costs, given the recent adverse sentiment in the bond market. On the other side, the central bank may also tighten the norms for the sector, in order to bring these companies almost on par with commercial banks in terms of regulation, The Indian Express reported.

Ongoing NBFCs liquidity crisis may hit small and the mid-level real estate developers
Ongoing non-banking financial companies (NBFCs) liquidity crisis may hit small and the mid-level real estate developers.
"If NBFCs go down and do not fund the projects in the second half of this financial year, we see certainly a big problem coming with the developers as all other funding avenues has got closed. Sales are happening, but are insufficient to be able to bear the total construction cost of the project.
"The usual funding has stopped from public and private sector banks, "In between, there was a little bit of private equity who started to come back into Greenfield and brownfield residential, but that also stopped and the only avenue was NBFC or sales," he said.
However, sales today are not being sufficient to cover the total construction cost for the project and hence the gap is being covered by the NBFCs.
Further, he said the real estate sector has been facing turbulence particularly in the residence for the last five years, "The commercial has been doing very well, but the commercial only represents 14 percent of the total Indian real estate. So, 86 percent is represented by residential, which is where the trouble is."
there is a silver lining in the crisis as in the last nine consecutive quarters, the sales have been more than the new launches, "The unsold inventories have started to sharply come down about 7.44 lakh units have come down to about 6.8 lakh units."
Under-construction segment is suffering a great deal, "First, lack of trust on developers to be able to execute and complete projects.  Second, the unsold inventory piling up there. Third, the Goods and Services Tax (GST) factors and fourth, the oversupply situation in the market has been very hard on the sector."
"There is a great deal of worry especially with the small and the mid-level developers as to how they are going to secure funding if the NBFCs do not come through with their commitments, which they had committed in the first half of the year."
“On the pricing front, I definitely believe the under-construction segment where sales are witnessing a great amount of slowdown, new launches have come down by 90 percent over the last one to one and a half years, that segment will continue to suffer and you could see some further price corrections,” he further mentioned.
Q 5. Reason for slow transactions in the market last year?
Ans The last few quarters of 2017 have slowed down the Real Estate market to a simmering investment pot making hardly any profits on account of Demonetization, RERA and GST. But we all know that the principle of real estate investment is 'Earlier the better'. Real Estate has, even in bad times, always provided better returns than any other investment like Gold, Equity, fixed deposits, etc.
(i)  What makes house prices fall: -

In other words, demand decreases while supply increases, resulting in a fall in prices. This pervasiveness of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors and property investors.
(ii)  How long do housing bubbles last: -

Real estate bubbles occur every 13 years on average, but last twice as long as the 2.5 years that stock market bubbles last
(iii) Is Indian real estate market in a bubble : -

The Indian property bubble refers to the concern expressed by some Indian economists that housing market in some major Indian cities may be in a bubble. The real estate sector is thought to be collapsing due to increasing costs of financing. ... Several of India's publicly traded real estate firms are in debt.
(iv)  What is a buyers’ market and sellers’ market:-

A seller's market is just the opposite. The demand is larger than the supply. People have more money to spend on real estate, so sellers will often see several buyers competing to buy their property, which drives up the price. This means that buyers will have to spend more to get what they want.
(v) Why do house prices go up:-

When demand increases and/or supply decreases, prices go up. In the absence of a natural disaster that might decrease the supply of housing, prices rise because demand trends outpace current supply trends. ... So, if there is a sudden or prolonged increase in demand, prices are sure to rise  

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