We’re in the midst of interesting times, with the real estate industry in the process of a significant reboot.
Regulatory interventions are going to move the industry from an unregulated, unorganised and fragmented sector to a more organised, predictable, regulated sector. Industries like banking and telecom, which saw similar interventions in the past, have witnessed enormous expansion thereafter.
For the last few years, the industry has been plagued with excess supply, sluggish demand, high but flattish prices, and an unflattering performance. However, we must appreciate that, much like gold, real estate is seen to be an aspirational purchase and there remain strong underlying growth drivers for the industry. Continued urbanisation, housing shortage, up-gradation, job creation and nuclear families will all continue to be strong, long-term drivers for the industry.
The industry is big, contributing to 5-6 per cent of the GDP, and therefore is an important driver of economic activity as well. Let’s delve deeper into various factors that would influence how the industry is likely to shape up over the next 12 months.
Environmental factors: The Real Estate Regulatory Authority (RERA) Act had been notified by the Centre last year and we expect the states to follow suit and start activities during the course of 2017. The mandate carried by the regulator is expected to bring far-reaching changes within the industry — there’s likely to be pressure on consolidation and on how capital is raised and deployed, while compliance costs for developers would go up.
The larger, organised developers are likely to be net gainers and so will the consumers, whose interests the authority seeks to protect. Unless there are any further policy changes which dampen demand, the effects of demonetisation are likely to settle down by the end of this quarter (March 31). The government’s Pradhan Mantri Awas Yojana initiative is likely to make a strong positive impact in the EWS/LIG/MIG segment. A continued softening of home loan rates, along with a thrust on affordable housing and infra development, would provide positive stimuli for growth. Further, if banks are able to bring product innovations, such as bridge loans, these could prove to be game-changers — if executed well.
Demand-side factors: Demonetisation has led to a deep-rooted, probably unrealistic, consumer sentiment that prices would fall steeply. This sentiment, along with the liquidity crunch, has led to a steep fall in property transactions as buyers and sellers aren’t able to agree on terms. Sellers are holding onto prices and buyers have deferred purchases. We expect it would be a gradual process to recovery, with any budget-led-stimulus probably helping to hasten the process.
This apart, 2016 saw a marked shift of buying preference to ready-to-move-in homes. We expect this trend to further develop in 2017 and developers would therefore be well-advised to focus on project execution as it would be far easier to sell homes closer to possession period.
The demand sweet spot continues to be in the Rs 40 lakh-Rs 80 lakh ($58,000-$116,000) price range. The last few months saw a shift of home-seekers choosing to rent a property instead. However, softening interest rates along with the limited price-correction that we’ve observed, has led to a ready-made bouquet of anything between 8-12 per cent effective discounts for home-seekers. Over the course of this year, we expect this trend to reverse and for more renters to convert into home-buyers.
Supply-side factors: The industry is already witnessing consolidation in developer space as cash-starved/unorganised players look to sell out their land banks to larger and professional players, or in the case of Noida, even returning the un-used land to the authority. We’re likely to see more instances of reputed developers entering into JVs or even taking over projects from financially-strapped developers.
New launch activity has reduced significantly and will continue to remain weak awaiting a revival in demand. While the case of over-supply has been extensively written about, this pull-back of new launches for the last two years will likely cause some selective supply shortages by end of this year as well. For instance, there is likely to be a shortage of villa projects in Pune as much as a shortage of homes in the Rs 2 crore-Rs 4crore price range in select micro-markets in Bengaluru.
Digital will make its mark in 2017: A recent industry report suggested that 65 per cent of those buying a home search online as part of their buying process. This figure is likely to grow with over three-fourth of users flocking to online as a more efficient medium for search and discovery. With the online platforms evolving, consumers are also likely to use portals beyond the discovery phase for research, price comparisons, and for services in the buying/post-purchase phase. Digital is also likely to capture upwards of a 25 per cent share of wallet-use across developers.
It’s a buyers’ market for now and would likely remain so in the course of this year as well. Buyers who had deferred purchases, and those who were shy of purchasing due to high property prices, would be well-advised to initiate their research activity and seek a good deal from sellers.
The underlying latent demand for real-estate continues to remain high and with an expected improvement in sentiment in the course of the year, we expect buyers to return to the market. These remain interesting times for the real estate industry. We expect the market to remain dynamic; a lot of the above factors are in play, and what happens in 2017 would depend a lot on how these factors play out.