Real estate: the struggle for reforms

Surendra Hiranandani

Demonetisation was undoubtedly a landmark event in the history of our economy. The aim of demonetisation was to curb the use of black money, but the cash crunch it caused contributed to significantly lower real GDP growth in the subsequent quarter. However, the more significant blow to the economy was dealt by policies that followed demonetisation.

While the economy was trying to pull itself out from its impact, confusion over implementation of Real Estate Regulation Act (RERA) and the Goods and Services Tax (GST) caused further widespread disruption in the short term again. To put things in perspective, in the last one year we have lost almost six months owing to the disruptions caused by implementation of policies within a short span of each other. It also contributed more to the economic weakness that we are witnessing currently and created confusion in all the sectors which hampered growth.

The primary residential market and projects undertaken by credible and reputed builders were not affected significantly by demonetisation. Transactions in these markets are broadly financed through legal channels of banks and housing finance institutions providing home loans to buyers. Only in projects where cash component was involved and those in the secondary market have been affected.

The residential sector was more impacted becasue of the state-wide implementation of GST and RERA. Developers got busy registering their projects under RERA and buyers decided to wait-and-watch, which hampered growth in the sector and led to loss of sales for six months. The implementation of GST without having the necesary infrastructure had a negative impact on the ancillary industires connected to the real estate sector.

Coming to the positive impact, the transparency and accountability in the sector has been enhanced significantly for institutional investors due to which they are looking at Indian Real Estate with renewed interest. The ongoing transformation is already witnessing a robust rise in investment inflow from both foreign and domestic institutional investors.

The long-term market dynamics for the sector are positive, especially in the residential market where prices are likely to remain stable over the coming few months. There hasn't been a significant dip in prices in the primary market in the recent past, as margins are very thin, though there has been some rationalisation in the secondary market.

The implementation of RERA will see consolidation in the industry where smaller players will align with the established ones. Only credible developers who conduct their business with transparency will survive in the future. In 2018 the focus is likely to be on completing existing projects on time and selling existing inventory.

On the flip side, RERA will eliminate fly-by-night operators entering the business of real estate. As the new paradigm emerges, it is clear that developers need to be highly compliant, transparent and extremely well capitalised.

We could also see much-awaited legal reforms happening in the sector. for instance, the implementation of title insurance will lead to renewed confidence among buyers and will definitely impact the real estate market favourably.

From a consumer's perspective, due to demonetisation, the influx of liquidity in the system has ensured attractive home loan borrowing rates, which are at their lowest in almost a decade. Owing to the ongoing transformation, developers have also been offering attractive rates and payment plans to draw potential buyers. It is a great opportunity to book homes and cash in on the deals offered by developers. They can purchase a property of their choice by doing full cheque payment. Once the market stabilizes after these few months of disruptions, we anticipate a robust recovery in both the primary and secondary residential market.

With the implementation of several policy reforms, the fundamentals for the country remain strong. As per syndicated reports, the potential employment opportunity in the real estate sector is expected to increase by more than 80 per cent by 2025. The share of the real estate sector in India's GDP is expected to double by 2025. The annual real estate supply in India is also expected to increase from about 3.6 billion sq ft in 2013 to about 8.2 billion sq ft in 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. Hence the long term prospects appear highly positive for the sector. 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.

We need to deregulate the sector to achieve long-term success as a major impediment to real estate development in India remains the approval process. The World Bank has ranked us 181 out of 190 countries in Ease of Obtaining Construction Permits Index. We hope the government looks into this at the earliest as improving its score here is crucial if it has to achieve its overall goals.