December 2015
Concrete policy and regulatory initiatives of 2015 set the contours for 2016
Yet another year has come to an end, and we have embraced the New Year with open arms and hope-filled hearts. However, before treading the path for 2016, it’ be worth our while to recapitulate the year gone by. Here’s an overview:

2015 - Looking Back

The dark clouds over the real estate space have begun to drift apart and there is a ray of silver lining. For the past few years, real estate was groaning under the burden of unsold stock, exorbitant prices and lack of financing to bridge the gap. In a populous country like India, there is no dearth of housing demand. However the existing situation on the supply side is a quandary that has always plagued the market. The current phase in real estate can be seen as a Point of Inflection wherein the slackness has paved the way for price correction, and potentially giving a boost to sales and increased absorption. The prevailing price point and reduction in housing finance rates have also eased entry for fence-sitters. Also softening of commodity prices reduced input costs and motivated developers to abstain from resorting to high prices.

The major highlight of 2015 was the undertaking of a plethora of policy initiatives. The very thought rings a bell of positivity that ultimately decision makers are keen on bringing efficiencies in the real estate market. Though many Government initiatives have not borne desirable fruits in the past, we hope things are different this time. Effective implementation has the potential to be a game-changer, so it will be interesting to see how 2016 unfolds for us and what path the real estate sector treads.
Pankaj Kapoor
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  The major policy initiatives that characterised the year
The major policy initiatives that characterized the year
AMRUT (Atal Mission for Rejuvenation and Urban Transformation)

One of the major urban development initiatives, launched this year has been the AMRUT (Atal Mission for Rejuvenation and Urban Transformation). Under this programme, cities with more than one lakh population would set the process of urban transformation to enable better living and drive economic growth. The plan is intended to handle urban planning and housing expansion in an all-inclusive manner. The AMRUT project is all set to be implemented on PPP model with equal share of funding from the Centre and State.

7th Pay Scale Commission

The recommendations of the 7th Pay Commission by the government is being touted as a potential game changer on the demand side. The real estate market is grappling with a large volume of unsold stock, and with increased demand from government officials the inventory should reduce significantly. This boosts the demand in two ways: first, the disposable income increases in the hands of government officials. Second, it is a known fact that tier II cities are the next big thing and major population of tier II and tier III cities is employed with Government services.

Housing for All

Pradhan Mantri Awas Yojana was launched in June 2015 to cover the urban poor under the roof of housing. Chhattisgarh (36 cities/towns), Gujarat (30), Jammu and Kashmir (19), Jharkhand (15), Kerala (15), Madhya Pradesh (74), Odisha (42), Rajasthan (40) and Telangana (34) are a part of this noble scheme. With this scheme, the government is striding in the right direction. It has also agreed to increase interest subvention to 6.50 percent on housing loans to beneficiaries belonging to economically weaker sections (EWS) including slum-dwellers and low-income groups (LIGs).

Smart Cities

Prime Minister Narendra Modi’s idea of developing 100 Smart Cities in India is not only meant to boost infrastructure and take India to the global stage, but also solve structural inefficiencies. Woven around the idea of deploying digital technology to empower effective functioning of the city, the Smart City also aims at reducing speculation and creating pricing efficiency. The urban development ministry has already got proposals for 85 cities this year. The most appealing aspect of Smart City creation is that instead of expanding city boundaries, existing cities are being revamped. This will also reduce urban sprawl and ensure effective governance. The price increase in future will be based on concrete factors such as livability and attractiveness of the cities and not on superfluous grounds such as speculation. However, real benefits of Smart Cities will take a long time to realize.

Real Estate Regulatory Bill

Construction delay is a major bane to the Indian Real Estate sector, and the cost of delay across 25 major cities impacts 1.32% of the nation’s GDP. In a major move to curb this menace, the Union Cabinet gave a nod to the Real Estate Regulatory Bill and pushed it a step forward to becoming a full-fledged Act. Standing on the pillars of Transparency, Accountability and Efficiency, this bill has the potential to usher an era of better governance. While the initiatives to protect consumer interest is laudable, concrete results will be realized only when approvals from Government authorities are expedited.

Benami Transactions Bill

Black money is a major menace in realty sector these days. The Union Cabinet tabled the new Benami Transaction (Prohibition) Bill which aims at curbing the generation of domestic black money. Apart from confiscation of property, the Bill provides for prosecution and aims to act as a major avenue for blocking generation and holding of black money in the form of benami property, especially in real estate. This will also usher fair market practices. The price of the property will be one that would ordinarily fetch on sale in open market. In cases where the price is not ascertainable, another procedure will be prescribed. The government is at least making certain efforts on this front and this bill will instill a sense of fear and accountability among the market players.

Four consecutive Rate Cuts

Four consecutive rate cuts have left Indian consumers wanting more. As a result of subdued inflation and RBI’s attempt to foster investment and economic growth, lower interest rate has been the flavour of the year. The Reserve Bank of India cut its policy interest rate to a 4-1/2 year low of 6.75%. Reduction in housing finance rates leads to the softening of EMIs, easing entry for fence-sitters. Though, the pace transfer of benefit by banks to their customers was quite slow, a few commercial banks still reduced interest rates up to 25 bps for home loan seekers. Another benefit of reduction in interest rates will be a surge in corporate lending, which would benefit the real estate and construction sector firms too.

New Integrated License Policy - 2015 - Haryana

Under this new policy, the land parcels closer to the habited areas in Gurgaon, Faridabad and many other towns of Haryana, which were locked due to not meeting the minimum requirement of 100 acres for township development, will now be available for development. This will make the existing developed areas more habitable. With this new policy, it is believed that the consolidation will become easier, lower time is required for development of smaller project sizes, which eventually leads to timely deliveries and lowered cost for the end users. Moreover the increase in the supply of more units on these locked parcels will lower the prices of the built units.
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  Realty landscape etched out in 2015
Reduction in sizes

Weakening sales and rising inventory levels against the backdrop of unaffordable housing prices are pushing realty developers to tweak their product strategies. Builders across geographies are constructing apartments with smaller configuration with an objective to make houses affordable for buyers by reducing average apartment size. Home-buyers' preference is changing with time. Several urban buyers are increasingly looking for new homes near their office locations, which could be small in size. Though there is no compromise on the lifestyle, preference has shifted to compact homes fitted with basic amenities.
Average Sizes in Tier-I Cities
Source: Liases Foras
Sales according to Construction Status
Source: Liases Foras
  Ready-to-move-in Property in demand

49% of Sales in Chennai and 43% in Ahmedabad is in ready stock. Due to prevailing uncertainties attached to under-construction properties, and delay in completion, smart buyers are now more inclined towards ready-to-move-in properties. Other factors such as inordinate delays in project delivery leading to increased pressure of EMIs plus rental values, have also contributed to a rise in ready property demand. The more the project nears completion, more the developers attach a premium to the price, as against under-construction properties. However, the buyers seem to be undeterred by this and opting for certainty instead of under-construction ones. Some of the other benefits are:
  • Tax benefits due to absence of service tax
  • Immediate rental income or saving of current rent
  • Lesser risk of interest burden when construction is delayed.
Softening Commodity Prices

Decline in global commodity prices due to dip in Chinese manufacturing and weak demand was a boon for the construction industry. Softening of construction material prices such as steel, fabricated structural metal product, copper and crude oil played a crucial role in lowering construction costs and bringing in profitability for developers. However, the other side of the coin is negative. Mining companies have incurred great losses because of softer commodity prices and it’s a blow to the economy. Any adverse impact on the economy trickles down to job creation and weakens buyer sentiments.

Luxury residences witnesses subdued sentiment

Luxury product is a relative term. Technically it may be defined as a product that is beyond the reach of the middle/average population’s purchasing capacity in a particular city. It is a product that comes with a premium attached to it due to better offering or prestige factor.
City benchmarking for Luxury market
  Price 40% greater than the weighted average
(Rs./sqft) (A)
Unit Size 40% greater than weighted average sqft
(SBA) (B)
Min. Value (lower limit) for Luxury Segment Rs. Lacs
Ahmedabad 3,988 1,694 68
Bangalore 7,310 2,223 163
Chennai 6,826 1,742 119
Hyderabad 5,921 2,550 151
Kolkata 6,440 1,938 125
MMR 18,054 1,521 275
NCR 6,993 2,016 141
Pune 7,786 1,491 116
Source: Liases Foras
Sales and Unsold inventory Luxury segment
Source: Liases Foras
From the graph it is evident that with the exception of Bangalore and NCR, all the tier I cities have witnessed subdued demand for luxury products and the unsold stock in this segment is high. The reasons for shifting demand varies across markets. However, delay in construction, liquidity crunch, speculative property prices, pressure from secondary market and a sluggish demand for housing from investors may be a few reasons.
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  Dampeners for 2015
Residential Real estate 2015
High Unsold Stock
Unsold Stock(Mn Sq.ft)
  Q2 14-15 Q1 15-16 Q2 15-16 YOY QOQ
Ahmedabad 67.9 77.0 80.1 18% 4%
Bangalore 139.0 175.2 177.9 28% 2%
Chennai 64.7 75.9 72.0 11% -5%
Hyderabad 53.2 50.4 59.1 11% 17%
Kolkata 29.3 32.0 34.3 17% 7%
MMR 170.6 201.1 217.2 27% 8%
NCR 318.9 325.9 345.8 8% 6%
Pune 69.5 79.8 89.3 28% 12%
8 Cities 912.9 1,017.4 1,075.7 18% 6%
Source: Liases Foras
Rising level of unsold stock has been the biggest dampener this quarter. In today’s times, we can see that there is the highest inventory to be sold. As per September 2015 quarter, the unsold inventory for eight Tier I cities stood at 1,075.7 msft clocking an increase of 18% on an annual basis. Initially, the situation was that demand is high but supply was limited. After 2000, the supply situation improved and now there is adequate supply and forever growing demand. However, there is a mismatch between them, which makes the situation appear as though there is excessive supply, which is not true. With ever-increasing population and urbanization, demand for housing is high in India. This is where the paradox lies. In spite of having enough supply and demand, the sector is going through a phase of lull. Actually, the demand just does not translate into fruitful transactions due to various factors such as exorbitant pricing, low income levels, lack of funding options, delivery delays due to approvals and overall muted sentiment.
Increase in Service Tax

Proposal to increase Service tax from 12.36% to 14% added fuel to fire and hiked price for the already costly properties. Service tax is applicable on almost all services that a consumer avails, including buying an under-construction property. This tax levied on the cost of construction coupled with separate taxes for additional cost for each of the amenities such as preferential location, car parking, club membership and rainwater harvesting has made affordability a far-fetched question.

Chennai floods

Perils of unplanned urbanization fructified in the most devastating form in Chennai. Floods lashed the city early December and caused major harm. It is being said that unrestrained construction by filling water bodies has led to this havoc. Whatever might be the true reason, property market has faced the brunt and hit a major roadblock. Buyers have become extra cautious, construction has halted, materials have been destroyed and developers are re-designing projects. Low lying areas such as Tambaram and Velacherry are witnessing subdued sentiment and crash in price levels. The authorities are checking if the average mean sea level for plinth can be raised in order to avoid such occurrences. While, some optimists believe the effect would phase out over a period, the Chennai flood is surely an eye-opener.

Relaxation of FDI Norms in Real Estate

Opening up FDI and relaxation of norms and Government’s aim to provide affordable housing and housing for all do not go hand-in-hand. FDI in the past has proved to be counterproductive. It has only inflated prices and added inefficiencies to the market. At the end of the day it is high cost capital that will motivate developers to quote higher prices from buyers. Rather than giving rise to speculative practices, the focus should be on end-user’s interest. It is the Government’s prerogative to provide housing for all and not the developer’s. After providing land bank to developers, the Government just cannot wash them off its hands.
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  2016: The Road Ahead
The Road Ahead
  Ready-to-move-in Property will continue to draw buyers

High demand for ready-to-move in projects and increased inclination for completed projects will continue to set the stage for the realty sector in 2016. Prospective home-buyers, who wish to buy a house for their own use will look at property that is ready for possession within one year.

Developers to tweak their product mix towards Affordable Homes

Affordability of projects will become the prime focus and builders will be looking at designing units that meet buyers’ budgets. Across cities, developers have already begun reconfiguring their projects to align with market demand, in the process saving on costs and passing on the benefit to buyers. Developers in South Mumbai who used to offer 3-4 BHKs are now shifting to compact 2BHKs and comfortable 1BHKs.
Tier II Cities to hog limelight

As a result of ever-expanding dimensions, the real estate sector is witnessing burgeoning rise in tier II and tier III cities. With an improved quality of demographics and job opportunities, the performance of these cities holds great promise in times to come. Tier II cities, like Indore, Chandigarh, Lucknow, Jaipur, Kochi, Coimbatore and Visakhapatnam too are experiencing growth. Currently about 20% of the market supply comes from tier II cities and with further development, they would be the focus of all attention in 2016.

Further clarity on GST may be expected

Since the very beginning, GST has been caught in political imbroglios. But it could see the light of the day in 2016. However, facts suggest its effect could be less than encouraging. Presently, home-buyers pay service tax and VAT on purchase of under-construction residential units. This, coupled with excise duty, customs duty, CST, entry tax, etc. paid by the developer on his procurement side, is factored while pricing the units. All these tax costs add up to anywhere between 22%-25% of the price of the units. Though the proposed GST is expected to replace these multiple taxes under a single umbrella, the stamp duty will not be subsumed. Adding to the woes is the high rate of GST at 18%.

The Real Estate Regulatory Bill - Half Bridge of Hope

The Real Estate Regulatory bill got the Union cabinet nod early December and now the entire sector is anticipating that it will come to fruition by 2016. Construction delay is a major hindrance to the Indian Real Estate sector and the cost of delay across 25 major cities impacts 1.32% of the nation’s GDP. However, the delay with which it is coming into place cannot be ignored. The most important factor of any regulatory change is right timing. The passing of Real Estate Regulatory Act (RERA) is overdue and it is likely that the Government realizes that establishing an effective regulatory mechanism is the need of the hour.

REITS are expected to gain momentum

SEBI approved establishing REITs in August 2014. A move that is globally recognized and that may offer a new source of financing to India's cash-strapped property developers. REITs are listed entities that mainly invest in income-producing real estate assets, the earnings of which are mostly distributed to their shareholders. Tax benefits have also been announced for REITs and infrastructure trusts. While this is definitely a positive move and a big attempt to place Indian realty on a global scale, the long-term impact of REITs is yet to be seen. It has not gained momentum in the past year due to ambiguity over tax issues. Once it comes into effect, it will be seen as to what kind of regulatory and operational hurdles it faces.

Resale Properties will see a rise

Though primary market saw some stagnancy in 2015, the secondary market still houses some of the optimism. Most resale properties are usually cheaper than newly constructed ones. Investors entering projects at early stages earned decent profits even at current market prices. Buying houses in the resale market also keeps the project execution risk at bay.
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  Realty sees a streak of hope in 2016
2015 was indeed an eventful year for the Indian realty sector. While there was a slew of policy initiatives and rate cuts on one hand, the huge load of unsold inventory and construction delays weighed down the sector on the other hand. As we have step into 2016, we can pin our hopes on a gradual and sustained recovery. Signs of progress are palpable; nevertheless, the road to the same will not be an easy one. The real test comes in the implementation of the proposed policies. Though these look extremely promising, achieving desired result is an enormous challenge. While Government is looking at rationalization of the demand and supply side, what is most important is rationalization of price. We definitely need supply and demand efficiencies, however all the corrective measures and policies must be aimed at attaining an economic equilibrium in the long run. This will only be achieved when the sector moves towards maturity and end-users garner a major share as compared to investors.
Realty sees a streak of hope in 2016
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Founded in 1998, Liases Foras is a non-brokerage research centric firm that offers data and advisory services. Our works on industry and scientific prognosis of the local market is highly regarded. We have an organized and structured data source on real estate and property trends in India, which is updated on quarterly basis by primary market survey.

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