Affordable Housing & Office Space Segment Keep Indian Realty Poignant
The way the credit situation plays out and the overall economic situation will have a heavy impact on the direction that Indian real estate will move in 2020.
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The real estate mid-market segment, affectionately known as the affordable housing sector, has been performing well in spite of the looming liquidity crisis in the industry. It just shows that if the product being built is what’s needed in the market, then the insatiable demand for housing in India will drive sale volumes northwards. This is one component of the residential sector that has shown volume and has kept the market moving even as the price point is different in each city.
Similarly the office sector has outperformed and has been the saving grace of the Indian real estate market. This sector is booming at the moment, recording historic highs in net absorption and project launches over the last 12 months. This is reflected in pan-India office absorption trends where 44 million square feet was absorbed in 2019 as against 41 Mn.Sq.Ft. in 2018. This is partly owing to sustained offtake of office space both for shared office or co-working space as the global institutional investors continue investing in completed or green field office assets causing all time high values in leasing activity in the sector.
The same cannot be said for the residential asset class. Contributing close to 80% of the overall real estate market, the inherent demand of housing assets is being significantly strained. The ongoing credit crisis, the bad track record for execution by developers, and the drop in buyer confidence due to the slowdown is leading to a lack of new supply. But what can be done to fix this? Developers need to evolve to understand the kind of capital needed for a project and build out the right products needed by end users. This combination will make the residential sector more appealing to all the stakeholders and is the long term solution going ahead.
Emergence of Alternative
The one thing that is playing out in the real estate market quicker than it looks is the emergence of the alternatives. Be it data centers, student housing, co-living, co-working, warehousing or education; the market is gaining momentum.
Apart from the office sector where large capital is still looking at opportunities, capital is moving towards fresh projects and not stuck projects, specifically in the residential segment. The maximum units of housing Sales in Mumbai City was noticed across price brands between Rs 1 crore to Rs 2 crore in all four quarters of 2019. Most capital in the residential segment is being invested in green field projects. This could be attributed to a couple of factors such as the lack of enforceability of the senior- junior structure in the capital stack of a project in case the situation goes to NCLT or the lack of clarity on the third part rights that may have been created in the project.
There are a huge number of stuck projects across the country due to a variety of issues but primarily due to the current liquidity crisis. The situations don’t seem to be getting resolved due to the combination of a variety of issues such as the equity value left over in the project, the legal framework not providing comfort for rescue/ last mile financing and last but not the least, lack of sales in the project. In fact, refinancing especially on stuck projects has been at a standstill in the last few months or the lack of clarity on the third party rights that may have been created in the project. The only way out reviving the struck projects is the approved land banks being taken over by larger and more reputed developers backed by healthy equity infusion from them and a strong PE partner. The Government initiative through the SBI managed fund should also help in the revival of some stuck projects.
The industry should not concern over the process of consolidation in the sector since consolidation plays out its own space during the time of most downturns/ slowdowns and it’s no different in the Indian real estate space. This has begun in the form of stalled projects and approved land banks being taken over by larger and more reputed developers, having more access to funding an account of their market reputations, ability to execute construction and sales and their overall healthier balance sheets.
The industry is expected to see entities also being taken over and this will play out to clearly differentiate top developers across the country. There is now a new wave of consolidation happening across certain sectors in real estate and the economy. Even the number of public sector banks has fallen by about half, from 21 to 12.
Overall, the realities of growth deceleration, significant tighter financial conditions, contraction of industrial consumption have markets on heightened recession watch. At the same time, the year 2019 has been a year of reforms in the industry with an increased focus on transparency and customer centricity by both, policy makers and developers. The regulatory framework has helped regain the trust in the industry. Also, the systematic implementation of the government reforms will definitely help in rekindling consumer sentiment, which will eventually push the growth of residential segment in the coming quarters. The Year 2020 is expected to be more promising for developers and home buyers where the growth is led by the positive change in the business ecosystem. Clearly, the way the credit situation plays out and the overall economic situation will have a heavy impact on the direction that Indian real estate will move in 2020.
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