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Emerging Trends 2018
The new real estate ecosystem will promote good governance, speeding up corporatisation of the sector
Photo Credit : Ritesh Sharma
As the Real Estate Regulation Act (RERA) fully settles down this year, it will lead to consolidation of real estate by bringing in greater professionalism and transparency in the sector, which in turn will see the exit of fly-by-night and non-serious players. It will also strengthen players who have been following good practices and enjoying brand equity. Players with sound financial, execution and marketing capabilities will benefit from RERA.
The new real estate ecosystem will promote good governance, speeding up corporatisation of the sector. This trend is clearly evident in home buyers reposing greater faith in corporate players in real estate. Such companies have been able to beat the slowdown and shake off the inertia in sales in the market where there is a big trust deficit between developers and home buyers.
With cash-strapped, debt ridden developers increasingly defaulting on delivery, buyers have refrained from making investments in under-construction properties. This has further aggravated the financial position of developers, who are not able to launch new projects, sitting as they are on huge, unsold inventory.
The situation according to real estate research agencies, is so bad in the NCR that it may well take five years to exhaust the inventory. So, this year, in order to generate cash flows, developers will focus on cutting down inventory, particularly of ready-to-move-in homes, for which there are takers. They will also focus on projects completion and delivery, especially of projects nearing completion. Once the inventory goes down and the regulatory environment improves further, they will be able to launch new projects that meet buyers’ requirements in terms of size and affordability and generate funds from customer advances. Market research has shown that newly launched projects sell faster.
In the present environment, when sales are slow and under RERA, there are severe restrictions on developers raising customer advances without land or approvals in place, besides a strict check on diversion of funds. Some developers may take to the build-and- sell model to gain sales traction. It will be particularly beneficial for players who do not have financial constraints. Even if they adopt a pre-sales model before they collect customer advances, they have to spend 60-65 per cent of their project cost on procuring land and obtaining regulatory permissions. So, in case of the build-and- sell model, all they have to spend extra on is 35 per cent of the project. This includes marketing cost which they would have to bear in the pre-sales model too.
And if developers enter into joint development projects with land owners, they can substantially reduce the project investment. So, many companies that favour the asset light model, will go for it. It also suits developers sitting on a land bank but lack project execution and marketing skills in a tough market. Through the build-and-sell model, they can, not only save on cost-escalation owing to delays in regulatory permissions, but also significantly cut down marketing expenses as ready-to-move-in homes sell much faster.
Over the last two to three years, the market witnessed a trend of investments shifting from physical assets (particularly real estate) to financial assets. While end-users have been staying away from the market for fear of their investments getting stuck in stalled projects, investors have been shunning real estate due to low, or even negative returns.
Going forward, one should see home buyers returning to the market and investments in physical real estate gaining ground, as the initial ill effects of demonetisation, RERA and GST are left behind and their positive impacts come to the fore. A Knight Frank report suggests that housing sales in the top eight markets have increased 28 per cent in the quarter ended December 2017 over the same period in 2016.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.