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BW Businessworld

Real Estate: Beyond Dark Clouds

Indian real estate market is churning for the better. The latest regulations will likely bring order, transparency and new life to the sector

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For 28-year-old S. Nagesh, a Noida-based software engineer drawing an annual income of Rs 26-lakh, the decision to buy a new three-bedroom apartment has been on hold for the last eight-months. “I am aware of the new regulations and laws. But I am waiting for further clarity, better choices and transparent deals. I want my own home and may be another as an investment, so I will wait,” he says. Like him, several willing homebuyers are on the fence, afraid to take the plunge into the residential real estate market amidst reports of sluggish sales, piling inventory of unsold housing units, brake on new project launches, incomplete projects, diversion of funds from one project to another leading to years of delay and increase in the number of litigations. The doom and gloom in the sector is the result of a largely unregulated market operating for several decades. But that is going to change soon. A spate of recent laws and regulations — the Real Estate (Regulation and Development) Act, popularly referred to as RERA, the Benami Transactions (Prohibition) Act, the Black Money Act and the very recent Goods and Services Tax Act — have been enforced to bring the realty sector back on track and towards a brighter tomorrow. Of course, there are shortcomings. Builders have challenged various aspects of RERA in court, but the big picture of bringing ‘order and transparency’ back to the business now depends on these laws.

It is no secret that the real estate industry, by being under-regulated for decades, had turned into a safe haven for generating, parking and circulating black money. But not anymore. The black money laws will deter individuals from keeping undisclosed foreign assets. Plus, inter-linking Aadhar with Permanent Account Number (PAN) to curb cash transactions and intense scrutiny of accounts are some of the additional steps taken to make the sector cleaner and transparent.

So how do the who’s who of the industry see these mammoth changes? How will the end-user gain? Will the new reforms revive investors’ interest? If so, by when? And for those looking to own their dream homes, should they go ahead or wait? We at BW Businessworld decided to engage with developers, experts and stakeholders from across the country to understand and present a clear view on a post-RERA & GST world for the end-users and investors.

Short-Term Pain, Long-Term Gain

Says Praveen Jain, president of National Real Estate Development Council (NAREDCO): “RERA and GST are expected to have a positive impact in the short term, six to eight months, and if that happens, things shall further normalise and set to improve in the long term, three to five years, and in the  times to come.” NAREDCO is an autonomous self-regulatory apex national body of the industry to act as bridge between the industry and the government.

Brotin Banerjee, managing director and CEO of Tata Housing Development Company, a pan-India player with projects in several cities, is very optimistic. He says the new reform measures will infuse accountability and confidence among buyers making the sector healthier for foreign as well as domestic investors. Behind his optimism is his belief that the real estate sector will continue to thrive, thanks to massive urbanisation that brings in around 10-12 million people to the cities annually. “This will continue to create demand for housing,” he says. But what is the situation after demonetisation? And how will RERA and GST — the two policy intervention seen by the industry as a short-term hiccup — help? “After demonetisation, Tata Housing witnessed record sales across projects in Thane, Noida, Goa and Bhandup in Mumbai. The introduction of RERA has created a favourable atmosphere and infused confidence among home buyers. Most leading banks and financial institutions have also reduced interest rates across various home loan segments,” says Banerjee. But he suggests that in order to create and sustain the demand for housing in the long-run, creation of infrastructure in the residential segment is key. “A dedicated PPP (public–private partnership) model is imperative in the long run to sustain the demand for housing,” he adds. “In addition to RERA, if gaps in easy access to land, financing and reducing the cost of construction are addressed, it will truly strengthen the real estate sector,” says Banerjee.  A recent report by the National Housing Bank shows a fall in prices of residential units in the January-March 2017 quarter for 19 out of 50 cities it monitored. Property prices fell most in Ludhiana (declined by 7.8 per cent) compared to December prices last year. Others in the list include Delhi (dropped by 4.3 per cent), Gandhinagar (12 per cent), Surat (8.9 per cent) and Kolkata (7.2 per cent). The slump was largely a result of the ill-effects of demonetisation and of the upcoming compliances required under RERA, among others.

The short-term disruption can be seen in the recent financial results of some of the listed players. Take for example the Mahindra Lifespace Developers, it recently reported a 21 per cent year-on-year decline in net profit at Rs 13.8 crore for the quarter-ended June. There are other examples too.

Kaizad Hateria, brand custodian and chief customer-delight officer of Mumbai-based Rustomjee Group, takes a step back to explain what went wrong with the housing sector. “Starting 2010, the Indian real estate market saw many new players coming into play with new launches. The prices doubled in about three years, making it absolutely unaffordable for home buyers. The year 2014 witnessed a steep fall in the sale of housing units. The uncertainty due to micro economic reasons was one of the reasons for the slowdown. Also, subdued sentiments played a role,” he explains. According to Hateria, with RERA and GST in place now, the sector will be well governed now. “However, the effects of these policy changes will only be seen in the long term. In the short term, it is likely to disrupt the market, but will eventually pick up in the next few quarters,” says Hateria.

Having heard several builders talk about short-term disruption and long-term order, we turned to the apex body of builders and developers, the CREDAI (Confederation of Real Estate Developers’ Associations of India), which represents 11,500 private real estate developers spread across 23 state level chapters and 162 cities in India. Says Jaxay Shah, President, CREDAI: “The introduction of a plethora of reforms such as the demonetisation, RERA, GST, Benami Act, etc., has definitely impacted the growth of the sector in the short-term. But the reforms will act as a catalyst in facilitating a more transparent and robust environment, and thus enabling long-term growth.” Since these reforms require a lot of amendments and streamlining, he says, several developers are adopting a “wait and watch” policy when it comes to rolling out new projects. “The short-term negative implications on the sector have already begun to disappear with housing sales rising in the top eight cities. We expect this number to increase further in this and the next quarter, provided there is no delay from state authorities in appointing a regulator to implement RERA,” says Shah who is also the managing director of Savvy Group of companies involved in infrastructure and real estate development. He, however, adds that since both the reforms are work-in-progress, it is difficult to anticipate the outcome. “It may take at least one to two quarters or more to see the results on ground. But with infrastructure status to affordable housing, relaxation of norms for REITs, and regulatory reforms such as RERA, more and more common people will invest in residential realty, which will drive growth,” says Shah.  

Next, we turned to Bengaluru, a realty market considered better organised and more evolved. One of the city’s top property developer, Century Real Estate Holdings MD Ravindra Pai, strongly believes in macro growth of the sector. “I am bullish on the macro-growth story of the sector, especially in the residential segment. The urban housing shortage is enormous and demand for well-thought out products is robust in the market. The government’s efforts to boost the housing sector through ‘Housing for All’, GST and RERA would significantly enhance transparency and confidence in the real estate sector in the long term,” says Pai. Another prominent developer from Bengaluru, Ashish Puravankara, MD of Puravankara, says, “The RERA implementation will see deacceleration in launches, but its features are customer-friendly. This will have a positive impact on our sales for completed and on-going projects.”

But how are investors looking at this sector? Will investments from organised funds and investors increase in the post-RERA and -GST market? “Yes, for sure,” says Anshuman Magazine, Chairman, CBRE India and South East Asia. CBRE is the world’s largest commercial real estate services firm serving owners, investors and occupiers. “With the entire sector becoming regulated, we expect to see an increased interest from investors, who till now, shied away from putting capital in the real estate market,” says Magazine. In fact, CBRE will soon join hands with select builders who have ready-to-move residential units across big cities. “It will be a one-stop-shop kind of a move where a consumer can walk in, get a good price for the house, get on-the-spot loans from reputed lenders and banks, and move into his dream home. We are in the process of rolling out such an initiative very soon for projects that are ready but having difficulty in attracting willing consumers,” says Magazine.

Our next stop was the fast-developing realty market of Kolkata, where we approached Harshvardhan Neotia, chairman of Ambuja Neotia Group to find out his take on RERA. “RERA puts accountability on developers in terms of financial disclosure, timely development of projects and maintaining good corporate governance practices,” says Neotia. What about the consumers? “The purchaser will be more protected and greater transparency will set in. Home buyers’ confidence is now set to increase on the back of these sentiment-building measures,” he says. But Neotia concedes that it may take time for the residential real estate market to pick up, as RERA and GST are likely to disrupt the real estate market in the short term; but in the long term, both are beneficial.
The GST Impact

According to Magazine of CBRE, with the GST council allowing 100 per cent input tax credit (ITC) on raw materials and services used for construction, there could be some respite for builders. “In the long term, ITC will encourage transparency, increase tax compliance and reduce dependence on cash because it can only be availed if raw materials are sourced from GST-registered vendors,” says Magazine. For developers, the impact of GST varies from project to project, depending on their stage of completion, says Ashish Sarin, CEO of Gurugram-based real-estate company Alpha Corp. “Customers who buy apartments in projects that are less than 60 per cent complete will get more benefit as against those near completion due to the higher input credit that builders may get in the early stages of construction,” he says.

Ashish Puravankara predicts reduction in the cost of construction materials with the implementation of GST. “We foresee the impact of taxes on construction materials, cement and steel will come down considerably for developers, ranging between 12 and 18 per cent. With the rates in place now, implementation of GST to our business is expected to bring down the project cost for developers, thereby leading to lower acquisition cost for under-construction apartments,” he adds. Puravankara has closed sales worth Rs 622 crore from its upcoming/under construction projects in the last one year (July 2016 to June 2017). Experts on the realty micro-markets such as Bengaluru, Hyderabad, Pune and Chennai say they have seen a steady rise in construction costs in the last two to three years. “There are speculations that RERA will bring down the cost, but the costs will certainly not drop as builders will want to sell their existing inventory and defer the launch of new projects,” says another builder who operates in the southern cities. Puravankara, however, anticipates the demand for homes to go up in the initial months of the RERA regime.

Consolidation or Shakeout?
Experts are divided on the adverse impact of RERA and GST compliance. Some recent reports indicate that 80-85 per cent of the 90,000 developers, builders, real estate firms, etc., operating across India, may shut shop or exit the real estate business. Shah of CREDAI concedes that under GST and RERA, the level of intricacies will increase. “Increased tax compliance, registration of projects and intermediaries, maintenance and updation of software and other provisional laws could ultimately affect the number of players in the market. Although such claims are not set in stone and only time will tell,” says Shah. But Sushil Mantri, chairman and MD of Mantri Developers, is very clear on how RERA will clean up the sector and present newer opportunities. “RERA as an Act is intended to weed out the fly-by-night operators and unorganised players. It will provide a clean slate for aspiring developers to make their name in the industry as the playing field has been leveled for all,” says Mantri.

In order to gauge the mood of recent home buyers and those who have invested in a residential property, we joined hands with Brickworks Media, a sister concern of research and data analytics company Chrome DM, to conduct a quick survey. Brickworks conducted the survey across eight realty hot spot cities — Delhi, Mumbai, Kolkata, Chennai, Pune, Hyderabad, Bangalore and Ahmedabad — on a sample size of 2,863 respondents. These respondents were in the age group of 18-40+ years with 76.5 per cent males. Also, over 46 per cent respondents purchased a property recently.
We asked: What was the most important parameter for buying a house? Over 72 per cent said superior connectivity and excellent transport facilities are paramount when buying a flat. Availability of local business, schools and hospitals, etc., come next on the list.

With RERA in place, there are now restrictions on advertising projects. When asked whether the respondents have seen/heard advertisements related to the real estate sector, an overwhelming majority (over 77 per cent) said they have not seen/heard/don’t know.  

Around 62.8 per cent thought RERA will have a positive impact on potential buyers, while 52.8 per cent said there was confusion about GST’s actual impact on the property index.

Hateria of Rustomjee Group, however, believes there will be a shakeout. “A huge chunk of B and C category developers, due to their poor standing in the market, may not be able to sustain or adhere to the stringent norms of RERA. They will have two choices; to shut shop or join hands with well-established developers. This, we see as a positive trend as it will increase customer confidence and promote positive sentiments,” says Hateria. Pai of Century Real Estate also expects “some consolidation in the near future”. So does Sarin of Alpha Corp. “Eighty five per cent shakeout may be an over estimation. But developers will now be forced to re-look at their business models for sure,” he adds. Neotia of Ambuja Neotia Group says real estate developers with transparent business practices are not worried. “Top developers would continue to launch new projects, partnering with consultancies to market them ethically to a highly responsive end-user clientele.” But Rahul Singla, director of Gurugram-based Mapsko Group, expects the worst. “We understand that many builders who are not structured according to the new RERA Act, would wind up/close down/shift business elsewhere. For unstructured developers and builders, it would be difficult to run their business with the new RERA Act,” says Singla.  

Transition Woes
What happens to projects that started four to five years ago but are yet to finish? RERA does not have an answer for that. Take for example the Delhi NCR market, one of the eight major realty hotspots in the country with the maximum cases of delayed possesion. Official sources indicate that in Noida and Greater Noida alone there are over 4 lakh home buyers affected due to delayed possession in 110-120 under-construction group housing projects. These projects have been delayed by around four years or more. The UP RERA is said to have diluted the norms to include delayed projects too. Things are equally bad in millennium city Gurugram, where only a small percentage of projects have been registered under the Haryana-RERA norms or HRERA. Says Chetan Kapur, director of  Gurugram-based real estate consultancy firm Golden Bricks: “As per the updated Haryana-RERA regulations, all the projects under construction and the new launches that have not applied for OC or has received CC will be under the HRERA registration code of conduct. The total number of such projects is over 120 in Gurgaon.” So who completes the unfinished projects? “There is no clarity on who will complete the defaulted projects or how customers will be bailed out of the situation,” says Bijay Agarwal, MD, Salarpuria Sattva Group from Bengaluru. Mumbai-based Wadhwa Group MD Navin Makhija says the onus of repaying buyers falls on the developer in case of default. “Adequate time should be provided to builders to clear the dues in case of any unforeseen circumstances,” he says. But Vineet Relia, MD, SARE Homes has a different take. “The buying-selling cycle has suffered because of lack of infrastructure. Litigation in the course of land acquisition is also a major hurdle. The government must look into these issues,” says Relia. Ssumit Berry, MD, BDI Group from Gurugram, feels that transparency in RERA will make it necessary for developers to use legal funds to purchase land. “This will add to their overall input costs and therefore lead to increased end-product prices,” he says.

Attractive Markets Today

Experts feel that those who are financially ready should take a plunge to gain the advantages. Cities such as Pune, Bengaluru, Hyderabad, Ahmedabad, Kolkata and Mumbai among others still hold a lot of value for buyers of ready-to-move apartments. Says Vidip Jatia, director of Pune’s Belmac: “Considering Pune is a micro-market, I see a lot of value in residential assets for both PE and individual investors. Grade-A quality assets available in the market will give handsome returns if invested at the right time.” According to Vikram Goel, CEO, HDFC Realty: “The urban housing demand is the highest in Delhi-NCR across all three segments (high, middle and low income groups), forming nearly 24-26 per cent of the demand in each of the categories. Mumbai and Bengaluru will follow Delhi-NCR. While majority of the demand emanates from MIG (middle-income group) within Mumbai, LIG (low-income group) accounts for the maximum portion in Bengaluru. In most cities, except Mumbai, developers are currently focusing on MIG with 60-70 per cent of the upcoming supply concentrated in this segment.” Sudhir Pai, CEO,, says India is now ranked among the best performing markets globally thanks to the fact that real estate property prices have more than doubled over the last decade. “Interestingly, the affordability rate to own properties has come down by 50 per cent, as income growth has lagged property price growth. That being said, India’s property market is relatively affordable compared to its global counterparts. With markets remaining almost flat for two years and a large number of projects in various stages of completion, this is a good time for a retail investor to enter the market,” says Pai. Any takers?