No recovery in sight for residential real estate

A series of good news flow has started trickling in for thereal estate sector. Reports say that though prices have not moved up apartment sale registration has increased by 15% in Mumbai. Commercial real estate too has seen activity, though not through direct buying but leasing. India’s office property market recorded the strongest easing activity in the Asia-Pacific region in the quarter ended September, touching $1 billion for the first time and contributing more than half of Asia’s total gross rentals in this space.

Navin Makhija, managing director of Mumbai-based Wadhwa group, has been quoted as saying that out of their 2 million square feet of office space in Mumbai only 1% is left to be leased. RMZ group of Bangalore has leased out 98% of its office park space. Increased commercial leasing signals a pick-up of momentum in corporate activity in the country. If commercial activity is picking up, residentialproperty cannot be far behind.

Businesses have already started taking up positions to capitalise on the situation. Funds are being raised, especially by new entrants who do not have illiquid assets like older financiers do. Motilal Oswal Real Estate is raising Rs 1,000 crore through its third fund while Edelweiss is raising $1.1 billion.

A boost to the sector has also come from the government through the recent set of announcements by Department of Industrial Policy and Promotion (DIPP). Restrictions on foreign funding in real estate sector have been relaxed. With promises of housing for all by 2022 and development of 100 smart cities government needed to attract foreign money in the sector.

The move allows developers easier access to capital in a country where more than half of the projects currently being marketed are delayed. In fact, in cities like Mumbai only 3.35% of the housing inventory is ready for sale, points out Confederation of Real Estate Developers’ Association of India (Credai).

According to broking firm IIFL, leverage among builders has more than tripled since 2008 and borrowing costs soared as falling home sales made banks reluctant to lend for commercial real estate.

In order to attract increased foreign flow government has to clean up the sector. The real sector is notorious for being one of the biggest generators of black money as a significant amount of transaction is in cash. The government is contemplating bringing a real estate bill in the forthcoming winter session of Parliament. The urban development ministry has accepted all the amendments proposed by a Parliamentary Committee set up to look at the bill and is readying to move the amended legislation for Cabinet approval and finally push it through Parliamen.

One of the key amendments in the bill is the proposed parity in the interest payable by allottee and developer in case of any default by either party. At present the scales are tilted heavily against the home buyers, where he has to cough up penalties as high as 18% as compared to only 2-3% for delays on the part of the builder. There is also a penalty provision of up to three years of imprisonment.

A regulator for the sector is a welcome step as the sector is plagued with cartelisation, artificial pricing and lack of redresser mechanism against arrogant builders. However, one of the main reasons for woes of the industry is opaque government policies, multiple clearances and delays in issuance of permits. Unless government bodies are under the ambit of the regulator with time bound single window clearances the sector will face problem. JM Financial is a report on the sector says that material improvement in FDI for under construction/pipeline projects will be contingent on government actions in improving sector transparency to increase project execution visibility.

Though the news flow is positive, not much is happening on the ground apart from the occasional spark. Real Estate Sentiment Index for September quarter (Q3) 2015, by Ficci-Knight Frank, the stakeholders’ sentiments for a shorter period also fell from 63 in Q3 2014 to 48 in Q3 2015. Sentiments are considered to be lead indicators, which does not point to a recovery anytime soon. As for activity in the commercial sector, the deals taking place are leases and not outright purchases.

Buyers are perhaps waiting for implementation of government policies and hoping for prices to come down. One of the first signs of recovery would be restarting of stalled projects and new project announcements by builders. Till then, at least in the residential space there is little to be excited about.