Missing the writing on the wall

Ravi Sinha

The year 2015 should have been the year of realisation that the days of creating ghost cities with inventory for investors are over. The investor is no more interested in blocking his money with a business where the returns are absymally low. According to market trends the returns in any of India’s major housing market is not more than six per cent today. 

But  an unfortunate reality is that the acceptance of this emerging realism is among a handful of developers only. For how long the developers can live in denial on the theory that affordable housing is a relative term and the higher input cost does not allow them to reduce the prices?

The fact of the matter is that affordability can’t be just defined in terms of cost per sq ft but also has to do with the size of the apartments. And it is here that the developers need a serious introspection moving ahead in 2016. In most of the urban centres today the demand is for smaller apartments because the cost per sq ft can’t be reduced beyond a point, but no developer is coming forward with 1BHK or 1.5 BHK where the demand far exceeds the supply. Most of the launches this year has been 3 and 4 BHK with some mix of high-priced 2 BHK. The developers have no one but themselves to blame for losing the opportunity to lower the cost in a year when the cost of construction has been probably the lowest due to less demand of cement, steel and other input materials.

Some of the analysts privately point out that there are two ways the houses can be affordable — either the developers listen to the real demand in the market and respond to it or else keep creating this kind of high-end offerings that is increasingly leading them to debt trap and hence distress sale at a point will automatically bring to the market these properties at the lower cost. The latter scenario is neither good for the developers nor the Indian economy at large.

Raj Gala Shah, Partner, Zara Habitats, agrees that in all fairness it must be admitted that 2015 gave most developers a ‘Reality Check’. He, however, points out that to say that developers failed to read the writing on the wall would not be entirely correct. Developers thoroughly understand and study their target market and audience. The statistics clearly show that there has been a drop in the number of ‘high-end’ projects being launched, thereby clearly indicating that developers have realised that such projects have a very limited consumer base.

“As such high-end projects are being selectively launched in traditionally upmarket areas of the city only. Creation of affordable housing is always going to be an ongoing process, as the demand in this segment is continuously rising due to urbanisation and the increase in nuclear families. To say that the opportunity is lost would not be prudent, since it is not that the scope or future for building such homes over, just a window of one year is anyways not enough to build the quantum of affordable houses required,” says Shah.

Arvind Jain, Managing Director, Pride Group, however, agrees that with the low cost of construction now, the assessment that an ideal eco system to build affordable houses has been wasted is true to some extent. According to him, developers, like buyers, often have the unfortunate tendency to wait and watch for the most optimal time, thereby tending to miss out on opportunities. However, it is also true that the eco system for boosting affordable housing is also still ‘work in progress’, and many more government initiatives are expected to come in on the heels of the Housing For All agenda.

“The market has definitely been lackluster in 2015, and proved to be a huge learning curve for the entire real estate sector. It would be disastrous to hold on to the false beliefs and erroneous calls that have contributed to this somber situation. Many lessons have been learnt, and will hopefully not be repeated,” says Jain.

Nikhil Hawelia, Managing Director of Hawelia Group,  nevertheless defends the sector with disagreement that majority of real estate developers are executing high-end projects. According to him, in 2015 major focus was on homes for middle class buyers. It was the overall economic sentiments which remained unfavourable throughout the year. Slowdown in all scales of business and economic policies were the major reasons because of which spending power of the middle class even on their regular needs was challenging. “Truly the cost of construction has been the lowest during 2015. But out of the two vital elements of affordable housing i.e. cost of construction and land, efficient work and planning was not done for the latter due to lack of support from the policy makers and authorities. Any steps taken from the government which could address the concern of lower income class are always supported from the real estate developers,” says Hawelia. Supporting the developers’ stand, Ashutosh Limaye, Head – Research & Real Estate Intelligence Service, JLL India, says he would not agree that developers have failed to read market signals correctly. He says at pan-India residential launches for 2015, the share of apartments priced above Rs 15,000 per sq ft has clearly dropped when compared with the trend observed over the past couple of years. Given that the mid and upper-mid segments attract lot of demand in the major cities, developers are finally trying to launch more units in this segment.

“By nature, launch prices will be different across cities but the broad trend remains that of reducing supply of high-end or luxury apartments. Also, there has been a consistent fall in residential unit sizes over the past few years until 1H-2015 suggesting that developers are trying their bit to ensure ticket size of apartments comes closer to the affordability level of potential buyers,” says Limaye. Despite the developers’ defence, the fact of the matter is that sales are below expectations despite of property prices coming down in various markets. The key issue is low demand. Most of the developers are holding on launch of their new projects rather  than launching low-cost housing. There have been high inventories and low absorption rate in mid to high segment of housing.

In a nutshell, the overall market of Indian real estate has seen a paradigm shift from being greed-driven to need-driven. The prices have moderated a bit but are yet far from being called realistic, and so is the anomaly with the unit sizes. More importantly, the lackluster market in 2015 provided opportunity for a huge learning curve for the entire real estate sector.

The big question is how many developers have taken a conscious decision to learn and move ahead by aligning with the market realities? Not many! The year has been more about the denial theory and hence 2016 indicates to be a painful process of revival for the sector at large. 

In retrospect

Growing Optimism

"The year 2015 marked a revival for the real estate sector with the commercial office space rebounding and Private Equity (PE) investments into the realty sector touching new highs since 2008, signaling growing optimism in the sector. The commercial office sector gathered momentum with some large leases and buy-out transactions witnessed during the year. Companies are firming up expansion and consolidation plans, leading to increasing leasing activity as they foresee higher potential and increasing business activity. The year also witnessed large debt-restructuring by developers, thereby improving liquidity in the sector."

Sanjay Dutt, Managing Director, India, Cushman & Wakefield 

Year of mixed fortunes

"It has been a mixed year with lot of regulatory and policy level decisions being taken, while the market scenario remained stagnant. The issue of liquidity and cash flow for the developers remained a challenge this year also. Acoording to real estate data research firms, new launches declined by 30-35 per cent as developers’ faced financial crunch and business was on the lighter side throughout the year. RBI cut rate twice in the year also did not contribute much to increasing the purchasing power of willing buyers. So, the sector is still expecting more boost from financial institutions, government authorities and department concerned for survival. Single window clearance system, industry status for realty sector, relief in housing interest rates and easy taxation process would have played an important role."

Anil Kumar Sharma, CMD, Amrapali Group

Waiting for growth

"The biggest concern of the real estate sector throughout 2015 remained centered around attracting the potential buyers to the market. Though the year has witnessed lots of positive steps like the approval of regulatory Bill by the Cabinet, successive reductions in repo rate and the arrival of FDI, the sale figures remained low. The investment and development in real estate sector is just waiting for growth triggers in the form of single-window clearance and considerable reduction in Income Tax for the home buyers which we expect the coming year will definitely provide."

Mr. Ankush Jindal, COO, SVP Group

Positive build-up

"The year 2015 witnessed major developments to herald positive sentiment in the real estate marketespecially in the tricity. The demand for residential and commercial projects went up. Real estate sector witnessed regulatory changes that included relaxing of FDI laws and movement on the much awaited real estate Bill. Also the interest rate cut by the RBI and the Seventh Pay Commission proposals will boost the real estate sector in terms of increased demand and supply. Additionally, the new International Airport promises to bring in more foreign investments in the real estate of the region. We witnessed the sales going up of all our products, with consumers presenting an increased focus on quality and facilities management. The investors showed keen interest in innovation presented by this sector in this year through concepts like convertible office studios. We started the possessions of two residential projects this year which are nearly sold out."

Prateek Mittal, Executive Director, Sushma Buildtech

Room for growth

"According to an international research, the Indian real estate purchase sentiment index has improved by 2.5 points in last quarter of 2015. This improvement in the overall index signifies that a larger number of Indian consumers are planning to purchase homes within the next 6-12 months. Moreover, policy reforms have given enough room for boost to the industry, this state of affairs is all set to change in 2016. We are confident that year 2016 will shower the return of feel good factor for the industry at large."

Aman Agarwal, Governing Council Member NAREDCO & Director, KV Developers 

Bugging delays

"Overall, 2015 was a good year for the real estate sector. First, there was a stable government which came to power and showed the intent for reviving Indian infrastructure with some bold steps. Although, these announcements stimulated investor sentiment, these did not lead to actual on-ground conversion of sales. Delays in regulatory approvals and injunction of ad hoc environment norms did delay the process of construction to a certain degree; however these aspects didn’t do much to pull the sector off the trajectory growth. The allocation of Rs 98,000 crore for Smart City came as a breather for the sector which was reeling under acute funding pressure."

Neeraj Gulati, MD, Sandal Lands, promoted by Assotech Realty

Three Cheers for affordable housing

"Year 2015 has indeed been a remarkable milestone in history of Indian realty. No other government has ever proposed so many reforms and developments in a single calendar year. It started with a favourable annual budget and continued throughout the year. Undoubtedly, this year belonged to affordable housing. The government’s intent has always been to promote ‘Housing for All’ and it came up with measures to push affordable housing. The relaxation in FDI norms and getting away with minimum project size and lock in period is certainly a boon for affordable housing. With new norms in place, even small projects qualify for FDI which would help the developers maintain the affordability quotient. 

Real Estate Regulatory Bill, which has been stuck for the past three years, finally got Cabinet’s approval and would soon become an Act. The provisions under this Bill are stringent enough to check misleading deeds in the sector and will strengthen the developers and customers’ relationship through which the prices will be stabilised in the market. It is due to the unethical practices of some developers that the prices have gone beyond the end users’ reach and the sector is struggling with huge unsold inventories. The formation of the Real Estate Regulatory Authority is a positive move and would help actual buyers get their dream homes in budget and on time.  

On state governments’ fronts as well, the sector witnessed some outstanding developments. Haryana Government came out with new Integrated Licensing Policy which would pave way for fair trade of land parcels in the sector. Overall, 2015 happened to be an eventful year. It appears that the impact of these developments would be visible in next two quarters making 2016 an year to watch out for."

Pradeep Aggarwal, Chairman, Signature Global

Tricity scan

Mohali fares better in a stagnant market 

The much awaited International Airport becoming open officially was among the major developments of the year that created some ripples in the stagnant real estate waters in the tricity region. Otherwise 2015 was another forgettable year for those looking for sales to pick up and prices to move up in Chandigarh, Mohali and Panchkula.  Of the three, however,  Mohali was termed as the safest investment bet. This was basically because of the “extra” push given by the government. While Mullanpur or the New Chandigarh strengthened its position as a good option for residential segment buyers, Zirakpur saw addition of new commercial complexes with convertible offices and SOHO (shop office home office) units.  The buyers however, remained elusive as the wait for  more price drop continued in the secondary market. All the three cities saw a correction of up to 35 per cent. “Though the current state is quite pensive due to subdued investor interest, the infra plans in the pipeline and creation of affordable housing zones hint at a better tomorrow, says Narasimha Jayakumar, Chief Business Officer, 99acres.com   

The flip side

The downside in the tricity's real estate market remained lack of planning in certain regions of  Zirakpur, delay in project deliveries by reputed builders such as IREO, DLF, EmaarMGF and persistent deferrals in international air flights despite the airport commencement.

Future Outlook

The future growth of Chandigarh and its peripheral locations is dependent on how certain challenges presented this year are addressed. Some of the important announcements that will have a positive impact on the real estate market in Chandigarh are passing of the Real Estate Regulatory Bill and Goods and services tax (GST) bill next year. The 7th Pay Commission for Financial Year (FY) 15-16 is expected to increase salaries by at least 75 per cent, which means that all retired defense professionals will invest more money in realty.

Performance in the past one year:

Mohali

Jan-Mar 2015 Rs 3060 psf

Apr-Jun 2015 Rs 3060 psf

Jul-Oct 2015         Rs 3442 psf

Oct-Dec 2015 Rs 3835 psf

Zirakpur

Jan-Mar 2015 Rs 2900 psf

Apr-Jun 2015 Rs 2900 psf

Jul-Oct 2015         Rs 2850 psf

Oct-Dec 2015 Rs 2800 psf

— The writer is CEO, Track2Realty