Q1 of 2019 has seen the Indian Real Estate sector attract the highest investment inflows of any first quarter in more than a decade. Investors have displayed their confidence in the market in no uncertain terms by pouring in Rs 17,600 crore ($2.5 billion). India’s first Real Estate Investment Trust (REIT) issue was also heavily oversubscribed recently, raising Rs 4,750 crore and indicating very upbeat market sentiment. Reforms and firm market fundamentals certainly seem to have got investors on board, but does the best first quarter investment volumes of all years since 2008 indicate that the long overdue urban renewal in India is finally on track?
The general sentiment, in the real estate sector across several regions in the world, is one of watchful optimism. A recent PwC report titled ‘Real Estate 2020: Building the future’ projects possibilities for higher growth rates, although it also cautions that there will be higher risks due to rapid changes. The report anticipates that emerging markets will be the major contributors to the growth in global construction activity. GlobalData’s ‘Global Construction Outlook to 2022’ report fleshes out the details of this upswing , stating that a slowdown in construction output in China will be offset by a concurrent upswing in construction in India. In essence, there is a widely held consensus among industry experts that there is a gathering momentum in Indian real estate. As a steadily growing economy, I wouldn’t term this assessment of the Indian market as surprising in itself, but the recent spike in investment suggests more than just a routine response to the growth in the number of prospective buyers and purchasing power. In my opinion, the inflow of institutional investors has the potential to power the kind of change in scale and output that the Indian real estate industry has seen as an opportunity for some time already, but lacked the easy access to funds, to pursue.
How the market was misread in the past
The migration of rural populations to India’s urban centers began in earnest at the turn of the millennium. The rise of purchasing power among the population added a new subset of prospective buyers to the market, which could plan towards purchasing a home at a younger age than previous generations. In all fairness, the government and the banking sector too tried to empower this growing market. Most Indian urban centers witnessed the mushrooming of “satellite towns” on repurposed rural land surrounding them, because of active government intervention and the previously conservative banking sector embraced far more liberal and aggressive lending practices. In response, the developer community too went into overdrive, with projects being announced through every possible means, including full page newspaper advertisements and constant text message campaigns. As became clear in just a few years, the market over-reacted and every stakeholder, from government agency and banks to developers and buyers, overreached. I can imagine that India’s traditional romance with real estate, as a coveted asset class, may have contributed to the overreach, but the expansion was clearly much more aggressive than what the market was organically generating.
Unfortunately by 2013-14 the conflicting goals of buyers looking for affordability, developers promising the world and government bodies hoping one of the economy’s leading job generators would continue to grow indefinitely, ran up against an acute shortage in liquidity. Misreading ground realities, or perhaps deliberately ignoring them for short term gains, began to lead to missed project deadlines and, worse, insolvent companies. The market had come to a standstill and change was needed. However, when the change came, it was decisive and added further pain to some businesses that had well and truly overextended themselves. The launch of a real estate regulator, the goods and services tax, the central government’s demonetization of certain batches of banknotes in November 2016, and a clean-up of the banking sector all imposed pressures that not every business was equipped to survive. In turn, buyers began a ‘wait and watch’ period as well, as the sector swallowed the bitter pill of inevitable market correction.
A more streamlined new market is emerging
So what has changed? Why the renewed confidence, especially among institutional investors, who tend to base their decision to invest on trends, facts and figures? It was essentially the same corrective measures introduced to fix the problems and distortions post the low liquidity phase in 2013-14, coming to fruition now. The establishment of the Real Estate Regulatory Authority certainly assisted in restoring buyer confidence, the GST regime replaced a complex mesh of state and central government charges and levies, to simplify home purchases much-less complicated and demonetization reduced price distortions. With legal action against developers with delaying projects or financial irregularities underway, a leaner and cleaner version of the sector is now ready to begin a new phase of expansion.
PropTiger.com registered a 24% rise in home sales during 2018 and expects renewed demand to drive sales to grow further in 2019. However, a liquidity deficit, in the aftermath of IL&FS payment default, is only just beginning to be addressed by the influx of renewed investment this year and a string of previously stalled projects are still expected to result in an oversupply, over the next year or more. Fortunately, the influx of capital and renewed demand is expected to support a steady and stable revival.
During the course of this transitional phase, the commercial real estate sector is emerging as the real estate class that is doing the heavy lifting and propping up returns. With proactive policies targeting a gradual but steady expansion in manufacturing and the emergence of a thriving startup ecosystem, the demand for office properties in prime locations has been a lifesaver for the industry. In addition, the government’s commitment for its housing for all initiative is creating a strong surge in the affordable housing segment as well.
The challenges ahead
In my opinion, the Indian real estate market still has issues to overcome. The liquidity crisis will take some time to be completely addressed, even with the forthcoming inflow of capital. Another couple of important factors that will dampen the sector for some time yet, are that a few of the industry’s biggest names were severely affected by the downturn and oversupply will continue to play a role for a while. However, it seems apparent that institutional investors and regulatory policies will provide the necessary support till these initial challenges are overcome.
Perhaps the most crucial factor for India’s urban renewal aspirations to be realized will be to avoid the mistakes of the past. The opportunity beckoning the Indian real estate sector is easily one of the largest ever, perhaps only comparable to recent decades in China. This space for expansion must not be allowed to be compromised in the same way as the much smaller one of a decade ago. Indeed, India can also look to the Chinese example, for a further set of mistakes to avoid and vital positive lessons to learn from. The real estate sector could be a prime mover of the economy for two decades or more of surging growth.
Ambition is a wonderful thing, but greed is looked down upon for a reason. India is at the cusp of a huge and transformative opportunity that has the potential to address social concerns, standard of living, economic goals, and sustainability and modernization issues through one concerted effort. With the core concerns of almost a fifth of humanity at stake, this is a chance that must not be squandered.
