Reforms rev up real estate as sector waits for election results

In the last five years, the Indian real estate sector has been impacted by various government reforms like demonetisation, implementation of RERA and the introduction of GST.

Realty has experienced a complete transformation, from an unorganised and opaque sector into a regulated, transparent and consumer-friendly asset class.

The government’s reform and policy initiatives were aimed at shifting the investor-driven market to an end user market to ensure that every individual could own his or her’s own house.

The government’s 'Housing for All’ programme launched in June 2015, aims to build 20 million urban homes and 30 million rural houses by 2022. It focusses on affordable and mid-segment housing, providing 6.5 per cent interest subsidy (up to Rs 2.67 lakh) under PMAY and zero tax on ready-to-move homes. 

Since the announcement of prime minister’s affordable housing incentives, 113,508 homes have been completed and another 755,083 are in the pipeline. 

Among the other reforms: builders of affordable housing received 'infrastructure status’, making them eligible for state incentives, subsidies, tax benefits and institutional funding.

2018 has been very crucial for the affordable housing segment. Not only has demand for this sector gone up, but government initiatives have motivated many developers to foray into this segment.

The impact of these reforms, specially RERA, are so huge that they have overshadowed the short-term pre and post-election effects usually witnessed in the past. 

Once RERA is fully functional, smaller developers may face a cash crunch. Additionally, investors who lend liquidity to developers might get a bit cautious during election time, which is not unusual. 

This would lead to a market slowdown and in turn effect supply over the next few quarters.

However, the main reason for this election-time sluggishness is RERA. With its stringent provisions, it has made transactions fair, transparent and secure. 

Traditionally, before polls, homebuyers are in the wait and watch mode because they don’t know what a new government may offer.

For developers, the situation remains the same. They would rather clear their existing stock then launch new projects. 

In the 2014 Lok Sabha election year, there was significant drop in the number of new launches, which was mainly driven by the uncertainty of policy changes from a new government. 

We believe that the end-user demand for housing real estate will continue to remain sluggish over the next few months due to the rise in interest rates. The demand for commercial and industrial real estate should stay on course with the upcoming REIT listings. 

The demand for these asset classes are largely determined by the macro India growth story, which will not change before or after the election.

The non-banking finance companies (NBFC) crisis that stuck in October 2018, lead to substantial slowdown of fund inflow for the developers, as the prices are expected to remain stagnant.

The debacle of one of the largest NBFCs in the country, which surfaced in September 2018 after a few consecutive defaults in repayments of maturing commercial paper with a corpus under Rs 500 crore, way smaller than the entire debt portfolio of $12 billion, shook the Indian capital markets. 

The prime reason behind the default was the cost overrun due to delays in various long-term infra projects funded by the NBFC, eventually resulting in defaulted repayments of even short-term money market instruments like commercial papers majorly invested by banks, insurance companies and mutual funds.

That may also impact the delivery dates of the projects, which are still under baked.

To sum it up, 2019 will start on a cautious note due to the upcoming election. This slowness in the market is expected to remain over the next few quarters as developers adapt to the reform changes, but will pick up significant momentum thereafter because of the various infrastructure initiatives introduced in the recent years. 

Some key projects include the Delhi-Meerut expressway, Eastern Peripheral expressway, planned coastal road and metro route expansions in Mumbai and Ahmedabad metro, which would increase the inter-city as well as intra-city connectivity in various cities. 

Also, approximately 200 road projects in the pipeline are expected to be completed by mid-2019. These infrastructure initiatives are likely to boost the real estate supply and demands in the adjoining regions.

Author is Founder and MD, PropEquity