I ndian real estate was devoid of any appreciable forward momentum in 2019. Dwindling consumption, lacklustre investment appetite and the global slowdown overshadowed all possibilities for growth. The GDP growth rate stuttered and sunk to a six-year low of 4.5% in Q2 FY20.
The sector’s performance — a reliable barometer of the country’s overall economic health — painfully reflected the macro-economic state of affairs. The liquidity crisis did not relent and dented any ‘real’ growth during the year. Multiple developers fell off the grid while others still struggle to stay viable. However, strong players with healthy balance sheets sailed through 2019 and recorded decent housing sales and revenue growth. Towards the end of the year, more than 72% (approx. $47 bn or nearly ₹3.3 lakh crore) of the total loans advanced to Grade A builders ($65 bn) are safe and stress-free. Grade B and C developers collectively accounted for just $28 bn of the total loan advances.
The commercial office segment flourished and remained the top-ranking real estate asset class. Residential continued to struggle under the funding crunch and slow annual sales growth. Other asset classes like co-working, logistics and warehousing, co-living and student housing gained traction in 2019, attracting slow but steady investments (collectively $210 mn).
Govt. interventions
Amidst the gloom, the government gave real estate major shots in the arm in the first leg of its second term in office. There were concerted attempts to revive the economy while simultaneously addressing challenges in the struggling automobile, real estate and retail industries. Most notable among these include the creation of an alternative investment fund of ₹25,000 crore for last-mile funding of stalled housing projects, corporate tax cuts, the further relaxation of FDI norms for single-brand retail, etc.
While these interventions have not shown any significant impact so far, they have boosted the confidence of India Inc. and the affected sectors.
The year also saw the Real Estate (Regulation and Development) Act (RERA) gain firmer ground with over 40% growth in project registrations. To make under-construction projects more attractive, the government slashed GST rates to 5% — unfortunately, without the ITC benefit. The government also took a major step towards safeguarding homebuyers’ interests by banning the once-popular (but often misleading) subvention schemes. RBI reduced the repo rates by a significant 135 bps all through 2019 and mandated commercial banks to link home loan rates to it.
All in all, in terms of policy interventions in 2019, the sector drew considerable fire but failed to display appreciable growth.
Residential focus
For the housing sector, 2019 was not eventful in terms of sales growth and investor interest. Sentiments remained subdued, sustaining almost solely on end-user activity focused on ready-to-move-in or almost-complete homes.
Branded developers gained ground, with some listed players performing exceptionally well on sales and commensurate revenue growth. As per Anarock research, the housing sales value of India’s top nine listed players touched ₹108 billion in the second and third quarters of 2019, amounting to a 5% q-o-q growth. However, some other big names were dragged into insolvency.
Smaller developers continued to perish or collaborate with big players due to extreme financial constraints. To be certain, the liquidity crisis gave no respite to the housing sector. Private equity inflows into the residential segment remained subdued, with major PE funds focusing on the commercial segment.
For the housing sector, the only light at the end of the dark financial black hole was the announcement of the alternative investment fund (AIF) of ₹25,000 crore to facilitate the completion of stuck affordable and mid-segment homes.
In fact, affordable housing remained upbeat in 2019 thanks to multiple government sops throughout the year. First-time home buyers were given further tax deductions (now amounting to ₹3.5 lakh in a year) on interest amount of home loans below ₹45 lakh availed within FY 2020 end. Luxury and ultra-luxury segments remained limited to end-user interest, with no serious investor activity.
Of the estimated 2.3 lakh new unit launches in 2019 in the top seven cities, nearly 40% or approx. 92,000 units were in the affordable segment, followed by mid-segment with a 33% share. The luxury and ultra-luxury segments accounted for the least share with 10% (approx. 23,000 new units).
Average housing prices in 2019 maintained status quo across the top seven cities, with a minuscule 1% yearly gain in MMR, Pune, Bengaluru and Hyderabad. NCR and Chennai saw no change at all, while Kolkata saw a 1% decline in 2019. Interestingly, between the pre-and-post DeMo period (2016 vs 2019), the end-user and IT-driven markets of Bangalore, Hyderabad and Pune saw the maximum price increase in three years - at 6%, 5% and 4% respectively.
Commercial growth
India’s office sector was decidedly vibrant this year, with demand for Grade A office space spiralling upward while vacancy levels in prime locales reduced. India’s first Real Estate Investment Trust (REIT) received an overwhelming response and within just six months of its launch, its value increased over 37%. Thanks to REITs, India entered the league of mature markets in 2019.
India also jumped to 63rd position in World Bank’s ‘Ease of Doing Business 2020’ report, both reflecting and attracting the confidence of both local and global entities. Unlike in previous years when most funds looked at only income-yielding assets in commercial real estate, 2019 saw major funds focus on the development of office assets.
Post the global WeWork debacle, India’s co-working boom came under closer scrutiny. However, the demand for co-working spaces in the country by entrepreneurs, tech start-ups and even big multi-nationals remains strong and growing.
Re-envisioning retail
Consumer spends took a major hit in 2019, both in terms of purchase volumes and ticket sizes. Inevitably, overall retail leasing activity reduced drastically by as much as 35% in the top seven cities alone.
Seasonal discount shopping gained prominence over brand loyalty. The struggling automobiles, fashion and telecom industries derailed both consumer spending and space absorption and only F&B, family entertainment centres, cinemas and beauty/wellness boutiques saw appreciable growth.
Retailers had to seriously re-vision their strategies in 2019. Analytics-driven decision making aided by expert retail leasing consultancies proved to be immensely important and strengthening customer loyalty was the watchword.
The government’s further relaxation of FDI norms for single-brand retail and the widened definition of mandatory 30% domestic sourcing norms benefited players like IKEA, Apple, H&M etc.
After a fairly scintillating performance in 2018, the logistics and warehousing sector failed to show much growth in 2019. In fact, it witnessed a 27% decline in total PE inflows in the first three quarters of 2019, equalling nearly $200 mn as against $275 mn in 2018.
Other sunshine sectors
However, the majority of available space in this sector is still unorganised and can, therefore, be tapped for future ROI growth potential. Initiatives like ‘Make in India’ will boost activity in manufacturing, e-commerce and retail — which will call for quality warehousing spaces. Its lower growth in 2019 does not really reflect future trends.
This year also saw alternate real estate asset classes like student housing and co-living gathering momentum.
All eyes on 2020
As the new year dawns on Indian real estate, expectations will initially overtake on-ground improvement.
Current trends indicate that H1 2020 will not see much growth over the patterns of 2019. However, the H2 does hold promise as the positive impacts of various government measures kick in.
Some major trends to watch out for in 2020 include:
- Consolidation and mergers will continue across all real estate sectors
- Environmental concerns will gain prominence and developers will have to reorganise launch rates and construction labour
- Some large stuck realty projects will be revived by government funds
- Residential property prices will remain stagnant
- New launches will remain muted, but housing sales could see improvement
- Branded players will gain more strength
- Private investment could increase from H2 2020 onwards
- More commercial REITs to be listed
The writer is Chairman, Anarock Property Consultants
