Weathering the cash disruption

Even as realty reels through disruptions, long-term buoyancy in the market is still intact, says Shishir Baijal, Chairman and Managing Director, Knight Frank (India) Pvt. Ltd.

There is never a dull moment in real estate. 2016 began promisingly in comparison to 2015; however, as things stand, the year isn´t expected to end on a healthy note. A major factor for this could be attributed to the policy developments by the government, which in the short term have led to an unpredictable disruption, but in the long run are projected to augur well for the industry as a whole. On the global front as well, developments like Brexit and the US President-elect are expected to have their bearing on the Indian real estate sector. The writing is clearly on the wall – 2016 will go down in history as a watershed year for the Indian real estate sector as a whole.

2016 – Where we stand
The residential property market witnessed improved sales in the first six months of 2016. Barring Delhi-NCR, other markets did well in the first half of this year compared to previous years. Mumbai and Bengaluru led the way and the manner in which markets rebounded in the initial phase of 2016 gave us the feeling that the year would end on a high note for the residential property sector. The overall positive sentiment was attributed to a host of factors including political stability, regulatory environment, enhanced infrastructure, strong investments, approval to the GST bill, and amendments to REITs.

Just when the industry was gearing up to meet the deadlines set by the government for Real Estate Regulation & Development Act 2016 (RERA) and Goods and Services Tax (GST), it received a jolt in the form of demonetisation of the Rs 500 and Rs 1,000 currency notes with immediate effect. While the broad motive of the Government of India behind this announcement was to curb the menace of fake currency notes and bolishing unaccounted money, the impact of this move could be felt across the economy and sectors including real estate. This move created a real dent in the residential real estate sector, pulling back the last quarter trend of residential sales substantially across the cities; consequently, sales are at a historical low and we expect 2016 to be worse than 2015, which was one of the worst years itself. Interestingly, the office market continues to do well in 2016 and the overall transaction volume by the year end will be at par with 2015.

The game-changers
While most of us awaited the results of the US presidential elections on 8th November 2016, the Prime Minister of India brought about the most sweeping change in the Indian economy in recent history. Demonetising the Rs 500 and Rs 1,000 notes was a rude awakening for the Indian economy and the real estate sector has been at the receiving end due to this move.

Another imminent change that will impact the sector in the days to come is the partial implementation of RERA. The Act lays down the broad parameters for functioning of the real estate sector and since land is a state subject, the Act required states and Union Territories to come up with governing rules by 31st October 2016. RERA, once implemented, will increase transparency, which in turn will bring back buyer confidence. The real benefits would be that the buyer will be ensured of a dedicated governing body, timely project completion, complete information on the project and amenities promised. Developers, on the other hand, will have to adjust to the new environment and more specifically, they have to change their business model whilst adhering to stricter compliance norms. However, as of date, only Maharashtra and Delhi have come up with and notified the draft rules for their respective States. Demonetisation and the new regulations for the real estate sector may have briefly halted the march, especially of the residential property market, but in the long run they will help the sector grow in a much more evolved manner.

For the office segment, further clarification on REITs is a positive step and is likely to give a greater impetus to the commercial market.

Global disruptions
On the global front, no other individual has managed to gain the public limelight like Donald Trump – President-elect of the United States of America. From the regular media jibes, to bringing back jobs and his bellicose views on immigration – Trump´s portentous rhetoric hasn´t gone well with industries and investors, especially firms that have their major businesses overseas. Traditionally, the United States has been one of the biggest investors in India with several manufacturing, technology and outsourcing hubs here. The fact that the technology sector has an undeviating connection with the country´s residential demand, any change in the US outsourcing policy could have similar appalling effects on India´s real estate domain. We need to wait until the new government formalises its policies on various issues including outsourcing, to understand which way the wind blows particularly for India. Earlier this year the UK voted in favour of Brexit, the unexpected outcome left the industry perplexed – a vote that translates into a complete shift of business policies to be adopted by the industry. The EU is a rather protectionist market and several Indian business entities choose to invest in the UK, with a view to get unrestricted access to the European markets. The scale of this effect, especially in the medium to long-term, will depend on the outcome of negotiations on the UK´s exit.

Outlook 2017
All of the above mentioned factors put together point towards a subdued beginning for 2017. With enquiries, walk-ins and sales drying up as a fallout of demonetisation, the first two quarters of the coming year will result in a substantial slowdown in sales. In the first half of 2017, the sector is expected to be largely muted and there would be pressure on prices. With consumers in a wait-and-watch mode, demand could be subdued due to a mindset that property prices could undergo reduction along with a substantial lowering of home loan interest rates. Likewise, tax benefits in the forthcoming budget will be another factor that could hold back demand for property in the initial quarters of 2017. Since buying a house is a discretionary need ù a need that can be postponed, it is anybody´s guess that the real estate sector will be the slowest to recover from the impact of demonetisation when compared to other sectors.

The office market is expected to face challenges to maintain the prevailing pace in the following year. This could be due to the geopolitical risk of a probable reduction in outsourcing from the US, structural changes in the domestic economy and top technology companies reducing their growth targets. With the advent of GST, the warehousing sector will see a consolidation, thereby bringing efficiency in the entire system.

By May 2017, RERA will be implemented in the country. The after-effects of demonetisation coupled with legislations like the GST bill and Benami Act, will further increase transparency and reliability within the sector. Furthermore, this will see a boost in institutional funds flowing into the sector at competitive rates, which will enable the sector to come out of the woods.

In a nutshell
To conclude, the impact of demonetisation is a transient one and the economy will undergo structural changes for the first three quarters of 2017. The industry awaits the implementation of policy reforms like RERA & GST, medium-term impact of demonetisation and listing of REIT.

During this phase, enterprises are expected to streamline their business processes and implement international best practices to adhere to the upcoming changed business environment.

There will be a greater influence of FDI (Foreign Direct Investment) that will help create jobs and revitalise growth within the sector. Overall, institutional participation – both domestic and global markets – will help the sector in getting high quantum of funds at competitive rates.

In view of the various procedural changes adopted by the government, it is also expected to be an important facilitator in bringing back stability within the real estate sector.

The end of 2017 is most likely to see the initiation of a robust and sustainable growth trajectory for India´s real estate industry and will be recognised as the base for the future growth of this sector.