2016’s a Good Year for Indian Real Estate — Do You Buy It?

Published on 20 Apr, 2016

India Real Estate 2016

The Indian real estate sector remains an important investment destination for investors looking at tangible investments.

Although the sector showed sluggish sales and low index returns in 2015, we expect that the accommodative government policies coupled with resilient and strong economic growth to renew investors’ confidence in the coming months.


India’s Real Estate Sector is Expanding

Led by an infusion of funds from PE investors and the rising number of deals

India’s real estate sector has been through some trying times due to sluggish economic growth and structural challenges that include delayed approvals, high construction costs, limited institutional funding, and an inventory overhang.

However, shored up by a robust GDP growth of 7.3% in FY2015 , the introduction of structural reforms, and a general sentiment of optimism in the country catapulted India to emerge as an influential country in the global financial market. This impressive growth boosted investors’ confidence in the country’s economy, and in turn, the real estate sector — which contributed 5% to India’s GDP in FY2015. Moreover, the approval of the Real Estate Bill 2015, lowering of interest rates, higher disposable income, and stable real estate prices augur well for the sector.

Private Equity (PE) investments into the sector rebounded in 2015, reaching new highs since 2008, signaling a growing optimism in the sector. PE funds invested nearly $2.77 billion in real estate projects and companies over 2015 through 81 deals, marginally higher than the $2.1 billion invested in 2014 via 90 deals. The average size of deals struck increased in 2015, complemented by a large number of companies engaged in mergers and acquisitions. For instance, the online classifieds platform Quikr acquired CommonFloor in December 2015 for $200 million. This was a move aimed at creating an industry leader in the online real estate segment. In addition, Quikr acquired Indian Realty Exchange (IRX), a mobile-first aggregator of real estate brokers, and RealtyCompass, a platform that provides builder rating and project analysis.

Here are some of the other significant deals that shaped the sector in 2015:

Top Five Private Equity Deals in 2015

Period

Investor

Developer

Deal Value

(in $ million)

Deal Profile

June

SPREP Ltd., alliance between Canada Pension Plan Investment Board (CPPIB) and Shapoorji Pallonji Group

Faery Estates Pvt Ltd.

220

Investment in IT Central Park, Chennai.

July

Warburg Pincus

Piramal Realty Ltd

284.34

Entity-level Investment.

August

Goldman Sachs Group Inc

Piramal Realty Ltd

136.8

Entity-level Investment.

August

Asian Development Bank, International Finance Corp, SCM Real Estate Singapore Pvt. Ltd.

Shapoorji Pallonji Group

200

Investment in affordable housing projects.

September

GIC Pte Ltd.

DLF Home Developers Ltd.

299.53

Investments in residential projects in Delhi.

Source: VCCEdge


Sluggish 2015 — Characterized by Unsold Retail and Residential Inventories

Although 2015 was characterized by large investment deals, only the commercial real estate segment flourished.

The residential and retail segments were subdued as inventories remained unsold, primarily due to weak consumer sentiment. According to a report by Knight Frank , unsold inventory stood well over 690,000 units in 2015, a stock that’s likely to run out in three years.

Expecting prices to fall, customers were reluctant to invest money in a market where residential real estate prices remained stagnant for over two years. Stated prices continued to be high, while transaction prices fell 10–15%. Moreover, discounts increased significantly in the secondary market and distress sales became common. All this resulted in alarming levels of unsold inventories, with Mumbai and Bangalore contributing majorly to the inventory overhang.

In Mumbai, the property portal Indianproperty.com reported an inventory pile up of 46 months. The absorption of old homes in the region declined 9% YoY to 28,446 units, while new launches fell sharply by 47% YoY to 18,887 units during H1 2015. This was primarily due to low demand and high property prices. Bangalore reported a high unsold inventory of 84,000 units in Q2 2015, surpassing Mumbai during the quarter, due to weak consumer sentiment coupled with new project launches.


Developing Trends in the Indian Real Estate Sector

India’s real estate sector has witnessed a new alignment of supply and demand over the past two years. Developers are focusing on a buyer’s requirements now more than ever before.

Interestingly, affordable housing has emerged as a preferred segment, with developers supplying a greater proportion of mid-segment apartments priced in the range of INR7.5–10 million, particularly in Tier1 cities1. This trend is in line with consumers’ objective of making small, effective investments. As a result, smaller units in popular localities are gaining traction. In addition, most buyers that invest in real estate for their own use end up shifting to other cities, or perhaps choose to exit one market to enter another. As such, smaller units allow a buyer greater liquidity in the real estate market.

The real estate sector is also experiencing high demand for ready-to-move-in projects, and a growing number of developers now focus on completing existing projects that have been too long in the making. On average, construction projects face a delay of about 33 months till completion. According to a report by the Associated Chambers of Commerce of India (Assocham), 75% of 3,450 live projects tracked across the country did not commence construction as of FY2015. Consequently, consumers are wary of investing in projects that have a lower completion percentage. Such apprehension consequently dissuades buyers from investing in real estate.

Government Reforms to Fuel Growth

The Indian government has rolled out a number of reforms to alleviate some of the sector’s woes such as declining sales and mounting debts. Of the various reforms introduced in 2015, one key regulation involved an amendment to the Foreign Direct Investment (FDI) laws governing the real estate sector. The government reduced the minimum built-up area as well as capital requirement for projects, while also easing exit norms. Improvements in the REITs tax structure as well have attracted PE investors who are geared for investments in these structures. A much anticipated Real Estate Bill aimed at ensuring consumer protection and standardizing business practices has also been passed, and is likely to revive consumer interests.

Outlook — India’s Real Estate Market in 2016

We expect 2016 to be a crucial year for India’s real estate sector.

Although overall business sentiment improved in 2015, the actual trickle-down effect of several reforms and policies announced over the past two years will likely be evident only during 2016.

The current year could witness a balanced demand-supply equation that ought to reduce unsold inventories across major cities to more sustainable levels. Sales are expected to pick up in the residential segment as well, with prices expected to remain muted.

There is also a growing interest among mid-sized and retail investors who wish to expand their portfolios by investing in retail shops, office space, and leased assets, a factor that’s likely to propel the commercial real estate segment.

Although news of the government keeping interest rates unchanged in 2016 dampened investors' spirits, the announcement of sops in the upcoming union budget would provide the necessary impetus to turnaround the stressed sector.


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