By: Sachin Sandhir, MD, RICS South Asia
Track2Realty: 2013 was one of much economic turbulence. High retail inflation, high interest rates and a continuous fall in the rupee value, have been slowing the overall growth and have continuously hindered the investment sentiment in the market during the entire 2013.
However, the recent decline in current account deficit (from 4.9% of GDP during April to June to 1.2% of GDP in July-September period), slight rise in industrial and agricultural output have given marginal relief. But, it could just be a mild bounce from the current slack in the economy.
While there is fall in the current account deficit, inflation is again above 10 per cent, as recorded in October. Wholesale price inflation (WPI) was at an eight-month high of 7 per cent in October, while retail inflation crossed 10 per cent. High inflation led by surge in vegetable prices has hit the domestic demand in the country.
Moreover, to curb inflation, the Reserve Bank of India (RBI) has been consistently raising the repo rate since September. Some nationalized and private banks such as the State Bank of India and HDFC Bank followed and raised their lending rates for retail borrowers, making the capital costlier. It is expected that the RBI, in its next monetary policy review, will revise the key policy rates to keep inflation under control.
The mega trend for the economy during the year 2013, however, was the currency fluctuations in the last six months. Between May and August 2013, the currency dropped sharply from Rs 53 to a dollar to Rs 68 per dollar – a net drop of 22%. This further raised the trade deficit – a measure of outflow of domestic currency (Indian rupee) to foreign markets – leading to the weakening of country’s economy.
Amidst global economic uncertainty, fiscal consolidation and the prevailing local market conditions have affected investor sentiments. According to industry estimates, private equity investments in the country witnessed a drop of over 65% for the quarter-ended September 2013. As per estimates, private equity firms invested around $1.3 billion across 75 deals during the quarter as against $3.91 billion across 126 transactions during the same period of previous year.
Of all the growth oriented sectors, real estate drew a significant amount of the total pie of investments despite a fall in the number of deals as compared to year 2012. But growth in the real estate sector cannot happen in isolation. While investments have come down in the sector, it still holds potential for giving healthy returns in future. As per industry estimates, around $ 2 billion is parked with private equity firms ready to be deployed in real estate, but funds want to put in money in only those projects with strong fundamentals.
Factors such as lack of professionalism, high degree of fragmentation in the market, shortage of qualified professionals and a partial paralysis on the policy front have led to a decline in investments.
On the policy front, two announcements – the Real Estate Regulation Bill 2013 and draft guidelines on SEBI (REITs) Regulations 2013 have the potential to change the fate of the sector. If implemented, these will not just bring greater transparency in the sector but will also help boost investments in the sector. However, their enactment as a law may take time.
The overall economic climate, coupled with inflation and high interest rates, is keeping buyers at bay. If one is to believe the current trend in the economy, there is hope that year 2014 would bring in some good news for the market. While the market witnessed a drastic fall in sales across regions, property prices in some of the established markets dropped on account of an oversupply situation.
However, in most regions, especially in emerging areas having ongoing projects, developers continued to hold on to their prices making some locations unaffordable.
On the markets front, while the office space witnessed improved transactions through the first half of the year, retail segment continued to face challenges such as supply of quality spaces affecting overall absorption. The residential demand improved during 2013; however, developers continued to struggle with unsold inventories and reduced cash flows for construction.
The housing prices are expected to move up marginally in 2014. However, rising interest rates and inflation will deter the new buyers from entering the market. Little improvement is expected ahead of the general elections but wary investors are likely to wait for the outcome of the elections till May next year.
