By: Sachin Sandhir, Managing Director, RICS, South Asia
Track2Realty: The year 2012 witnessed subdued interest in real estate due to inflationary pressures and rising interest rates in the country, coupled with the on-going economic crisis in the Eurozone and US.
GDP growth progressions for the country have been fairly narrow and revised lower continually over the last few months, with the economy expected to grow at an abysmal rate of just 5.3% – 5.5% in 2013. Additionally, disputes related to land acquisition, delays in regulatory processes and project clearances have weighed down the aggregate demand.
Some good news for the last quarter of this fiscal year could be a boost to infrastructure spending, as the government now appears close to launching the National Investment Board. Therefore, overall sentiment for 2013 is expected to be one of cautious optimism.
The Wholesale Price Index (WPI) indicates inflation in the country to have fallen to a 10-month low of 7.24% in November. Additionally, core inflation has declined to 4.49% in November as compared to 5.19% the previous month. Basis this development, some relief measures for both developers and investors can be expected in the form of decline in interest rates and increased liquidity in the near future. This could help stimulate demand for real estate and lead to better economic growth prospects.
However, outlook is likely to remain tempered in relation to growing concerns among investors that prime assets in several realty micro-markets are becoming overpriced. India hasn’t really delivered since 2005 on the promise that it held as an investment destination. With 20% internal returns promised by most PE funds in 2005-07, the current rate of return is only 8-10%, less than half of what the funds aimed to achieve.
Additionally, several funds are finding it extremely difficult to exit their investments. Even foreign direct investments (FDI) in real estate between April 2009 and December 2011 have declined by a drastic 92% and accounts for only 1.94% of the total FDI inflow.
Such diminished returns are prompting international investors to stay clear of the market, therefore most of the capital finding its way into the sector today is really domestic capital.
On a positive note, the recent move by the government to open multi-brand retail to FDI will go a long way in strengthening organized retail in the country. For long now, the retail sector in India has been facing numerous challenges with respect to processes, technology, supply chain, real estate, infrastructure etc., resulting in fewer investments in the sector as compared to others, which have seen growth occur at a much faster pace.
FDI in retail will be a powerful vehicle in bringing the retail sector on the trajectory of the much needed growth. This will have a positive spill over on real estate as well, as with multi-brand retailers entering the market, retail property will witness renewed demand and uptake along with improved investor confidence in the sector.
As we step into the New Year, it is advisable that industry players focus on achieving operational efficiencies to improve construction productivity, delivery of projects in hand with the help of technological advances and commitment to improve delivery capabilities including up-skilling of existing manpower.
Therefore, efficiency, innovation and cutting-edge technology such as BIM and assembly line mass housing solutions may well be the keys to success, in addition to improved project delivery and execution skills and addressing the rampant capacity constraints across the built environment.
Also, we do hope that the issues related to the Land Acquisition and Real Estate Regulation Bills are addressed in the winter session of parliament, where clear, concise and practical reforms which work to the benefit of all stakeholders and are relevant to market conditions are brought to order, which in turn will help bring in much needed efficiency, transparency and accountability in the sector.
