By: Anshuman Magazine, CMD, CBRE South Asia
Improving economics
Track2Realty Exclusive:Following nearly two years of sub-5% growth due to currency volatility, high inflation and fiscal deficits, poor investment and market sentiment scenario, India’s economy bounced back with a growth rate of 5.7% during the April–June period of FY 2014–15, up from 4.6% in the preceding quarter. With business prospects improving across key sectors, the economy is expected to display further improvements in the next quarter.
Consensus forecasts by global institutions such as the IMF and World Bank have projected a growth of above 5% for FY 2015; while according to Deloitte’s projections (using the Oxford industry model) India’s GDP growth for the current fiscal stands at around 5.9% (Deloitte India Competitiveness Report, November 2014).
Policy support and improved sentiment drove faster growth in the first quarter, following the election of the new government in May 2014, when market sentiments improved and boosted transactions and investments. Foreign Direct Investment (FDI) alone saw a dramatic 34% y-o-y increase during Q1 2014–15 as multinational firms reacted positively to the new government’s reform agenda.
Moreover, consumer price inflation (CPI) dropped to a record low in October 2014, and wholesale price inflation (WPI) also edged down. One implication is that interest rate cuts could soon come onto the agenda. Going forward, faster infrastructure approvals and corporate decision-making look likely in the coming months, which will support investment and demand for commercial real estate.
On the regulatory front, the realty sector saw two major developments—the Securities and Exchange Board of India’s(SEBI’s)announcement of final guidelines on the setting up of Real Estate Investment Trusts (REITs), and the revision in FDI norms for the construction sector.
SEBI’s recent move of issuing the final guidelines for Infrastructure Investment Trusts and Real Estate Investment Trusts (REITs) in India signalled a positive move for India’s capital markets as a whole, and its realty sector in particular. Reducing the minimum requirement for commercial real estate asset sizes permitted to be listed in India REITs from Rs.1,000 crore to Rs.500 crore is likely to generate more investments and also encourage mid-sized development firms to consider this new funding channel. Although the government has already clarified that REITs will be given ‘pass through taxation status’, clarifying the tax structure is of high importance at the moment.
Meanwhile, the Central Bank’s move of keeping base rates unchanged in its latest policy review was widely expected as consumer price inflation remained a concern and the impact of the Union Budget was yet to be felt across sectors. Any reduction in base rates in the coming months will be a positive indicator for the sector, spurring housing demand and construction activity across the country. Yet another positive policy initiative saw the government clearing upto 100% FDI in railway infrastructure segments such as electrification, signalling, high speed and suburban corridors; while permitting upto 49% in infrastructure and defence.
The month of October saw the government easing FDI norms to boost India’s construction sector. The announcement is expected to widen the sector’s investor-base by allowing FDI in smaller projects of 20,000 sq. m. instead of 50,000 sq. m. from firms with capitalization of US$5 million instead of US$10 million. Likely to encourage more FDI, especially for mid-sized financial institutions, the decision will also encourage new projects in prime areas of large cities and in tier II towns.
By making smaller-sized initiatives more feasible, the FDI rule revision might also increase developers’ investment options and drive development in smaller cities, where investors previously found it challenging to source suitable developments sized 50,000 sq. m. and above. The real estate and construction industry is starved of funds. What it requires at the moment is an injection of capital for infrastructure and development. All central government efforts to increase capital flow in these areas can only help the real estate and construction sector in particular, and the economy in general.
Rising business confidence
According to industry surveys conducted by CII and FICCI, corporate India’s business confidence indicated an improvement in investor perception during the July–September quarter. While the CII Business Confidence Index shot up to 57.4 in the quarter (from 53.7 in the previous quarter), FICCI’s Overall Business Confidence Index moved up to 72.7 (over69in the last quarter)—the highest in 15 quarters.
The key industry bodies are of the opinion that the management of inflationary expectations would hold the key for ensuring a continued momentum of economic revival through supply-side measures. A slow pick up in global demand, high inflation and rising borrowing costs were cited to be their top three concerns.
Market reality
The market reality, however, is that the recent festive season failed to boost property sales, despite discounts and freebies from development firms. Traditionally a period when property sales usually witness a sales rise of about 20–25%, the period this year failed to clock in anticipated sales volumes. High property prices and interest rates kept home buyer demand on a short leash.
Although inflation has come down in recent months, real estate demand is yet to revive, with home buyers perhaps awaiting a more consistent period of low inflation levels and interest rate cuts before investing in properties. The flipside of this demand scenario has been that property markets in Mumbai and Gurgaon—two of the country’s largest real estate markets—have been witnessing prolonged stagnation.
In the case of Gurgaon, especially, there is significant inventory of housing units available in the secondary market at more affordable price points than the primary market, making them attractive options for end-users. Till such time that the RBI does not let go of its current interest rates, it will take the real estate market a couple of more quarters to leverage the recovering economy.
The good news in this scenario, however, is that consumer sentiments have improved in recent months, with India having topped the quarterly index of the Nielsen Global Survey of Consumer Confidence and Spending Intentions (October 2014).
India had ranked at #2 and #3 positions in the previous quarterly surveys, hence consumer spending has obviously improved lately. Additionally, according to the credit rating agency, ICRA, India’s corporate sector saw more rating upgrades than downgrades in April–June 2014 for the first time in four years. Although the real estate and construction sector remained excluded from this assessment, faster economic growth, more employment creation, higher salary increments and lower interest rates are some of the ingredients expected to pull up sagging demand in the real estate sector.
Another silver lining this year has been the slew of realty fund launches (mainly in the residential segment) of much larger transaction sizes as well as transaction volumes in this fiscal over that of the previous fiscal. Investment firms to have launched such funds this year included Centrum Capital, Indiareit Fund Advisors, and ASK Property, among others. The Indian real estate sector continues to be a favoured sector for investments from overseas as well as domestic investment firms.
In conclusion
There is optimism in the market about an improving economy and expectations that the new government will usher in a period of significant fiscal and economic reforms. Consequently, improved investor confidence is also likely to be reflected in higher capital inflows and higher business investment in the near term. A relaxation in interest rates is required to revive sagging demand in the housing sector and generate investor confidence. With this in mind, the onus will be on the government to follow through with the reforms outlined in the Union Budget 2014–15 to support the economy. It now remains to be seen how the government implements progressive structural reforms to bolster this anticipated growth.
To support sustained, overall economic growth, India will need to develop its infrastructure and construction sector, which has been identified as a key long-term growth driver of our national economy along with sectors such as BFSI, retail, automobile manufacturing, pharmaceuticals, and information and communication technology. Growth in the construction and real estate sector will not only generate substantial direct employment opportunities, but also fuel growth in a large number of ancillary industries.
The new government’s latest policy announcements indicate plans for improving infrastructure and construction activity in the economy through the creation of a ‘100 smart cities’ and the planned achievement of ‘housing for all by 2022’.Such government initiatives are anticipated to bring about growth opportunities in the infrastructure and realty sector. Growing income levels, rapid urbanization, and the growing requirement for urban infrastructure will be the key factors for triggering off growth in India’s real estate sector in the long-term.
