In the last two-three years, India has taken wide-ranging steps to regulate the real estate sector. Not ever in the history of Indian real estate have so many most important events taken place within such a short period of time. Indian real estate has witnessed a 'systems re-boot' – beginning with demonetization, the legislation on Benami Properties, RERA, GST followed by the amendment to the Bankruptcy and Insolvency Code. Furthermore, the Union Budget for 2017-18 catered affordable housing with infrastructure status and the Pradhan Mantri Awaas Yojana (PMAY) offer interest subsidy schemes to incentivize affordable housing segment. The government also announced Credit Linked Subsidy Scheme (CLSS) making loans available at much affordable rates, thereby benefiting both buyers and developers.
The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which allows investors to invest in the Indian realty industry. The liberalization of the FDI norms will further improve the cash flow into the sector and encourage a robust environment.
All these policy reforms and regulations coupled with the ever-increasing population and rapid urbanisation have once again made the Indian real estate market shift gears and adapt itself to the growing needs of the rising populace in the country. The year 2019 looks to redefine the Indian reality space.
Ever increasing demand for homes
One of the biggest positives about Indian real estate is the constant demand for residential property, which is fuelled by our ever-increasing population. In addition to the population growth, the rise of nuclear families and increased urbanisation has led to real estate developers focusing on the affordable housing segment. The past decade, however, was all about luxury housing and the mid-range segment. The 2017 Union Budget gave a much-needed nod to the affordable housing segment, and since then, this sector has seen unprecedented growth. While experts predict this growth will not slow down in 2019, the luxury and mid-range segments, too, will pick up thanks to increasing salaries and purchasing power, as well as easier financing and payment options. All in all, developers will be able to focus on all three housing segments in terms of revenue, and homebuyers will be presented with multiple options.
Improving transparency level
Over the past couple of years, India has considerably enhanced the levels of transparency in the real estate sector. Thanks to the battery of massive reforms, the investor sentiment is improving consistently both at domestic and global levels. The face of India's real estate sector is changing, and changing quite fast. Implementation of game-changing reforms such as Real Estate Regulatory Act (RERA), Benami Transactions (Prohibition) Amendment Act, Goods and Services Tax (GST) and demonetisation, one after another, attempts to address the core, systemic issues that persist in the sector for several decades.
With the advent of RERA and GST, the real estate sector now moves ahead positively towards a greater transparent environment for home buyers in the country. Legal mechanisms to resolve disputes with developers were introduced to ease the burden on buyers and instil confidence in them to enter the market without any hesitation.
India has improved its ranking by one notch to 35 in JLL's 'The 2018 Global Real Estate Transparency Index (GRETI)'. The report covers 100 markets and is based on 186 indicators. These variables are divided into six areas –performance measurement, market fundamentals, governance of listed vehicles, regulatory & legal frameworks, transaction process and environmental sustainability.
India is expected to become more transparent and the ratings are further going to improve once RERA is implemented in all the states. Other policies are also working in tandem to improve transparency in the real estate sector. The country's ranking is likely to improve further in GRETI 2020, mainly on the back of comprehensive implementation of the Real Estate (Regulation and Development) Act in all states of India, introduction of insurance policies for Land Title Insurance, pseudo-ownership of properties weeded out through "Benami Transactions Act" and the sector aligning itself well with the Goods and Service Tax (GST) regime.
New business model
Demonitisation and twin reforms or RERA and GST have changed the way real estate business was traditionally done. There was a huge cash shortage after demonitisation and cash strapped developers sold their land parcels in distress sales to complete existing projects.
The cash shortage forced many developers to rethink their business models. This has led to the emergence of joint ventures (partnership among developers) or joint development (developer partnering with land owner) models.
RERA and GST have increased compliance cost for developers. RERA is particularly tough on small developers, because the Act does not allow developers to sell housing units without securing all the required approvals unlike in the past when pre-sales funded the early stages of a project. The mandatory rule of maintaining 70 per cent of the proceeds from buyers in an exclusive escrow account for the project and other compliance issues has pushed up operating cost for developers.
This has forced small and mid-sized developers to change their business model and look at joint development model instead of investing money in buying land.
Joint development and joint venture models of real estate development consume less capital. It works for small and mid-sized developers who have found it difficult to raise capital after RERA. In the current regulated real estate market, sharing risk has become popular. Joint development models work very well for land owners, who do not have the time, resources or the experience to execute a project.
Foreign investment and private equity
A strong growth in the GDP in the past few years, governmental reforms and an incrementing positive turnover have attracted a slew of foreign investors, looking to gain entry into the finance-deprived, potential Indian real estate market. Thanks to the recent reforms introduced by RERA, the Indian real estate market is witnessing a lot of investment or joint venture bids from foreign investors and private equity owners.
The government has allowed 100 per cent FDI for townships and settlements development projects. In January 2018, Government of India allowed 100 per cent FDI in single-brand retail trading and construction development without any government approvals. With the laws now allowing 100% foreign investment in real estate, it promises to not just boost investments but also ensure that the sector is pumped with completely clean money. This has been a big, welcome shift that's appreciated by foreign and Indian investors alike.
The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which allows investors to invest in the Indian realty industry. This would aid increase of the cash flow in the sector and create openings worth billions over the years.
Consolidation of industry
Indian real estate post-RERA has witnessed major consolidation. Lower sales coupled with financial incapability also prompted several small-size developers to either exit or consider consolidation via mergers, acquisitions, and joint developments with organised bigger players.
Joint developments, joint ventures and development management agreements between landowners or smaller developers and larger, organised developers has been growing in the recent past and is expected to continue in 2019. Consolidation will not only be limited to developers but may even extend to co-working operators. Developers with deep pockets, commitment to corporate governance and transparency will sustain their operations while non-serious players will be weeded out.
Increasing prominence of green building
India is currently witnessing a surge in the demand for green buildings. Residential as well as commercial property developers are switching towards green buildings. Green buildings can play a significant role in conserving the environment and in an increasingly urban society where the need for housing will keep on rising, they can play an instrumental role in maintaining the ecological balance.
Real estate development is one of the biggest consumers of natural resources (water, energy, raw materials) and generates gargantuan amounts of wastes and pollutants. This sector alone ingests about 40% of natural raw materials, 25% of water and 35% energy resources. In addition, it emits 40% of wastes and 35% of greenhouse gases.
By adopting green building practices, the real estate sector can reduce its negative ecological footprint and simultaneously help create a more sustainable environment over the long haul. Efforts towards sustainable real estate development involve the optimal use of natural resources, reduction and recycling of wastes, and significantly reduced pollutant emissions. A sustainable environment is the most precious legacy humankind can leave for the future generations.
Though at a nascent stage, India has emerged as one of the leading countries in terms of green buildings' projects. India's green building market is estimated to double by 2022