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Realty drew significant amount of total pie

Comment

 Last year was one of much economic turbulence. High retail inflation, high interest rates and a continuous fall in the rupee value slowed the overall growth and continuously hindered investment sentiment in the market during the entire period. Amidst global economic uncertainty, fiscal consolidation and prevailing local market conditions have affected investor sentiments. The overall situation has thus kept buyers away from the market, as evident from poor sales recorded across micro-markets over the entire previous year.

The current state: A slump in the demand within the domestic market means that there has been a sharp rise in inventory levels of unsold units. This has further added to the overall pressures on companies already dealing with problems of delayed projects and poor sales.

Additionally, the global recession, the tapering of the stimulus package by the US central bank, China’s banking crisis in recent times, and the unstable political scenario within the country do not augur well for fund flows to the sector. 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 too led to a decline in investments and buyer sentiment.

Financing to the sector has also remained a concern. Amidst tight lending from banks, private equity investments too have come down. 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 September 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 in 2013 as compared to 2012.

What to expect from the year ahead?

If one is to believe the current trend in the economy, there is hope that 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 that have ongoing projects, developers continued to hold on to their prices making some locations unaffordable.

With the recent measures of fiscal consolidation, it is likely that the situation will get better during the second half of the year. Slowly and gradually the sales will pick in the second half.

On the commercial real estate front, the supply of commercial spaces has grown relatively faster than the demand in the past several months. Due to an oversupply situation in certain key markets, the capital values of office spaces have bottomed out. Rents on the other hand have remained stable or flat. If the situation continues to be as it is now, there could be a drop in transactions in the commercial segment in the coming months. Going this way, it would take at least a year for sentiment to revive within the commercial space.

While there are indications that the economy will revive, a few concerns remain. The new government should bring key reforms for the sector. 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. We should see some activity in this regard.

Moreover, some additional sops are required to up the sales. Providing relief to millions of first time homebuyers, the government had earlier announced an additional tax deduction of Rs1 lakh to persons taking a home loan of up to Rs25 lakh for the first purchase. But the provision is applicable to property purchases done before March 31, 2014. The move helps in promoting housing in the country by enabling first time homebuyers and pushing sales. Extending tax deductions by another year will be a
key differentiator.

• The author is MD of RICS, South Asia. He can be contacted by email at ssandhir@rics.org

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