Regulation and commercial pressures can make a difference to buyers in 2016
By all indications, many changes set in motion this year will impact the real estate industry in 2016 and beyond, in a way that will benefit ordinary Indians yearning for an affordable roof over their head. The rapid, decade-long increase in prices finally halted, sometime around 2013, when prices became unaffordable for ordinary Indians. The developments, since then, indicate that things can only improve for the ordinary Indian who makes his biggest investment with a borrowing tenure of a decade or two.
A research report issued by securities firm CLSA (Credit Lyonnais Securities Asia) in December 2015 says that the bear cycle in real estate that began in 2013 could lead to price correction of 50%, based on past trends. According to CLSA, bull and bear cycles in this sector usually lasts a decade. More importantly, it says, black money, which kept prices unaffordable for the common man, will play a lesser role in the years to come. If that really happens, the ‘mind boggling’ returns in realty will drop to 2%-3% above inflation (or a return of 7% to 8%).
Were this to really happen, investors who anchor large realty projects would no longer be interested, forcing builders to embark on new projects only if there is demand from consumers and to construct and sell flats at fair prices. With property prices declining and increased pressure from bankers to recover outstanding loans, builders can no longer afford long construction delays or put up with the rent-seeking ways of government officials and politicians. The backlash against corruption is already evident in Mumbai, where demands of politicians and officials allegedly drove a well-known builder, Suraj Parmar, to suicide. This has turned the spotlight on six municipal corporators he had named in his suicide note, as well as the trail of payments made to some members of the legislative assembly (MLAs). The builder community erupted with anger. A builder, who wants to remain unnamed, told me that although realty prices were stagnant for over a year and building rules had been tightened considerably to disallow illegal extension of the floor space allocation, the rapacious demands from government officials for routine permissions were only increasing.
Yet another factor to impact the industry is the growing pressure from banks to recover outstanding loans by selling assets. Anuj Puri, chairman of JLL India, real estate consultants, points out in his year-end report that “Construction delay is a major hindrance to Indian Real estate and the cost of delay across 25 major cities impacts 1.32% of the nation’s GDP.” He believes that the Cabinet clearance to the Real Estate Regulatory Bill will push the industry towards greater transparency and accountability and also introduce new financing instruments for the sector. He, correctly, points out that concern for the consumer has to be matched with ease of getting sanctions and clearances by builders; otherwise, it is only half a solution.
Pankaj Kapoor, of Liases Foras, also believes that increased accountability will have positive implications across the value chain. However, he, too, is of the view that delays in sanctions and clearances, unless fixed, will continue to drag the sector down and make the bill only half as effective. Quick clearances, faster construction, transparency, accountability and effective regulation are all crucial for the government’s much-touted ‘Housing for All’ programme. At the same time, we know that manipulating land and realty prices has been the biggest milch cow for Indian politicians and provided a cover for their unaccounted wealth. In fact, many of our politicians claim to be in the real estate business; they are bound to block any move for complete transparency in property records and transactions. The bigger issue today is whether parliament will ever be allowed to function and perform its duty of clearing legislation that is in the national interest.