Real estate: A year of apprehension ahead
Moneylife Digital Team 03 January 2012

Debt, regulatory issues and customer service are the three big concerns

2011 was an eventful year on the realty front. The discomfort was already underway, with Unitech landing up in the second generation (2G) spectrum allocation mess, and if 2010 saw sales slowing down, in 2011, the industry was hit harder. The economy was already struggling, and inflation was high. Following a succession of mishaps, an embarrassing non-performance by the government and overall confusion, 2011 was the year when the customer, finally, ran out of patience— and the realty sector; at least vocally; had to promise amends or at least trying.

This year, the realty sector is to see some major changes. The most important among them being setting up of a real estate regulator. The draft Real Estate (Regulation and Development) Bill is going to be the most keenly watched piece of regulation. It was scheduled to be tabled in the Winter Session, but with the Lokpal Bill not being cleared in the Rajya Sabha, the real estate regulation bill has been deferred. Also most builders have expressed their unwillingness on the issue.

However, Maharashtra is reportedly thinking of setting up its own regulator—which is less stringent than what the Centre is envisioning. Ministers and government officials have admitted that they had left out certain provisions like depositing 70% of payments received to stop diversion of money for buying more land instead of developing existing projects—which leads to delay and raises price.

The other ‘big’ Bill is going to be the Land Acquisition, Resettlement and Rehabilitation Bill, which is aimed at providing fair compensation to displaced land owners. The move came after the Supreme Court quashed Greater Noida Industrial Development Authority’s attempt to acquire more than 150 hectares of land from poor farmers for prominent developers like Supertech and Amrapali.
The Bill on ‘Benami’ properties is also crucial. Benami Transactions (Prohibition) Bill will empower government to seize properties which are proved to be ‘benami’; i.e. properties that are owned by someone but are registered under a different person’s name, mainly to avoid taxes.

These developments are laudable and most optimists have said that ushering in transparency will only change things for the better. However, the industry has reacted testily. Bodies like CREDAI, FICCI and individual developers have accused the rehabilitation and regulator bills of being ‘biased’ against developers; and have even hinted at the possibility of price rise once they are passed.

The penalising of DLF by the Competition Commission of India was an unprecedented event. The news gave hope to property buyers, who are often helpless to counter the realtors on issues like delay in delivery or lack of services. Reportedly, many other complaints have been registered against builders with the CCI, but it is yet to be seen how the body reacts—since it could take on DLF only because it was the market leader.

While everyone is hoping that the economy achieves equilibrium and the rupee appreciates once again, many experts believe that the bleak streak of 2011 will continue. Media reports claim that the realty industry is sitting on a Rs45,000 crore debt. In November, Knight Frank India reported that even in Navi Mumbai and Thane, flats have no takers and 70% of flats costing above Rs75 lakh remain unsold.  

According to statistics, gross bank lending to the real estate sector grew 11.6% between October 2010, and October 2011, compared to 15.7% during the year-ago period. Similarly, foreign direct investment (FDI) flows into the sector witnessed a 26% decline on an annual basis.

With banks limiting lending to realtors, the latter have turned to private equity for funding which comes with interest rates as high as 18%-20%. With residential sales showing no signs of improvement and commercial properties going through a crisis, the industry will no doubt support FDI in retail which they hope will provide them with some much-needed relief. Many retailers are struggling with cost, staff and inventory management and have also accumulated huge amounts of debt (Pantaloons has a debt of Rs 4200 crore), yet show no signs of slowing down on their expansion plans.

Jones Lang LaSalle India says that another 15-17 million sq ft of retail space is expected to get operational by end-2012. The major contributor is likely to be Delhi, followed by Mumbai. A total 146 malls opened in seven cities of Mumbai, Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. FDI will definitely allow for a growth in space, but it remains to be seen how that will help the retailers. “We have seen customer sentiment slump,” says an analyst. “For the last two quarters, apart from food and some FMCG products, customers haven’t really been enthusiastic about purchasing even during festive seasons. If customers remain reluctant, malls and retailers will find it very difficult to recover their costs,” he added.

On the residential front, experts don’t see much corrections happening. Ganesh Vasudevan, vice president, says, “I would rather say that prices will have an upward bias. Correction may only happen in luxury segment, depending on additional services and features. However, in 2012, the pent up demand from the last year may play out in the first two quarters.”

Experts are optimistic that sales will pick up in 2012, not only because of robust demand; but other enabling factors. The Reserve Bank of India (RBI) does not seem to be enthusiastic about another rate hike and banks have waived erstwhile pre-payment charges—which will make it easy for the home loan taker.

2012, some industry experts say, will also see the launch of many affordable housing projects—both in the metros and other regional commercial centres. With gap widening between affordability and prices, and increased migration, affordable housing projects have become a must.

The small towns and other urban centres, however, have not suffered so heavily—as the prices have not heated up so much. While completed projects by big builders are unlikely to reduce prices, projects under construction or recently delivered are seeing some reduction. Small builders are also offering discounts and other freebies to offload inventory.

Bangalore is now being touted as the next favourite—thanks to the new metro project. Motilal Oswal, in a brokerage report has said that Bangalore has significantly outperformed other markets with a good absorption rate, reasonable pricing, low speculation and a competitive market. Chennai, too, has put up a stable performance, while Hyderabad, the other favourite, looks likely to stabilise once again as the Telengana issue settles down.

Piyush Chamedia
1 decade ago
The real estate regulator will never be a reality in India since all politicians and builders are in nexus.More than 50% black money flows through this system, and they don't want to shoot in their own foot by bringing this bill. This will meet the same fate as Lokpal, I guess 2020 is a good timeline to see some transparency in the sector - 2 decades after we thought we should have some !
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