GST rollout a setback for real estate in city, no new constructions started

GST rollout a setback for real estate in city, no new constructions started

DEHRADUN: Last year’s demonetisation and the July 1 rollout of Goods and Services Tax have affected the already struggling real estate sector.

Dehradun alone has over 100 group projects where thousands of flats are under different stages of Continue reading “GST rollout a setback for real estate in city, no new constructions started”

Unsold inventory in the real estate sector is piling up, slump is aided by scepticism over RERA and GST

Unsold inventory in the real estate sector is piling up, slump is aided by scepticism over RERA and GST

As per the report, this slump is despite the 20% price correction in the past 18 months. About 17,188 units were sold in the first half of 2017 compared with 23,092 units in the same period last year.

It’s a buyers’ market. Or so say analysts tracking the real estate market. Reams and reams have been written about how anyone planning to buy a house can pick and choose from the large stock of unsold inventory and pay lower than what was the price a few years back. But Delhi resident Simi Mohan isn’t convinced. “I don’t want to book a flat in any upcoming project because I don’t know when I will get it. And the prices of the already built flats are not in the affordable range for me. So how is it a buyers’ market?” asks the 32-year-old paramedic, who works in a government hospital. Mohan has a point. The unsold inventory is piling up, developers are sitting on unfinished projects and the consumer is nowhere in sight. Regulatory norms in the sector have changed in favour of the buyer, but sales are not improving.

A report released last week by property consultant Knight Frank India says housing sales fell 26% in Delhi-NCR in the first half of 2017, and the unsold housing stock stood at a staggering 1.8 lakh units—the highest in the country—which will take developers four-and-a-half years to sell. As per the report, this slump is despite the 20% price correction in the past 18 months. About 17,188 units were sold in the first half of 2017 compared with 23,092 units in the same period last year. “The real estate market for residential units remains subdued owing to several factors, which mainly include incomplete projects adversely affecting the confidence of buyers, over-leveraged balance sheets of frontline realty firms and a weak job market,” says DS Rawat, secretary general, Assocham, an apex trade association.

From 2007 to 2010, construction across various cities was at a peak and many projects were launched. Prices reached an unattainable stage towards 2013. Around the same time, the country was hit by job losses. Many fly-by-night operators fled the scene, cheating consumers of their hard-earned money. “The trust factor is at an all-time low. People are not ready to invest unless it’s a ready-to-move-in flat or a reputed developer,” says Neeraj Bansal, partner and head, ASEAN corridor and building, construction and real estate sector, KPMG India, a consultancy firm that tracks the sector.

Regulation woes

But these reasons are nothing new and it’s not the first time that the real estate market has been hit so badly. “This time around, the slump has been aided by regulatory factors,” says Gulam Zia, executive director, adviser, retail and hospitality, Knight Frank India, adding, “Regulatory norms like RERA [Real Estate (Regulation and Development) Act, 2016], GST (Goods and Services Tax), Benami Property Transactions Act, together with demonetisation, are impacting the sector and this effect is here to stay for a few months.” As per Frank Knight India, the stock of unsold units in the top eight markets of the country stands at 5.96 lakh units. The unsold inventory made it a buyers’ market, leading to a dip in prices last year, and experts point out that it has become even more so this year.

Unrealistic prices, coupled with demonetisation, led to a price fall in the range of 15-25% in 2016. “It was a buyer’s market last year and has become even more so this year. Prices are at their lowest point, banks are eager to lend and developers are bending over backwards to accommodate customers with more discounts and attractive offers,” says Anuj Puri, chairman, Anarock Property Consultants (formerly JLL India-Residential). Most of the inventory in NCR is priced 20-25% lower than in 2012. Even discounts, flexi payment plans and freebies such as club memberships haven’t been able to turn around consumer sentiment and result in upward sales.

Where are the buyers?

Customer behaviour has changed in the past few years, explains Zia, with buyers having lost confidence in a developer’s ability to construct and deliver a project on time. The market may have plenty to offer, but the buyers are wary of the developers’ tall claims. “There is plentiful supply in the market, even in the ready-to-move-in category. If there is any difficulty for buyers at all, it probably lies in the fact that they are spoilt for choice,” Puri says. The lack of conviction in a builder’s ability to deliver isn’t an overnight phenomenon. It has taken shape over a period of time. Developers in the past have launched massive townships and often used customer advances to buy land or launch other projects. This often led to delays in construction by months and even years, resulting in an erosion of confidence among home buyers. The situation has been aggravated this year by the various regulatory norms—demonetisation, RERA and GST—which have all come one after another in quick succession in the past seven-eight months.

“As of now, RERA is a long-drawn battle. The regulator is yet to be appointed and then the builders have to register themselves. We can’t trust the developers yet,” says Vineet Kumar, a senior business analyst with Royal Bank of Scotland, Gurugram. He had booked a flat with a prominent builder in Noida, and is waiting for possession for the past seven years. He, along with 1,500 other flat owners in Noida, now plan to file a case under the UP Apartment Act against the errant builder.

With RERA, which became effective from May 1, the country got its first regulator that seeks to bring fair practices to protect the interests of buyers and also impose penalties on errant builders. “RERA brings discipline and transparency to the sector,” says Vamshi KK Nakirekanti, executive director and head, valuation and advisory services, CBRE, South Asia, a real estate services firm. “But it all depends on speedy implementation,” says Abhay Upadhyay, national convenor, Fight For RERA, a forum consisting of home buyers fighting for the implementation of RERA. “At the moment, dilution in real estate rules by states and non-appointment of regulator are our biggest concerns,” he adds. The forum was started in June 2015 with the objective of smooth passage of RERA, which was at that time stuck in the Parliament.

So far, only Kerala, Rajasthan, Madhya Pradesh and Maharashtra have appointed a regulator and 18 states and union territories have notified RERA. Urban development minister M Venkaiah Naidu has asked all states to approve the regulation, notify the rules, appoint regulators and operate regulatory authorities by July 30. “RERA is in the process of rendering the Indian real estate market more transparent and buyer-friendly than ever before,” Puri of Anarock Property Consultants adds.

RERA will be a helpline for consumers. Under the new norms, developers can’t advertise, sell or book any property without first registering it with the regulator. Missing a deadline will attract penalty to be paid to the buyer, and no developer can ask for more than 10% of the property’s cost as an advance booking payment before actually signing a registered sale agreement. “With RERA coming into effect, delays due to cash crunch would become a thing of the past, as 70% funds need to be maintained in an escrow account for the project,” says Gagan Randev, national director, capital markets and investment services, Colliers International India, a global commercial real estate company.

“I advise anyone wishing to buy property to wait till RERA is implemented fully. The builders are in a financial mess and we are suffering. The ones I have booked a flat with have expressed their inability to finish the project and have asked us to take an alternative flat in one of their other properties,” Kumar says. He had booked a two-bedroom house for Rs35 lakh in 2010 and the developers are offering him another property, a three-bedroom house for Rs70 lakh. “Where will I get the extra money from, and why should I expand my budget?” Kumar asks.

Developer dilemma

If the consumers are yet to cheer up, developers are also crying foul. “Many developers are ready with the paperwork, but where is the regulator? The ill-preparedness of states in implementing RERA is going to cost everyone. It will push for hasty compliance when regulations come into place,” says Rohit Raj Modi, secretary, CREDAI, an apex body of private real estate developers’ associations. “Also, every state is drawn by local nuances and has to keep local land sale deed practices in mind. So they need broader consultation,” he adds.

The big builders have realised that building trust is going to take more than pre-launch freebies. “Developers are getting increasingly aware about the requirements under RERA and most of them are already in advanced stages of revitalising their processes, systems and business practices to suit the regulations,” says Randev of Colliers International India. For developers with footprints in multiple territories, different provisions of RERA would mean treading the path even more carefully. “The primary concern for the real estate community remains the limited infrastructure available to get themselves and their projects registered under the Act, and getting their operations in line with the law,” says Randev. The bigger players know that regulation will help in bringing conviction back to the much-maligned sector.

“Transparency and accountability will become the new norms in the real estate sector. The customer will undoubtedly become the king, but it will be a win-win situation for real estate developers as well,” says Rohtas Goel, chairman and managing director, Omaxe, a real estate company whose major thrust areas have been tier II and III cities. This is a point reiterated by most developers as of now. “The Act will also allow for the speedy redressal of disputes between buyers and developers, and help in enhancing the trust between the two,” says Rajeeb Dash, head, corporate marketing, Tata Housing. The company intends to expand its portfolios across 10 metros and emerging cities.

Ground zero

Several debt-laden developers in big cities are struggling with slow sales, high unsold inventory, delayed construction and stalled projects. Most leading banks and financial institutions have reduced interest rates between 50 and 100 basis points across various home loan segments. A slow revival is being predicted in the next quarter as far as the affordable housing sector is concerned.

The exceptions are evident in the way residential units were launched in the quarter demonetisation was announced and the last quarter. PropTiger Data Labs’ report of Q4 FY17 shows a 19% jump in the number of residential units launched compared to the previous quarter, and a 42% jump compared to Q4 FY16. “The new regulations will have a temporary sobering, slowing down impact on the business for two-three months in each state after RERA is notified. This will happen because of the time taken by developers to get their projects registered,” says Sunil Mishra, group chief strategy officer of real estate portals Housing.com, PropTiger.com and Makaan.com.

The market will show a positive impact, albeit slowly. “The tax revenue collected from real estate deeds remains one of the highest sources of earning for state governments. So this sector can’t be lagging for long,” says Bansal of KPMG. “There will be a lot of consolidation, and only well-capitalised and organised developers will remain,” predicts Puri. Over the next year, it is expected that developers will rush the pace of construction and will focus on the execution of existing projects rather than go ahead with multiple projects to generate more funds.

“In the long run, mortgage rates are expected to rationalise further. RERA will bring in greater investor confidence and increase the ability of the real estate sector to attract formal sources of capital, thereby rationalising borrowing costs. This will help in realistic capital values and increase in attractiveness to end users who are currently holding on to investment decisions,” says Nakirekanti.

Till then, gloom might seem to be the norm in the sector.

The 21st-Century Real Estate Deal: How the Internet of Things Is Changing Commercial Real Estate

The 21st-Century Real Estate Deal: How the Internet of Things Is Changing Commercial Real Estate

The commercial real estate (CRE) industry is on the verge of a major disruption: the Internet of Things (IoT). Technology is making its way into an industry that historically lacks the innovative spirit, and we’re beginning to see a drastic change in what it means to be a real estate broker. As client needs evolve, brokers must Continue reading “The 21st-Century Real Estate Deal: How the Internet of Things Is Changing Commercial Real Estate”

Now, buy real estate as a structured financial product

Now, buy real estate as a structured financial product

Investors now have the option to go in for real estate as a financial instrument with all the safety nets in place to ensure that they get their returns or the physical possession of the asset at the committed price

After three tsunamis of demonetisation, RERA and GST, the real estate market is coming up with innovative offers with structured deals woven together for investors.

The deals involve projects wherein the developer agrees to buy back the units at pre-determined returns if the desired sales rate is not achieved within a pre-defined period.

The investor has the option to go in for real estate as a financial instrument with all the safety nets in place to ensure that they get their returns or the physical possession of the asset at the committed price, say experts.

“Structured real estate products for investors are available in the market today for investors who have investment quantum starting from Rs 1 crore onwards. Since these are all bulk deals, the discounts range anything between 15-25%,” says Anckur Srivasttava of GenReal Advisers that is structuring similar transactions up to Rs 20 crore.

Experts also point out that with stock markets doing well, many investors may look at reaping a portion of their profits into such instruments.

Last year, the distribution arm of a real estate fund manager raised Rs 12.5 crore for a developer active in Dharuhera area to help it complete its project through what is known as profile funding. The project was 85% complete and the amount required by the developer was Rs 15 crore.

The fund manager managed to raise Rs 12.5 crore by floating a scheme through its channel partners who further sold it to their clients. It worked something like this. If an apartment was priced at Rs 40 lakh, the clients had to pay Rs 20 lakh upfront and were promised an assured return of 15% after three years in case they decide not to keep the apartment. But if after three years, the clients decide to take possession of the unit, they will have to register at the cost of Rs 40 lakh. Also, if the developer failed to pass on the assured return of 15% after three years, the client, as per the agreement, has the legal right to get the property registered in his name at half the amount paid by him, ie, Rs 20 lakh.

“The scheme was launched a year ago and all the units have been sold now. But how this scheme will have to adhere to RERA norms once the rules are in place in Haryana,” say sources.

Another scheme that is doing the rounds in the market is that of bulk purchase that has a buyback clause attached. In case after three years, there is no appreciation, the builder can buy back the units sold to investors after passing on the minimum returns promised.

This model works something like this. If the market value of a unit is around Rs 3000 per sq ft, the investor pays the builder at the rate of of Rs 1500 per sq ft and the sale agreement that is drawn has specific safety features built into it. What this means is that if the builder fails to honour his commitment after three years of passing on 15% interest or 18% interest to the investor, he has the right to get the apartment registered under his name at a price of Rs 1,500 per sq ft.

Another developer is reported to have sold around 40 to 45 plots at around Rs 18,000 per sq yards near Gurgaon to a financier. If after three years the price does not cross Rs 22,000 per sq yard, the developer is bound by the agreement to give back Rs 4,000 per sq yard to the financier.

Prateek Pant, head of products and solutions, Sanctum Wealth, says high net worth individuals are today interested in inventory that is close to completion or are ready and are shying away from under construction projects as they involve development risks.

Huge inventory is available in the constructed space and there are good discounts available. Investors are ready to buy inventory in projects at price points that are deeply discounted with an undertaking that the developer will buy it back or assure to sell at the end of the investment tenor or they will have the right to register it in their names at discounts, ranging from 20-30%. Now more and more investors are looking at purchasing assets in their names and prefer to go in for structured schemes that have a buyback or a sale arrangement in place to ensure safety of their capital. Investors are more interested in finished or close to completion projects where the yield is close to 16% to 21% in the form of rent, interest payment and capital appreciation, he says.

In otherwise standard investment options, their interests and risks are pooled and there is no individual right on the title.