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The year 2012 has been a challenging one for Indian economy. Although the 2011-12 financial year started on a positive note, it got bogged down as the monetary tightening continued to arrest the inflationary pressures. International Monetary Fund (IMF) has estimated India’s Gross Domestic Product (GDP) growth to be 6.1% during the financial year 2012-13, which is far lower than what Indian economy achieved during its heydays of 2008-2009. With inflation rate being checked to a certain extent and Reserve Bank of India (RBI) softening cash reserve ratio, 2013 economy is forecasted to improve. The second half of 2013 is pegged to see growth in the real estate sector.
Residential real estate
Housing prices have soared much higher than the reach of average Indian in the past decade at an annual rate of 14%. However, price appreciation has slowed significantly during 2012 in the top seven cities of the country, where capital value has gone up by only 1-3 percent. Owing to sluggish sales and increased holding and construction cost, the real estate scenario has found itself in deep waters.
The coming year holds possibility for home prices coming down. The Finance Ministry took serious notice of an estimated 80,000 unsold houses under construction in the Mumbai Metropolitan Region (MMR) alone and urged the developers for a price correction. Confederation of real estate developers association of India (CREDAI) responded to the concerns voiced by the government and CREDAI has asked the developers to consider selling maximum number of units at discounted price.
The previously offered freebies and other incentives by the developers are not expected to revive the falling home sales. Along with price correction, there is a possibility of innovative payment schemes and pre-launch benefits will be offered to the buyer. Big developers with massive inventories will be under pressure to offer discounts, so that they can sell off maximum number of units. Although launches have come down by 50% in most of the Indian cities in the past four quarters, residential launches are predicted to be on the rise in 2013.
While expressing his views on challenges to be faced by the real estate in 2013, Mr. Ravi Saund, COO of CHD Developers, said “Domestic real estate will continue to jostle with swelling cost of construction, rampant shortage of skilled workforce at all levels, lack of availability of serviced urban lands, absence of single window approval system, slow reforms and unavailability/dawdling pace of growth in infrastructure.”
Despite the challenges ahead, he noted that residential sector will grow in 2013. “The first quarter may witness a decline in project launches but the mid of second quarter will turn the story around. The mid-segment and upper mid-segment are likely to grow”, said Mr. Saund.
While talking of CHD’s plans in 2013, Mr. Saund said, “At CHD we have always bestowed the middle class with premium lifestyle that doesn’t cost a fortune. In 2013, we will give NCR another nouveau concept. An out-of-the box theme will rule the roost. We intend to launch Spanish Meadows, Spanish expandable villas in CHD City, Karnal.”
The availability of debt capital in housing sector is likely to increase while the flow of equity capital will remain stable in 2013. With Securities and Exchange Board of India (SEBI) allowing debt funds to invest an additional 10% in Housing Finance Companies (HFCs), liquidity in the housing market is set to increase.
Commercial real estate
In 2012, major cities of Mumbai, NCR-Delhi, Bangalore and Chennai absorped 72.5% of total commercial space in the country. For 2013 also almost 75% commercial space absorption will be concentrated in these cities. IT/ITeS sector has been the major contributor in 2012 and the same is predicted in 2013 as well.
Investor-driven demand to go on rising in Chennai, Hyderabad and Pune. Corporate transactions are predicted in Mumbai and Delhi and also interest from high net worth individuals (HNIs) and institutional investors. The exchange rate benefits due to falling value of Indian currency is set to boost investment from the Non Resident Indians (NRIs).
The biggest problem concerning non resident market has been slow growth of job market, crumpled by a struggling economy in 2012. Office space supply in India has been low in the current year due to lack of job opportunities. With possibility of revival job market in 2013, many local markets will be caught with insufficient supply and only then the lack of supply can be addressed.
Retail real estate
The organised retail project completion rate will witness more than 100% rise in year-on-year basis in 2013. 9.5 million square feet of additional mall space will be added in 2013. Of the total mall space absorption in the country, Mumbai, Delhi-NCR, Chennai and Bangalore will have the major share, around 70%. Other cities like Hyderabad, Kolkata and Pune will absorb the rest 30%.
Government’s approval ofForeign Direct Investment (FDI) into multi brand retail is set to be the most influencing factor on the retail scenario of the country. As per recent reports, India has replaced USA as the second most preferred FDI destination in the world. The allowance of FDI will open up portals to major MNC retail brands in India, which will be instrumental to increase the retail space absorption in the country.
Government policy now permits FDI of up to 51% into multi-brand retail, which will invite products, practices and technologies to India retail sector. Along with it, 50% of total FDI will be directed towards infrastructural facilities like warehousing and logistics, which will further boost the retail growth in the long run. However, the real benefits of FDI policy may not be visible in the retail market in 2013 itself, it will take at least two years for mall developers to incorporate every elements to deliver world standard malls across the country.
Predictions related to key areas
The Finance Ministry had requested the leading lenders in India to help the developers out of cash crunch. As a result, after a gap of almost two years, banks are likely to start offering construction finance to residential projects in 2013.
Developers with longer operating history such as Oberoi, Shobha and Prestige will find it easier to raise funds in the coming year, owing to have good track record and specific target class in key locations. Joint ventures with landlords will be given priorities considering the ever rising land prices across the country. Big players with strong local presence will try to strengthen their expanse locally, rather than imprinting footprints nationally.
Investment period of Private Equity funds is expected to come down to four years from five years. Vintage PE funds from 2007-2008 will look to postpone exit from market in 2014 rather than in 2013, considering lower returns on their investment so far. Most PE funds will be concentrating on Tier I cities like Mumbai, NCR, Bangalore, Chennai and Kolkata.
In 2013, investors will focus more on transparency, governance and liquidity before investing. Issues like regulating the real estate is to find firmer ground with passing of Maharashtra Housing and Development Bill and setting up of bodies like Federation of Apartment Owners’ Association (FAOA). Developers will have to be more accountable and home owners are set to get opportunity to address their grievances in a transparent manner.