Low-income buyers key to realty sector revival

The year 2018 was a year of moderate performance for the real estate sector with various external shocks such as demonetisation, goods and services tax (GST), and the Real Estate (Regulation and Development) Act (RERA) affecting buyer confidence across markets, even though the long-term impact of these regulatory measures was seen to be positive.

RERA and GST, introduced in 2016 and 2017, respectively, transformed the market leading to changing buying preferences amongst end-users as well as impacting the developer’s flexibility in executing under construction projects as they grappled with new norms and compliances. The equity markets were also unsupportive with S&P BSE Realty index declining by over 30% since the beginning of the year. November was characterised by an IL&FS default, resulting in a liquidity crisis in the financial markets, especially impacting housing finance companies (HFCs) and non-banking financial companies (NBFCs). This marked a new challenge for the real estate business that has a high dependency on the ready availability of liquidity to fund the liability side of most lenders. Liquidity has since returned, albeit limited to the larger operators, but the general sentiment remains negative. 2019 is likely to start on a challenging note as well, especially in the run-up to general elections, with the revival of the industry taking some time.

We do see business taking its normal course towards the middle of the year, however, with a sharp focus on execution-oriented developers and an increased emphasis on creating affordable stock that has been driving demand in the current market. This is also going to be complemented by the affordability and availability of housing finance. Today, 70% of the housing finance book by value is contributed by a few metros that primarily include Mumbai, the National Capital Region, and Bengaluru. Most of the HFCs, in turn, are therefore focussed on lending to the population residing in tier-I markets. Affordability in these cities, however, is still a problem which has manifested itself as a slowdown in sales velocity. To grow from here, HFCs will have to wait for a price rationalisation to take place whilst also looking beyond the tier-I markets where housing units are still affordable.

It is important to note that after demonetisation, the introduction of RERA and changes in tax norms, and, the real estate market has transformed to an end-user-driven business from the earlier investor-driven market. We are already seeing developers coming up with multiple promotional offers and subvention schemes that are focussed on easing the purchase decision of the salaried class.  However, not everyone is taking the bait. The upper echelons within the salaried class, which used to think of a second house as an investment option to get additional tax benefits, has moved towards other investment options. Therefore, real estate companies should also work with HFCs to come up with new products that specifically cater to individuals with lower salaries. For example, these companies ought to work together and reduce the entry barrier for end-users, who face a tough challenge arranging the upfront down payment.

Raising the limits of priority sector lending (PSL) is another area that needs attention. To facilitate more and more people—in the lower-income bracket—avail the benefit of PSL, it is important that the eligibility norms are pegged to the average prices of lower-income housing of the respective cities over a four-five year horizon. As there is a marked difference in prices across most of the cities, a standard limit for PSL across the country is actually acting as a limiting factor for the scheme’s offtake.

Along with the government’s efforts to revive the real estate sector, if some of the above suggestions are adopted and implemented, we, believe that KPMG’s prediction of the Indian real estate sector touching $1 trillion by 2030 is certainly valid. This same holds true for IEBF’s (Indo-European Business Forum) forecast that private equity investments in Indian real will grow to $100 billion by 2026.

(The author is managing director, Piramal Capital & Housing Finance. Views are personal.)