What real estate will look like in 2016

Tepid home sales, rising inventory levels and weak sentiment pulled down India’s property markets in 2015, with not much hope of a recovery soon. The sector awaits the return of investors and customers, who seem to be waiting for prices to stabilize and developers to honour project delivery schedules before they take the plunge again.

TRENDS TO WATCH

Year of fund-raising: Several private equity (PE) funds are either planning or are already on their way to raise almost $4 billion from overseas investors to invest in real estate in 2016. Among them, Edelweiss Alternative Asset Advisors Ltd, part of diversified financial services firm Edelweiss Group, is raising up to $1 billion for its first residential real estate fund. Housing Development Finance Corp. Ltd (HDFC), through an entity, is close to raising $850 million. With project cash flows still weak and bank lending not easily available, developers are securing much of their funding requirements from external pools such as PE funds.

A slow and gradual recovery: The real estate sector that suffered much pain in the past two years is moving towards a more rational regime where developers, having learnt from their mistakes, now focus on project execution and delivery. 2016 is expected to gradually move towards better home sales and see a spurt in launches in some locations. The year will also see the sector moving from an investor-driven to an end-user driven cycle. Home prices, which declined to some extent in 2015, may see further correction as customers are still delaying home-buying decisions. Prices may stabilize in some other markets.

More platform-type deals, more offshore investors to come in: With the government easing foreign direct investment (FDI) norms in the construction sector, more offshore investors are likely to invest in real estate. This will also enable smaller-sized investments. More exclusive partnership platform transactions between Indian developers and investors are also expected to happen, giving fund managers more control over investments and decision making. The relaxation of FDI norms in the midst of a prolonged slowdown in the sector is expected to bring back some cheer in the real estate sector.

Return of equity investments: After more than three years of PE funds doing primarily debt and debt-structured transactions in real estate, a few of them are again ready to infuse equity capital into projects to get better returns through long-term commitments. Housing Development Finance Corp. Ltd, through an entity, is raising an $850 million fund which will do pure equity deals. Some investors are looking to increase the equity portion in their new funds or are introducing equity, thereby taking on more risk.

Commercial office space: The commercial office sector, which was a saving grace during the slowdown, is expected to further shine in 2016. Vacancy levels have fallen and large firms, many in the e-commerce space, are taking up new space at a brisk pace. Buyouts of ready commercial space is on, and private equity funds are now even looking at investing in under-construction properties. Realty firms with office development portfolios are not only focusing on growing their business, but in some cases are also shifting focus from residential to rent-yielding office projects.

Source: PropertyatNeoDevelopers.Wordpress.Com

2015: A Year of Anticipation

People are likely to press the buy button only if interest rate cuts and tax sops are announced; developers will focus on affordable housing.

The year 2014 saw people shying away from buying their first homes, choosing to wait for prices to correct and the apex bank to slash interest rates. Unfortunately for them, the wait was in vain. While developers did not lower quoted prices, they went ahead with flexible payment options, freebies and add-ons and the Reserve Bank of India chose to control inflation rather than push demand-led economic growth.

So, will 2015 be different? One expects developers to become more earnest about right-sizing and right-pricing their offerings. Smaller, yet better-designed and more efficient homes will define the residential market space this year and selective correction may take place in over-priced cities, say experts, adding the market will take at least 12 to 18 months to start looking up but it will have to be backed by interest rate cuts and creation of more jobs and the resulting demand for residential units.

The year will see only end-users dominating the residential space and very few investors. There will be demand primarily for value-for-money units in the NCR. Areas that will look up will be those offering units in the 5000 to 6000 per sq ft range or the 60 lakh to 1 crore, depending on the location. These will include Ghaziabad, New Gurgaon, Neemrana, Dharuhera and Faridabad.

According to Anuj Puri, chairman & country head, JLL India, smaller, yet better designed and more efficient homes will define the residential real estate market in 2015, and selective corrections in some of the over-priced cities will help bring about faster sales for stagnated supply of larger configurations. Townships will become more prevalent, and the supply of luxury homes will moderate to align with the slow demand dynamics for these offerings. Affordable housing will clearly be the flavor of the season.

Higher demand for office spaces means that more employment will be generated, which in turn will fuel residential demand. As a thumb rule, for every 100 sq ft of office space that is taken up, there is 600 sq ft to 800 sq ft of residential space which is needed.

“The Government should focus on getting the regulatory bill passed as the real estate market is experiencing significant pain, especially the investor-driven markets. As many as 50% sales in a year in NCR are driven by investors. As a matter of fact, NCR sales in a year equal that of sales in Chennai, Bangalore, Mumbai put together. The end-user this year will continue to be cautious unless there are interest rate cuts and more value-for-money products in the market,” says Ankur Srivastava, chairman of Gen-Real Property Advisers.

Rajeev Bairathi, executive director, North & Capital Markets, Knight Frank India, is of the view that the market is awaiting fresh triggers such as reduction in interest rates on home loans, a further improvement in buyer sentiment on the back of employment growth and a healthy double digit growth in corporate staff compensation packages. All these factors are expected to improve affordability which should make year 2015 much better as compared to 2014 in terms of sales volume. "We, however, do not expect any significant appreciation in prices for another two to three quarters".

There are some experts, however, who are optimistic about the market and say it may start looking up in the second half of the year. “The anticipated pick-up demand should take place from the second half of 2015, though the demand could be boosted earlier if interest rates are reduced and/or the Government introduces some additional taxation sops in next year’s budget. However, we can also expect to witness increased institutional purchases of large number of units by investment funds, who have been setting up dedicated funds to purchase units in bulk during their construction phase and off-load them once they are completed. Developers too could increase the supply by launching more units, if the Government provides the right incentives by reducing the time taken for regulatory approvals, removes bottlenecks in the supply of raw materials, etc,” states an analysis by Cushman & Wakefield.

Source: PropertyatNeoDevelopers.Wordpress.Com

All that Glitters - NRI Investors: Dos and Don'ts

When investing in India, NRIs should not go merely by the builder's marketing pitch.

If NRI buyers do their homework diligently, investing in Indian real estate could prove rewarding for them. Buying the right property When investing in residential real estate, the NRI investor should not go merely by the builder's marketing pitch.

Builders know that NRIs are often not in a position to visit the site. In western countries, there is greater transparency within the real estate sector: what people say is what they deliver. That may not be the case in India.

So instead of going just by what the builder or the property agent says, the NRI should get the ground realities checked.

He should depute someone - a relative or a friend to visit the site and not rely entirely on the pictures shown in glossy brochures. “Only a visit to the site will tell the NRI buyer whether the project's location is attractive, and whether it enjoys good connectivity,“ says Sanjay Sharma, managing director of Qubrex Realty.

The NRI investor should ideally hire a lawyer to do the title verification. The latter will ensure that the builder has the ownership title to the land on which he is developing the project.

He should also check that the builder has the licence to develop the project and has obtained approvals for his building plans from the civic authorities. The lawyer can also do the due diligence whether the developer has obtained clearances from the airport, forest, and environment-related authorities.

Before buying, the NRI investor should also do some on line research on the builder. A number of online forums exist where people discuss the projects that are currently in the market. Reading the posts on these forums will give the NRI buyer an idea of the pros and cons of a project and its builder. If telephone numbers are available on these forums, the NRI should call up and speak to some of the buyers who have already invested in the project.

NRIs should preferably invest with renowned builders who have a track record of having delivered several projects.

Ground Reality! In western countries, there is greater transparency within the real estate sector. What people say is what they deliver. That may not be the case in India.

Source: PropertyatNeoDevelopers.Wordpress.Com

Builders happy with escrow proposal

Developers to deposit less money in escrow. Real estate experts want clarity on housing ministry proposal.

The housing ministry’s proposal to allow builders to divert up to half the amount collected from a buyer for a specific project to other projects has been welcomed as a “fair and positive step” by the developer community. Experts, however, say that the amount to be put in an escrow account should not be uniform but differ for metros and far-flung areas. Issues such as establishing single window clearance and an efficient regulatory body also need to be addressed first, consultants say.

The amount collected for a project from the allottees and put in an escrow account to be used only for construction of that project has now been reduced to 50% from the earlier 70%. The earlier clause in the Real Estate (Regulation & Development) Bill, drafted by the previous UPA government, was aimed at keeping a check on the developers and preventing them from diverting buyers’ money to start new projects instead of finishing the one for which money was collected. The real estate lobby was pushing hard for dilution of this clause.

This is a “fair” clause and we welcome it, says Getamber Anand, president elect Credai (Confederation of real estate developers association of India), adding the builder community would also want the taxing authority and the urban local bodies to be made part of the bill.

Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield is of the view that the proposal to review the Real Estate Regulatory Bill to allow builders to use 50% of buyer funds whilst reducing the mandatory holding in escrow account to only 50% (from previous 70%), will be a welcome move, should the parliamentary committee accept the same. From the developers’ perspective, this will allow them to utilize the money for construction activities to ensure timely completion of the project. This is positive for developers who will have more access to capital in short term for time bound activities relating to specific projects.

The dilution, according to experts is necessary as the amount kept in an escrow account can be used only for construction and usually the major cost in any project is that of land. Most developers have already paid for the land parcel before launching the project and construction cost is generally not more than 30%. A major chunk therefore would have been left unutilised in the escrow account.

By making developers block capital, there will be an opportunity loss that he will be forced to pass on to the buyer. This is like asking somebody to park ` 20 crore when you need only ` 3 crore for construction. There is huge interest to be paid on the remaining amount that is lying idle for which the customer may be forced to pay, say consultants.

“The government has said that all construction-linked expenses should be paid out of the escrow account. It is, therefore, not clear whether the interest expenses (which are also part of construction cost) and land cost are also part of this 50% limit or not. A clarification is required on that front,” says Neeraj Bansal, partner, KPMG in India.

For projects in far-flung areas where the land cost is much less, a higher amount should be kept aside in the escrow. “The government needs to take one more step, they should define what an urban location is for which 50% amount should be kept aside in an escrow account and define a second layer of cities where the escrow component should be 70% or even higher so that the developer is forced the complete the project on time,” says Bansal.

So, how will this change impact the real estate sector? The impact of this in the long run will be that there will be an assured supply in the market which in turn will impact prices of units.

“This will increase available liquidity with the builders. Considering the factors such as high interest rates on home loans, difficulty in securing bank credit for projects and overall dip in private equity investment sentiment, the move to reduce the escrow amount limit will usher in liquidity for both housing and commercial projects,” says Sachin Sandhir, global managing director, emerging business and MD, South Asia, RICS.

Source: HT Estates, Dec 20, 2014, Page 01

PROS-CONS - Invest at the Right Stage

Here are the pros and cons of investing at each stage (construction stages) or types of commercial projects.
You can invest in any of the following stages or types of commercial property: when the property is under construction; a property under construction that offers assured return; a property that has been constructed but is still lying vacant; or a ready building for which tenants have already been found. You may also invest in a shared property. When you invest in a property under construction, you are able to buy it at a low cost. However, by investing at this stage, you run what is known as development risk. Development risk is one where the developer could delay the completion of the project, or the developed property may not be of the quality that the builder promised.

Nowadays, you also have the option of investing in a property under construction that offers assured returns. Amidst the slowdown in the real estate market and the adoption of more stringent norms by banks, builders are finding it hard to raise loans.

If at all they manage to raise loans from Non-Banking Financial Companies (NBFCs), they have to pay interest rates as high as 16-18%. Therefore, many developers have started offering assured returns on their projects. This is an innovative means through which they are raising finance for their projects.

The advantage of an assured return scheme is that your investment starts earning a return from day one. But these projects come with several risks too. One is that these projects also carry development risk.

Also examine the quality of the occupiers: is it a small local company, a large Indian company, or an MNC?

Quick Byte: Now a days, you have opportunity of investing in a property under construction that offers assured returns.

Source: PropertyatNeoDevelopers.Wordpress.Com

Finally, a Real Estate Appellate Tribunal!

Bill in Parliament: Tribunal to be headed by a sitting or a retired judge for adjudicating disputes in realty sector.

The real estate regulation bill, which has to be passed in Parliament, aims to regulate the housing market and protect the interests of home-buyers and developers.

Although the bill is not flawless, it is certainly a step in the right direction and all the stakeholders hope that this new legislation will be supplemented with necessary rules and regulations which will clarify any ambiguities or gaps that exist in the bill.

Taking a risk-based approach, the bill has been modeled taking into account appropriate checkpoints in key stages of a property transaction where regulation is most required, given the history of fraudulent practices and unfulfilled promises, a consultant said.

A common complaint is that developers and builders do not deliver what is promised when selling apartments.

While their advertisements show buildings and landscaping to match international quality, in a majority of cases, the ground reality is far different leaving buyers feeling cheated.

The regulatory body envisaged in the draft bill would ensure that the developers are held accountable for what they promise and provide recourse to customers in case these are not fulfilled.

Some of the guidelines in the bill are provisions like restricting launch of projects or advertisements unless all approvals are received, maintaining separate account for customers' monies, sale of projects based on carpet area, etc, which will indeed help bring in transparency.

Other provisions like mandatory registration of projects within 15 days and registration of brokers are well intentioned but unless objective guidelines and rules are stipulated regarding the registration criteria, there is a danger of subjectivity creeping into the registration process.

Stipulation of `carpet area' as the only measurement unit will limit fraudulent practices from using units like salable area, super built-up area, etc.

The bill proposes to set a real estate appellate tribunal, headed by a sitting or a retired judge, for adjudicating disputes.

J P Gupta, vice-president of Credai NCR-Haryana, says, “In 2015, we expect the government will accord real estate sector the `infrastructure' status and bring in a single-window system for approvals.“ Aman Agarwal, director of KV Developers, says, “We look forward to a better future in 2015 for the real estate market with the government focusing upon the regulatory and land acquisition (amendment) bill."

Dhiraj Jain, director of Mahagun Group, hoped the government would bring more transparency through the land acquisition bill and that the RBI would reduce interest rate to salvage the fund crunch in the sector.

Source: Times Property, Dec 20, 2014

The district administration has decided to take strict action against developers who have launched affordable housing schemes, if they charge premium amount from the buyers to allot flats, bypassing the draw of lots.

Deputy commissioner T L Satyaprakash told the media that his office has received several telephonic complaints against builders for flouting norms. Some complainants said a few developers are charging premium amount from them to allot flats in affordable housing schemes without the lottery. "It is a state government scheme. Therefore, the developers cannot charge any premium, as it will defeat the purpose of the affordable housing policy," he said. He also said all benefits to LPG gas consumers will be given through Aadhaar seeded bank accounts from January 1. The amount of subsidy per LPG cylinder will be deposited directly into the consumer's account. But for this, consumers need to submit a copy of the PAHAL form to the distributor and another copy to the bank where they have their account.

Source: Times of India