Residential sector is facing crisis like situation

Residential sector is facing crisis like situation

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It’s now just a slowdown but if it’s left unattended for long it may turn out to be a major crisis blunting growth our economy. This is the state of affairs in our residential realty sector, explained in very brief.  Though RERA has speeded up the construction of realty projects, there are many projects which are stuck up midway due to various reasons. According to one study, 600msf of projects, or 470,000 units which accounts for 50% of unsold inventory in terms of units are stuck or facing significant construction delays. The Mumbai Metropolitan Region (MMR) and National Capital Region (NCR) account for more than half of the stalled or delayed projects. On the other hand, Southern market which majorly comprises Bengaluru, Chennai and Hyderabad and Pune in Western region has relatively far lower levels of such stalled projects.

Funds crunch is the major reason for stalling of the projects. Recent NBFC crisis has only aggravated the situation. Realty sector used to get most of the funding  from the NBFCs which has suddenly stopped post IL&FS fiasco. Also, advances from customers too have exhausted and now such projects can be restarted only with fresh funds infusion. Even if a new party steps in to complete these projects, the question arises as to who will bear the cost escalation.  Customers also tend to shy away from purchasing homes in such projects even at a reduced price as they are unsure of delivery date and quality of construction. Also, this will drive away the potential customers from investing in under construction projects.

This may hasten the process of consolidation in the industry which has already started on a limited scale at certain parts of the country. With mounting unsold inventory, stalled projects and lack of funds, consolidation seems to be the only way out and this process may speeded up in the coming days.

Post RERA/GST implementations in Q1FY18, developers have tweaked their product offering to include more affordable (like the concept of “Jodi Houses”) and mid-income housing projects as that’s where bulk of the demand lies. In fact, at present affordable housing is the only saving grace for the residential sector.

Commercial office space

A few years ago, realtors’ main choice was residential segment and for them commercial real estate was less lucrative. Lure of quick profit and pre-sales had made the residential real estate the first choice of realtors. Further, commercial real estate needed large capital commitment during construction period which also went against the sector. However, things have changed dramatically for the sector in last 3-4 years as the residential sector is faced with demand slowdown and mounting unsold stocks. On the other hand, offshore institutional players’ inclination to acquire stabilized assets has compressed the capitalization rate, leading to better valuation for commercial real estate.

In case of Grade A office space, demand outstrips supply by wide margin leading to increase in office rentals and less vacancy across cities as occupiers were left with limited choices. Further, SEBI’s recent decision to allow listing of REIT on exchanges also will help the segment to sustain its growth in the coming years too as raising of funds would become much easier now. Calendar Year 2018 was a watershed year for the sector as it saw the successful launch of REIT, by Blackstone and Embassy. This has also helped to build confidence amongst the institutional investor and office developers in Grade A office sector. REIT has opened up a new avenue for commercial real estate developer in the cash-strapped Indian real estate sector.

According to JLL, a leading property consultant, share of Institutional investments in commercial real estate has seen quantum jump during the last ten years. Institutional investments have gone up from $ 1.6 bn in CY2009-13 which was 17% of total investment in real estate to $ 8.2 bn in CY2014-18 which is 40% of total investment. In fact, the period CY2017-2018 recorded maximum investments ($ 5.9 bn) in commercial real estate. Commercial assets continued to be most sought after assets constituting more than 60-70% of the total investment in real estate in CY2018.

Within Grade A office sector, Bengaluru and Hyderabad saw significant traction in leasing in CY2018. Traditionally, Bangalore has been a hub for IT and ITeS and in recent times it has also been attracting lot of start-ups which in turn has increased demand for co-working space. Banking, financial services and insurance (BFSI) has the second largest share in leasing.

Despite the substantial new supply, absorption rate is expected to remain high which will keep  demand supply gap wider. In almost all markets, demand for office space from IT/ITeS and BFSI is expected to be high in all markets. Office space demand from co-working and fintech is envisaged to continue and gain further momentum. The co-working segment is expected to account for a larger share of the market in 2019. High occupancy levels, relatively lower rentals in dollar terms, quality Grade-A assets and high-quality tenants – all will help commercial real estate to attract the lion’s share of institutional investments.