Indian Real Estate: 2016

According to reports of industry experts, the New Year 2016 shows signs of an uphill real estate market trend. Though slow, a positive sentiment is building in the industry attributed to the policy initiatives taken by the Government to bring back the real estate trends on track.

Introduction of Policy Measures

The introduction of various projects like the Smart Cities scheme, Housing for all by 2022, promise of 24/7 electricity for all, and various other infrastructure developmental schemes promise to have a positive impact on the real estate sector. On the other hand, the approval of amendments to ‘The Real Estate (Regulation and Development) Bill, 2013’ and the Real Estate Investment Trusts (REITs) will make a set up for transparency in the sector.

With the current repo rate of 6.75%, there is scope for banks to reduce the lending rate to home buyers. This, coupled with lower EMIs, price reduction and discounts by the developers to clear their inventory stocks, invites end user home buyers as well as long term investors to buy property in 2016. With property prices expected to increase in the last quarter of 2016 and the rupee trading at an all-time low, NRIs can get a good exchange rate on the US dollar and make a profitable investment in the Indian real estate industry. Now is a conducive time to capitalise on the good exchange rate and favourable market condition in India.

Renewed FDI Norms

Relaxed foreign direct investment (FDI) norms will be a boon to the real estate industry in 2016. Along with investments, fresh ideas, knowledge, skilled labour and employment generation will be fuelled to the economy. It is expected to impact more than 30 sectors apart from the real estate industry. Thus, it is expected to give the much needed push to India’s affordable housing plans.

Commercial Space Scenario

The year 2015 saw optimistic growth activities and a mixed absorption pattern of old and new office space driven by IT and ITeS, e-commerce, consulting and start-up firms which is expected to grow stronger this year. Rents in 2015 rose at a faster stride in secondary and peripheral business cities than in the first tier, central business cities. The small scale markets showing more leasing activities in various cities in 2015 will continue to do so in the year 2016. A whooping 32 million sq. ft. net office space absorption is estimated this year, mostly by large IT occupiers. It will have a rub-off effect on the residential segments.

On the whole, 2016 is the much awaited year of transformation for the Indian real estate industry with the introduction of REITs and Smart Cities project, approval of amendments to the Real Estate Bill and the relaxed FDI norms. 

Impact of the Revised Real Estate Regulatory Bill 2013

India has been in need of policy corrective measures in the real estate sector for a long time now. Stringent market and economic conditions have pressed the real estate trends into sluggish markets. Though the industry has recently observed an upward shift, there are other factors like delay in residential project completions and prolonged bank interest rates which have dampened the spirits of buyers.

In this gloomy scenario, the introduction of the Revised Real Estate (Regulation and Development) Bill, 2013 will bring new hope. The amendments will make way for a more transparent and accountable system for the benefit of the developers, investors and buyers. This will also attract global investors bringing in structured capital to the sector.

The Bill is on the verge of enactment and once implemented, the government will have higher control over the contracts between real estate developers and buyers and thereby, will be able to standardise the business practices in the industry.

In the proposed Bill, the minimum balance to be maintained in the escrow account is reduced from 70 to 50% of the sales proceeds. This provision will enable the developers to diversify their funds to land acquisition and other projects but will increase the concern of the buyers regarding funds. The remaining 50% will place restrictions on the developers resulting in timely completion of projects.

Another amendment is to include commercial real estate under the law. Apart from developers, brokers and agents come under surveillance and are punishable by law if they are found to be non-compliant with the legislation.

The Bill also proposes to establish a regulatory authority in every state within a year of enactment to screen projects and to resolve buyers’ grievances and disputes. All new projects have to be registered with the regulator before commencement and under-construction projects will get three months to register. If a project is not registered, the developer will have to pay a penalty of 10% of the overall project cost and an additional 10% for continued non-compliance. Registering with incomplete and/or incorrect details will attract a 5% penalty. Also, the developer cannot make changes to the original, approved plans without the prior consent of two-third of the buyers.

A crucial step for the overall success of the law is to ensure that it is implemented at the grass root levels as well. While it is not possible to forecast constrains in the implementation process, a few anticipatory measures will be of great help.