India’s real estate sector was already hurting. The Covid-19-instigated lockdown only made things worse. Last summer, a Goldman Sachs report forecast that 70% of Indian developers could go belly up due to stress in the credit market. As economic distress and work-from-home (WFH) roils the real estate sector, many think lockdown would take that number to 90%-plus.
India’s $180 billion real estate sector is the second-largest employer (over 70 million) in the country after agriculture, and contributes over 6% to the GDP. Also, for most Indians and businesses, real estate constitutes a big chunk of costs, earnings, assets and investments.
India’s long-pending land reforms and rigid land laws have historically deterred investors much before Covid-19. Since 2015, GoI has unleashed many policy shocks and resets like demonetisation, goods and services tax (GST), Real Estate (Regulation and Development) Act (Rera), and the Insolvency and Bankruptcy Code (IBC). They were painful but each served a purpose.
Demonetisation caused disproportionate pain but instilled fear of black money and moderated prices. GST brought in transparency and accountability.
Traditionally, as the sector attracted investor-buyers, scant attention was paid to end-user needs. False promises, project delays and fund diversion became rampant. Rera, effected in 2017, was a big move placing customers at the centre and bringing in accountability, financial discipline and rule based business, especially for builders and brokers.
For example, to curb fund diversion by builders, project funds now had to be parked in an escrow account. But Rera was a partial success. It had the bark. IBC gave it the bite. For the first time in India’s real estate sector, the balance of power has tilted in favour of buyers. Errant developers are being brought to task with over 115 bankruptcy cases filed with IBC and rising.
Land is a state subject. Regulating it has always been difficult. The Narendra Modi government’s strategy to show the direction at the Centre and letting each state choose its own pace seems to be working. Take Rera — 31 states and Union territories have notified it already.
Ditto for the Land Acquisition Act, which was passed in 2013, making land acquisition — a pet peeve for investors — costlier and messier. GoI’s proposed amendment ran into stiff opposition. But progress is being made. This March, the Supreme Court removed some of the biggest hurdles around land acquisition. And now it is up to the respective state governments to take the lead. Already, nine states, including Tamil Nadu and Maharashtra, have made changes to suit their own needs.
Amid all this, the Covid-19 pandemic is now unleashing some big shifts and will probably reshape the relationship India’s citizens have with real estate. WFH will have deep impact on work spaces even after the pandemic has been tackled. Many large firms like Infosys and Wipro with large campuses may monetise their real estate assets with sell-and lease-back deals, already a global norm. Extended lockdown, shut malls and a renewed thrust on ecommerce has put many retail developers in deep distress.
Residentials, already reeling under oversupply and glut, too are seeing some big shifts. Experts expect millennials — whose ‘rent, not buy’ philosophy and lifestyle have fuelled the sharing economy — to emerge as a critical buyer segment. The pandemic will also force developers to realign their product offerings to suit WFH, such as houses with home-office facilities, etc. At a time when developers are going belly up, many see the emergence of specialised platforms to tackle distressed real estate projects.
Implications of all this are significant. The developer community is likely to see a consolidation with stronger survivors setting a new bar for the industry. With little capital appreciation in house prices, investors are fleeing, even as the percentage of end-use buyers goes up.
GoI’s thrust and incentives for affordable housing will add momentum. Despite the economic distress, investors are still keenly looking at niches that hold out hope and potential, like logistics, warehousing and server farms. Emergence of SEA — services, experience and amenities —is making land commoditised and services the big differentiator. Already, a slew of joint ventures — from Blackstone-Hiranandani, Embassy Group-Blackstone, GICDLF — are being forged in key realty verticals that help improve standards in the sector.
Realty as an asset class in India has been unique. Dominated by investors, opaque and an ideal playground for black money, it has largely been a bet on capital appreciation. India’s net rental yield at 2-3% is one of the world’s lowest with 6-7% being the global average. Hopefully, some of the big shifts afoot will create a healthier real estate ecosystem.
Anything that doesn’t kill you makes you stronger. That might as well be true for the real estate sector going through a painful recast.