INSUBCONTINENT EXCLUSIVE:
In addition, the sector employs a 52 million workforce and is expected to generate over 15 million jobs over the next five years.
The
importance of the real estate sector is well acknowledged by the central and the state governments and the introduction of
affordable/mid-income and rural housing schemes are aimed at improving real estate activity
Funding will remain the lynchpin for the sector
We expect moderation in prices, if current liquidity trends continue in 2019
While this disruption will lead to uncertainty in the short term, improving affordability and higher transparency will result in better
economics over the medium term.
Sensex vs BSE Realty Index in 2018Realty stocks tumbled up to 62% in 2018Strengths:-The sector is expected
to witness significant transformation with the implementation of RERA, GST and IBC, leading to higher transparency and accountability, going
forward.
The residential market has seen more prudent launches by players, resulting in a 13-15 per cent decline in inventory
With asset valuations remaining flat in last five years, affordability has improved significantly over time.
The commercial office space has
reported rising rentals and improving occupancies across cities
Key demand drivers have been the technology sector, manufacturing/engineering and financial services
Rentals have gone up 5-10 per cent annually across regions over the last five years, driven by high demand for Grade A office
space.
Weaknesses:-The residential sector awaits recovery as buyers remain cautious
The underperformance of the asset class has been a key reason for deferral of purchase decisions
In addition, the cap on property loss provisions has further impacted investor demand.
Cost of funding remains high as land financing is
available only from NBFC leading due to materially high cost of capital
With NBFC funding cost rising, we see an increase in developers funding cost, leading to low returns, especially in a weak pricing
environment.
Opportunity:-Affordable housing: This remains a key opportunity for players, as 90 per cent of housing shortfall is in the
economically weak and low-income segments
Buyers are likely to benefit from the availability of low-cost home loans and lower GST rate, while developers will enjoy the advantage of
Affordable housing will remain key driver for residential segment in 2019.
Consolidation in the sector: With stringent regulatory
requirement and rising funding cost, we expect market share gains for organised developers and developers who adapt their business models to
back.
REITs - Unlocking capital: With 550msf of Grade A office space, India provides a significant opportunity to investors and developers
looking to tap the REIT market
The total office space market size is about $75 billion; and out of this $30 billion could be available to tap through the REIT channel
Apart from the commercial office market, India has 77msf in retail malls valued at $16 billion, of which $5 billion would be available to
tap through the REIT channel.
In addition, REITs would allow other sectors to unlock commercial real estate by partial liquidation of
portfolios.
Key Threats:-Funding risks: NBFC funding to developers posted a 35 per cent CAGR over FY16-18 as companies faced operating cash
With an increase in funding costs and fewer refinancing lines, developers would need to increase collections to meet the shortfall
As a result, we expect prices to rationalise in the near term
However, a delayed demand recovery despite price rationalisation could lead to defaults in the interim period.
RERA implementation: RERA
norms implementation has been lagging in most states
Delayed implementation with diluted norms will result in further delay in project execution with no improvement in customer
sentiments.
(Abhishek Anand is Vice President for Institutional Equity Research at JM Financial Institutional Securities
