Some trends are becoming prominent in the Indian real estate industry and are being embraced with the spirit of endurance.
The real estate industry has been one of the most prominent pillars of the Indian economy. With a contribution of close to 6-8% to India’s Gross Domestic Product (GDP), it stands second in terms of employment generation. The sector has been at the cusp of transformation with policy changes, fall-out of funding agencies and their subsequent cautiousness towards residential projects, developers experimenting with new sectors and offerings, etc. Given the way the economy is moving forward and the sector’s performance over the last 18 months, some trends are becoming prominent in the Indian real estate industry and are being embraced with the spirit of endurance.
Technology has been playing a pivotal role in the growth of the real estate sector in India and has led to gains not only for buyers but also the sellers. Not just in terms of construction, but even in terms of simplifying the property buying process. Access to information, customer expectations, and client service are very different from what they were even five years ago. Technology has increased the construction quality standards and reduced the time taken to build the infrastructure. What once took months and years to build, can now be achieved in weeks, without taking a toll on the project cost and labour. The concept of augmented and virtual reality is picking up pace where buyers can experience the property without physically visiting it. India could potentially become a hub for blockchain technology in the real estate sector as it will bring the necessary confidence back in the system.
Foreign capital has been chasing investment-ready assets in core office locations in major cities. The commercial real estate sector has been a big draw for foreign investors in the past five years owing to the steady demand and rising rentals. The first half of 2019 saw a 28% increase in private equity inflow compared to the same time last year, thus signalling confidence in India’s grade A offices, retail properties and the warehousing sector. Foreign investors have formed investment partnerships by backing local developers. Through these platforms, we will see further traction in both core as well as development assets. The overwhelming response to the stock market listing of Embassy Office Parks’ REIT (real estate investment trust) this year has given confidence to investors for opportunities in REITs which are expected to open up more funding avenues for the sector.
Focus on consumer demand
The slowdown in sales and tightening of liquidity have prompted developers to realign their strategies. Affordability and trust being the key words, large as well as small-sized developers have jumped into the bandwagon of aligning with consumer demand. The average size of units have decreased to help “fit into the budget”. Developers are trying to focus on completion of the existing projects given that the current demand is primarily from the end user. Builders are open to mergers, consolidations, acquisitions, joint developments and joint ventures with established and prestigious developers. Hyderabad has seen numerous examples where strong local developers have joined hands with national players to elevate the level of offering.
Market Consolidation to become more pronounced
While the overall home sales remain weak in the country, the top developers have still managed to show sustained sales in major cities. These developers are also striving to reduce their debt by hiving off assets, while the smaller firms are struggling to survive. The number of property firms tipped into insolvency has more than doubled since last year. Though the government plans to set up a Rs 25,000-crore fund for stalled residential projects, this fund is estimated to help revive less than 10% constructions that are running behind schedule. The slowdown will thus swallow many more of the smaller firms.
Growth of new segments
The real estate model in India has changed quite a bit in the last couple of years. The year 2020 will see the industry grow in terms of newer policies aimed at improving buyer sentiments and the sale of affordable housing. The definition of ‘affordability’ is changing as affordable projects have started including amenities that typically luxury projects offered. The residential segment will also see more traction from the buyers with increased demand for co-living and affordable spaces. On the commercial front, co-working space, data centers and warehousing space would continue to be in demand.
The real estate industry has evolved from being a brick and mortar driven industry to a service-driven product offering. It is important to customise the offering according to the changing dynamics of the market. In the days ahead, one can expect a flurry of changes in the way these offerings are structured across markets and segments.
(By Divya Seth Maggu, Director-Valuation & Advisory Services at Colliers International India)