2016 - Annus Miserabilis for Real Estate/By Sunil Mishra

2016 will be remembered by realtors as the year which had two distinct parts. The first 10 months of the Year broke the trend of falling sales in the residential sector, a trend which had continued unabated since 2013. Sales plateaued at about 50,000 units per quarter in the first three quarters of CY2016, down from almost 150,000 units per quarter in CY 2013. This formed a new base for the sector – at least 200,000 people in a year needed homes to live in! Larger Developers continued to increase market share as did national organized Real estate advisors – both benefiting from the shake-out of smaller players in their respective space, who were finding it tough to keep the kitchen fire warm amidst the three-year reduction of market size. Sales for these large, organized players hit an all-year high in Oct, riding on Diwali and increasing optimism in the buyers’ minds. This optimism arose from stabilising GDP growth rate, and the many small Projects that had been launched by the NDA government over the past 2 years.
The second part of 2016 lasted for the concluding 53 days of the Year – starting from Nov 9th. The PM’s announcement on demonetization was like an upper cut on the chin and a kick in the teeth, combined into one, for the Real Estate Sector. Some stock-market gurus immediately announced an imminent fall of 30% in prices of real estate, ostensibly based on the logic that cash transactions form 30% of total transactions, and they will get impacted because of lack of cash. Any sane buyer who was planning to make the largest investment decision of her life in form of buying her dream home would introspect, procrastinate and finally postpone her decision for some time till she is sure that prices will not fall, and that she wasn’t taken for a ride. Real estate sales fell by 40% post that.
To add to the cup of woes, there was a new item of impending fall in interest rate, and hence home loans going to become cheaper. Adding fire to the fuel was the third piece of “news” that stamp duty may fall (by almost half). Combinedly, these three “rumours” brought the industry to a crunching slowdown. People who are buying homes for their own end-use, and are largely convinced that there is not going to be a drastic fall in prices are the only ones who are buying apartments currently. Resale transactions have almost come to a grinding halt. New apartments are still being sold largely if the Developer has a strong brand, or if there is a deep discount or if the Developer is giving a Price Protection assurance.
But we are Indians and our future is always bright! 2017 brings in its wake implementation of RERA across states – while it may restrain supply of fresh launches for a few months, this is surely going to consolidate the sector more – strong Developers will become stronger, smaller brokers will have to find other means of livelihood. Consumers will have more protection, consumer confidence will be back, and lots of fence-sitters will enter the market. So will Investors who want to take a long-term bet on the Indian Real Estate sector.
Implementation of GST will simplify indirect taxation in the Sector to some extent, and hopefully, increase customer confidence further.
Coming to the forecast on the period for which the current ongoing impact of demonetisation will continue, this is a bit of anyone’s guess. In the scenario that prices will not fall – I am personally betting on this scenario – customers will keep on postponing their purchase till Jan-Feb of 2017. The Feb Budget will bring some measures of relief to the middle-class. Further, much of the Rs 14.4tn lost in form of old Rs 500, 1000 notes will be back in form of new notes by Jan-Feb. March onwards, sales of apartments will come back to normal.
In the scenario that prices fall by 10-20% in major markets – a highly unlikely scenario – people will again wait till Jan-Feb to be assured that prices are not going to fall further. After that, there will be a boom in real estate sales as people have been waiting for the past three years to buy their dream home at the right prices.
So, in any scenario, I foresee starting 2017, a re-run of the golden era of 2003-2008 and to some extent of 2010-2012 in the Real Estate sector. 2017-2021 might go down as the five-year period that changed the shape of the Real Estate sector in India.
Of course, as in stock markets, one will not benefit from betting on the entire sector – one will have to choose the best developers, best advisors, and invest in what is right for your own personal needs. For Investors, one will have to stick to their Strategic Asset Allocation, maintain debt:equity:realty ratios; within real estate. Investors need to diversify beyond their home markets, invest across residential and commercial, and a mix of early-launch & ready-to-move-in properties in residential.
(Sunil Mishra is Chief Business Officer- Primary Sales, PropTiger.com)