India's real estate sector remains soft as 2019 general election approaches

In the past 24 months, new policies enacted by the Government of India have changed dynamics in the country’s real estate sector.

Demonetization the first of these policies, is a major event for a nation dominated by cash transactions.

Under demonetization, which was announced November 2016, banknotes valued at ₹500 and₹1000 were stripped of their value and exchanged for new ₹500 and₹2000 banknotes. This was done to reduce the circulation of illicit and counterfeit cash for illegal activities and to bring transactions into the banking system, making the funds subject to review and taxation. The short-term effects of this policy include cash shortages and general unrest related to the exchange process. Currently, the Reserve Bank of India reports that less than 1% of demonetized banknotes were not returned to the banking system. The process also caused a decrease in India’s industrial production and gross domestic product growth rate. Within the real estate sector, transactions outside of the banking system decreased in many parts of the country, the long-term results of which are still being evaluated.

Following demonetization, the Government of India implemented the Real Estate Regulatory Act (RERA) and the Goods and Services Tax (GST). Intended to protect the interests of home buyers and enhance transparency in the real estate sector, the RERA Act of 2016 established a Real Estate Regulatory Authority in each state. These local authorities regulate the real estate sector and mediate any disputes that arise regarding real estate transactions. Passed in March 2017, the GST Act established one indirect tax for the entire country. Levying a tax at every point of sale, the GST has made business across state lines easier by implementing a uniform tax rate which benefits the economy by improving the collection of taxes.

As a result of RERA and GST, there’s more transparency and accountability in India’s real estate sector. The sector is more organised, with larger players like DLF, Embassy, Prestige, Blackstone and Brookfield, among others, driving the growth. Additionally, these policies encourage consolidation.

For a long time, the sector has remained overcrowded and fragmented operating across the country in various segments. But now, the business environment is getting tough for builders indulging in wrong practices and they are surely making way for large developers with a stronger project execution track record.

The new policies have accelerated the pace of consolidation and the sector is now witnessing a separate class of organized or branded developers emerging strongly across project categories.

The process of consolidation has gathered momentum. Across the country, small developers have been coming up with interesting ways to deal with the pressures of difficult business environment. Many builders are opting for solution of joint ventures or even selling their incomplete projects on an outright basis. Several incomplete, long-hauled projects stalled due to legal or financial intricacies are seeing handovers to more serious and capable developers and institutional players.

For now, the pain may seem unbearable but this is expected to instill confidence among occupiers, buyers, institutional investors and, most importantly, drive the sector’s much-needed revival.

Institutional investors that lend liquidity to projects may become cautious as the election approaches. Though this is a common trend prior to elections, it suggests a decrease in supply over the next few months.

With approximately 900 million people eligible to vote, and two-thirds of the population casting ballots in previous elections, the 2019 general election is expected to be the world’s largest democratic election. Held every five years, the election will take place in seven phases starting April 11, 2019 lasting until May 19, 2019. During this period, members of Parliament will be elected from single-member constituencies to the Lok Sabha, the lower house of India's bicameral Parliament. Votes will be counted on May 23, 2019 with results announced the same day. The Prime Minister, the head of the government with the most executive power, will be appointed by the party in the Lok Sabha which holds the majority. As the government cannot make major announcements or start projects during the election period, there will not be any new initiatives or policies enacted between April 11 and the conclusion of the election.

The demand for commercial and industrial assets is expected to stay on course due to the onset of upcoming REIT listings and recent growth in the warehouse and industrial sectors. This is consistent with India’s macro growth story which is not expected to change immediately before or after the election.

In light of these new policies, we can expect the softness of the real estate sector to continue over the next 12 months as stakeholders adapt to the reforms.

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