Ground realty: After harsh winters consumers and developers get ready for long-term gains
After a harsh winter for both buyers and builders, things may now be set for some long-term gains.
It has been a harsh winters for consumers and developers for the real estate sector. But this period has also coincided with some welcome structural and policy changes that will usher in long-term gains for the sector.
The sector was battling weak consumer sentiments due to poor deliveries when demonetisation brought down property prices further. While houses became more affordable after demonetisation, the sector now faces a liquidity crunch as funding has become scarce.
RERA: Real Estate (Regulation & Development) Act
The grievance redressal mechanism of RERA, enacted in May 2016, improved consumer and investor confidence by focusing on transparency. According a Magicbricks poll, around 56% of home buyers still prefer filing their first real estate complaint under RERA. The act addressed compelling issues of delayed delivery, poor construction quality and non-delivery of projects. While the markets in Maharashtra and Madhya Pradesh have moved towards seeking resolution through reconciliation, the NCR market has not yet found a solution to the large number of incomplete projects.
GST: Goods & Services Tax
The bid to introduce a uniform tax and compliance structure came into force on July 1, 2017. Taxes such as stamp duty and property taxes were not subsumed under GST. Additionally, a 12% tax burden on under-construction property made it less attractive for buyers, as they earlier had to only pay 4-6%. Ready-to-move-in properties became more popular as they did not attract GST. At a GST Council meeting on January 10, a seven-member panel was formed to understand the impact of the new tax regime on under-construction properties. The tax is proposed to be reduced to 5% from 12%. With over 250 sectors linked to the real estate sector, any change in GST rates will have a direct impact on all stakeholders.
PMAY: Pradhan Mantri Awas Yojana
The scheme, under the Housing for All by 2022 Mission, aims to provide every Indian family a pucca house by the 75th year of Independence. Till December 30, 2018, around 3.4 lakh beneficiaries had availed of CLSS benefits under the PMAY (Urban), which offered a direct EMI reduction of about Rs 2,600 a month. The Centre has also extended CLSS on home loans for the middle income group under the PMAY (Urban) till March 2020. Urban housing shortage is largely seen among the economically weaker and lower income groups. This suggests affordable housing development over the past several years was skewed towards the more premium sector. Around 40% of home buyers said PMAY encouraged them to buy a new home, according to a poll conducted by Magicbricks. However, some states are still lagging in constructing PMAY houses.
IBC: Insolvency & Bankruptcy Code
The IBC has been successful in instilling a sense of urgency among all stakeholders to resolve bad loans. Home buyers were given the status of secured financial creditors, with a berth on the committee of creditors, along with lenders and banking institutions. Operational creditors and individual buyers have demanded companies be declared insolvent for even delaying payments by a little. This move, however, is unlikely to expedite the completion of stuck projects.
The government has taken a series of measures to bring in structural reforms in the realty sector. Demonetisation and the war on large cash transactions were the first and the most disruptive. Close on their heels came the Centre’s Real Estate (Regulation & Development) Act (RERA), which has been enacted in all states — barring West Bengal, where the state government launched a similar act, and the Northeast, where the dynamics are still evolving.
The goods and services tax (GST), Pradhan Mantri Awas Yojana (PMAY), Credit Linked Subsidy Scheme (CLSS) and the Insolvency and Bankruptcy Code (IBC) have also made an impact on the property sector.
TOP CITY TRENDS
There has been a marked shift in consumer demand towards affordable housing of up to Rs 30 lakh and in the Rs 30-60 lakh range. Government push to first-time home buyers has helped. The 80IBA tax incentives offered to developers also pushed up stocks.
There has been a rise in demand for houses near job hubs and transport corridors. Unit sizes have shrunk to suit the wallets of users and lifestyle amenities have become the norm.
Various studies by consultants estimate there are 6.73 lakh units of unsold housing inventory, with nearly 85,000 units ready to move in, across the top seven cities. They estimate that out of these unsold ready-to-move options, nearly 60% units are in the affordable and mid segments, priced below Rs 80 lakh per unit. The National Capital Region and the Mumbai Metropolitan Region have the most unsold ready-to-move stock. Together, they account for nearly 54% of such stock in the top seven cities. Hyderabad has the least, with just over 4,400 units.
METRO AND REALTY
Across cities, metro connectivity has pushed up housing values by 10-25% if the properties are 200-500 metres from the nearest metro or bus stations. Delhi has the country’s biggest metro network and is hence a good place to understand the correlation between connectivity and real estate prices. It was visible in Uttam Nagar in southwest Delhi.
Abutting one of the largest sub-cities, Janakpuri, the area saw two price spikes in our Magicbricks Propindex in the past five years, thanks to metro connectivity. Uttam Nagar is a preferred locality and also an affordable destination to buy builder-floor apartments. It is connected by two metro lines — easing access to educational and commercial areas as well as the airport. Uttam Nagar, an unauthorised colony, is on the list of colonies to be authorised shortly.
As a result, it was outside the purview of the planning process. When access to two metro stations became a possibility, most landlords redeveloped their plots with three or four single-floor apartments. Demand surged, too. Today, there is a high supply of new formal housing stock listed on Magicbricks, mainly of one and two BHK units. The locality continues to see a price rise for the last 1-2 years, even when prices stagnated in other markets.
CHANGE IN UTTAM NAGAR PROPERTY PRICES
BUY OR SELL?
With prices stable for 3-4 years, this is a good time to buy, especially ready-to-move-in houses. In many places, prices have dropped or are negotiable. Developers are mostly focused on finishing ongoing projects. Sale prices in places such as the NCR are close to construction cost now. The 12% GST on under-construction projects and no GST on completed projects make it even more attractive.
This is a good time to sell, too. It is easier to find a buyer now as prices are not very high. One can now use sale proceeds to buy not just one but two houses to avoid capital gains taxes. It is a good time to sell for NRIs who purchased properties during 2009-10 when the dollar conversion rate was Rs 45. It may not amount to much if NRIs want to sell and repatriate the proceeds, converted to dollars. But if you want to sell and buy another property or to hold your capital in India, this is a good time. There are two ways your property can be monetised: a regular rental income in the range of 1.5-2 % of the capital values or sell it at a profit and buy another.
Here is what we know about making decent returns on real estate investment. You make most money when the ticket sizes are low and the prices middling. Normally, a property yields best returns in 5-6 years. Core city areas give better regular returns but are more expensive to enter. For instance, even along a delayed infrastructure such as the Dwarka Expressway, people who bought in 2009 and sold in 2013 got good returns. What is important is that as an investor, you have to be unemotional about your exit strategy.
WHAT LIES AHEAD
Muted price: Factoring in all the variables, prices are expected to remain largely muted in the next 12 months.
Favourable price/income ratio: Price income ratio (median real estate price in the city divided by median income) has been falling. The lower the ratio, the more affordable the housing. For example, in Mumbai the ratio dipped from 11 in 2010 to 7.2 in 2018. This dip will encourage buying.
Stronger rental market: Increased ready-to-move stock will lower rentals. Emergence of specialised rental units and the entry of organised players is also expected.
Boost to affordable homes: The segment, doing well over the last year, will really come of age with big demand upticks. As a result, demand will outstrip supply by a factor of 3-5, depending on the city.
Ready to move in: Cautious buyers, supply and good deals are pushing home buyers for secondary sale (units sold in the open market by individuals), which anyway has always been much bigger (even double or triple) than the primary market (first sale by developers to individual buyers). This is expected to become at least twice that of primary market volume.
(The writer is editor of real estate portal Magicbricks.com; with inputs from Ravi Kumar Diwakar. Magicbricks.com is a part of the Times Group, the publisher of ET Magazine)