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Abu Dhabi, UAEFriday 14 December 2018

'Year 2017 has changed India's real estate forever'

A year of landmark reforms has slowed the sector, but developers hope the revamp will pay off in long run

A man works on a construction site in Mumbai, India. Developers are hoping for a better year next year. Shailesh Andrade/Reuters
A man works on a construction site in Mumbai, India. Developers are hoping for a better year next year. Shailesh Andrade/Reuters

Property developers in India are hoping for a pick up in business in 2018, following a tightening of the regulatory environment and the continued impact of demonetisation, which made this year challenging for the sector.

A long-awaited real estate regulation act (Rera) came into effect in May, aimed at bringing much-needed accountability and transparency to the sector.

“If anything, 2017 will be remembered in history as one of the most challenging years for developers as they survived GST [India's new goods and services tax], demonetisation and Rera,” says Amit Wadhwani, the director of Sai Estate Consultants, a real estate broking firm in Mumbai.

Demonetisation, a move in which he Indian government suddenly banned the two highest-value banknotes, sapped a lot of the liquidity in the Indian economy, negatively impacting the property sector. The primary aim of demonetisation was to reduce the amount of black money in the Indian economy, of which the real estate sector had been a major beneficiary, along with the legal cash flows it was accustomed to receiving.

The past few years have been difficult for India's real estate sector, but this year was particularly tough, data reveals. The number of residential units sold in India's top eight cities, which include New Delhi, Mumbai, and Chennai, declined by 11 per cent in the first half of this year compared to the same period a year earlier, according to Knight Frank. Residential launches dropped by 41 per cent.

Meanwhile, Rera “has completely changed the landscape of the real estate sector”, says Rohit Poddar, the managing director of Poddar Housing and Development.

The act is applicable to residential and commercial developments. Under the act, projects and real estate agents have to be registered. Developers can face punishment of imprisonment of up to three years and brokers can be jailed for up to one year for violation of the rules.

The rules also dictate that developers are responsible for paying the interest on bank loans in the instance of construction delays. In addition, 70 per cent of the money collected from customers has to be deposited in a separate bank account. The act helps to protect homebuyers from unscrupulous developers and it will ultimately boost consumer confidence, experts say. But it has caused some upheaval in the sector.

“This led to a cleaning up and weeding out of fly by night operators whose sole objective was to prey on hapless home buyers,” says Rohit Gera, the managing director of Gera Developments, a residential and commercial property developer based in Pune.

India's launch of its new goods and services tax (GST) in Julyreplacing a myriad of them has also had implications for the sector.

“The introduction of GST will further streamline the supply chain of developers and bring many small-time contractors and vendors into the GST net.”

He is upbeat on the outlook for the new year.

“As Rera settles down and the economy recovers from the impacts of demonetisation and GST one can expect better days for the real estate sector in 2018,” says Mr Gera.

Builders were forced to take stock this year, as they had to incorporate the new rules, while potential buyers sat on the fence, waiting to see how demonetisation would impact prices. The Indian authorities have also moved to crack down on “benami” property transactions – which refers to property or land being bought in someone else’s name or under a fictitious identity, often to hide black money and stay under the radar of the taxman.

At the beginning of November, the government launched an amended, much stricter act on benami transactions – including a punishment of imprisonment up to seven years and fines of 25 per cent of the property’s value, and rules to investigate benami properties.

“New residential projects dried up as developers’ focus shifted towards becoming compliant to the new order,” says Shishir Baijal, the chairman and managing director of Knight Frank India.

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“Similarly a slowdown hit home sales as buyers turned wary. Even the festive season failed to bring any cheer to the sector.”

Reputable developers believe that the policy reforms and upheaval may be having a short-term negative impact but they say that ultimately the changes could benefit the sector, as the industry makes the transition to becoming more structured.

“The Indian real estate market is agitating for a better tomorrow,” says Sushil Raheja, the chief executive of Raheja Homes, a Mumbai-based developer. “All the hiccups and hassle shall now be converted into profits and actions. Policies and regulations implemented in 2017 will change the game for the entire market. This process is about pain and gain - the regulations implemented are stringent but were the need of the hour.”

Adarsh Jatia, the managing director of Provenance Land, a luxury developer, says: “GST, along with other significant reforms such as demonetisation and Rera, will strengthen the real estate sector and the country's economy and we expect a positive momentum in 2018.”

Affordable housing is another area that has come into sharp focus this year, with the government actively trying to boost the drive towards its ambitious aim of "housing for all" by 2022.

“The government’s push on affordable housing was quite visible and this initiative has the ability to turn around the sector and can cater to the mid-income strata of the society, where actually the huge demand of housing lies,” says Neeraj Sharma, a director at Grant Thornton in India.

Some builders say that further changes to the segment are on their wishlist for the new year.

“The real estate industry has been demanding a single window clearance scheme for affordable housing projects," says Mr Poddar. “In a business format of affordable housing where all developers operate on wafer-thin margin, the delay in approval is a major block. We really hope that a single window solution is provided with top priority.”

And there are some reasons for the industry to be cheerful.

“Not just foreign investors but even domestic players are raising funds to invest in the sector,” says Mr Baijal. “The next 12 to 18 months are likely to be the 'under observation' period for the real estate sector. Industry stakeholders should spend the period in reorienting businesses in line with the new order. We are also hopeful that India’s strong economic fundamentals still puts it among the fastest growing economies in the world.”

As developers look forward to a better fortunes in 2018, it seems unlikely that they will easily forget this year.

“2017 will go down in the history of Indian real estate as the year that changed the sector forever,” says Mr Gera.

“Never in the history of Indian real estate have so many major events taken place within such a short period of time.”