Estimates peg yields from residential real estate at between 2 and 5 percent and commercial between 8 and 10 percent
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India’s real estate sector has been in the doldrums for a while. Unsold inventories were a nightmare for builders even as prices remained stagnant. Besides, a glut in the economy, caused by demonetisation and the Goods and Services Tax (GST), had thrown the sector off track. But there appears to be a ray of hope.
In February, the government reduced sales tax on under-construction residential houses from 12 percent to 5 percent and offered tax sops for affordable-home developers. That apart, its decision to allow rollover of capital gains into two residential houses instead of one is a big step.
“The Indian real estate is riding on a new wave of optimism, following the triple benefits offered to it by the government in less than two months,” says Anuj Puri, CEO of property consultants Anarock. “Acting like booster shots, these sops will not only spike homebuyers’ sentiment but also boost confidence of other stakeholders like builders and long-term investors.”
“The already prevailing liquidity issues—further exacerbated by the NBFC crisis in the last quarter of 2018—were anticipated to have a cascading effect on the residential sector in early 2019,” says Puri. “However, the concerted efforts by both the RBI [home loan rates have fallen following the central bank cutting repo rates] and the government are aiding in at least boosting the confidence of homebuyers. These sops will help fence-sitters take the plunge and increase sales for builders who are keen to clear their total unsold stock of 6.73 lakh units across the top seven cities.”
As per Anarock data, 15.27 lakh residential units were launched in the past five years across the top seven cities. The figure was on a decline from 2014 to 2017, but picked up in 2018. Housing sales numbers have indicated similar trends; nearly 13.5 lakh units were sold in five years. The unsold inventory rose from 6.98 lakh units in 2014 to 7.9 lakh in 2016 before coming down to 6.73 lakh in December 2018.
As far as commercial real estate goes, data from Anarock indicates that total absorption across the top seven cities in five years crossed 168 million sq ft, increasing year-on-year, with only 2016 seeing a decline of 8 percent. In terms of supply, the seven cities saw over 162 million sq ft new office stock added between 2014 and 2018. There was a 19 percent increase in 2018 compared to the preceding year.
As an investment opportunity, the residential real estate sector hasn’t garnered much attention as yields continue to be low. Estimates peg them to be between 2 percent and 5 percent. Commercial properties, in comparison, get between 8 percent and 10 percent.
“The commercial real estate segment has been performing well for the past couple of years, as global and Indian corporates continue to enter and expand their footprint across the country,” says Anshuman Magazine, chairman and CEO, India, Southeast Asia, Middle East and Africa, at CBRE, a global real estate consultancy. “India’s strategic advantages of cost and availability of talent and real estate have ensured that despite a volatile external environment (particularly the global economy and US’s anti-outsourcing stance), the country’s commercial sector continues to perform well.”
According to CBRE, by the end of 2018, Bengaluru, followed by Delhi-NCR, Hyderabad and Mumbai, dominated office space take-up last year, accounting for almost 80 percent of the overall transaction activity. “A significant amount of new space is expected to be released in the decentralised locations of leading cities over the next few quarters, particularly in Hyderabad, Bengaluru and Delhi-NCR,” says Magazine.
Indian real estate developers’ debt burden shot up from ₹1.2 trillion in 2009 to ₹4 trillion in 2018