Government 3.0 Realty to Follow High Growth Path

Making rapid strides in its third year of bull run, the Real Estate sector will continue to chart a high growth path in the current government 3.0 amidst strong economy and reform-led policies.

Vinod Behl

the Real Estate sector

That the realty juggernaut is moving at a rapid pace is clearly evident from the high sales of Rs 1.17 lakh crore made by 18 leading listed developers. The housing market's significant drop in unsold inventory, which according to global property consultancy JLL, was reduced by 31% in Q1'24 in top 7 cities and stands below two years, at 22 months.

Positive market sentiment

The robust run of real estate is also reflected in the continuous rise in real estate sentiment index seen at a decadal high in Q1 '24, with stakeholders showing a sustained optimism in the economy and enduring demand. This sustained positive market sentiment is also seen in S&P BSE Realty Index topping 8800 mark, highest in over one and a half decade. What is significant about the current real estate market is that both demand and supply are healthy.

Investors continue to view India favourably amidst a strong economy, strengthening regulatory framework, and sustained demand across various realty segments. The FDI inflow in infra construction, development, and power sector, more than doubled in FY '24, with total FDI inflows touching USD 70.9 billion. The real estate sector saw the highest investment inflows since the Covid year 2020, recording USD 5.4 billion.

Over the last 5 years, the ongoing upcycle in real estate has seen 10 lakh crore of debt sanctions by 2023-end. The real estate, according to JLL- Propstack report, presents a Rs 14 trillion financing opportunity up to 2026 through construction finance and long-term debt.

Offices & alternate asset classes

The office sector continues to be the most significant contributor with 56% share in total inflows, recording USD 3 billion of FDI. Residential realty registered 20% higher inflows at USD 655.6 million. Foreign investors have been forging investment platforms with Indian developers for residential and commercial realty. After office real estate, the highest inflows of over 877 million are seen in alternate asset classes of industrial and warehousing, registering YoY growth of 108% amidst increasing stock of green and A-grade spaces. Infra and realty investments, according to Crisil, are set to reach Rs 15 trillion by FY'26, registering a 38% growth.

New frontiers of real estate

Smaller towns are emerging as the new frontiers of residential, commercial, office, retail, hospitality, and alternate real estate segments due to infrastructure development, affordable realty, skilled talent, and policy initiatives. According to global property consultancy Colliers, these 16 cities, namely Amritsar, Ayodhya, Jaipur, Kanpur, Lucknow, Varanasi, Patna, Puri, Dwarka, Nagpur, Shirdi, Coimbatore, Kochi, Tirupati, Visakhapatnam, and Indore will see significant momentum in residential, commercial, retail, hospitality and industrial segments, besides data centres, senior living, second homes, etc. The robust growth in these small cities will propel real estate to a USD 5 trillion market by 2050.

Infra connectivity

Amidst infrastructure development, connectivity boost is transforming the real estate landscape in small cities. The current government's enhanced focus on infra connectivity through highways , railways and airways in its third term will prove to be a big booster in the years ahead. The Highway Ministry is aiming for construction of 18000 km of expressways and high speed corridors, and has sought about Rs 22 lakh crore of investment covering around 30600 km, by 2031-32. Railways laid 27057 km of tracks in 10 years (from 2014-15 to 2023-24). It will now invest 7 trillion rupees over the next decade to lay a record 50000 km of new tracks, supporting high speed trains.

A promising scenario

Going ahead, the real estate scenario looks promising with the country’s economy in the pink of health. Fitch ratings has hiked India's GDP estimate for FY '25 to 7.2%, at par with RBI's projection. RBI study has also put household sentiment on employment and income at pre-Covid level. In fact, HSBC Flash India Composite Output Index survey says that job creation (in June) in the private sector has been the strongest in the last 18 years. This bodes well for real estate in the current government 3.0.

Housing is following a phenomenal growth trajectory with top 7 cities expected to deliver 5.31 lakh new units this year, marking a 22% increase in supply. CREDAI projects 7 crore additional housing demand by 2030. Today, the net office leasing space at 11.5 msf during January- March 2024, is the third highest in five years.

What's truly significant is that the Indian commercial real estate has been defying global headwinds, attracting private equity investments, with strong demand for Grade A green spaces. Going forward, India's prime office space supply is expected to reach 1 billion sq ft in tier 1 cities by 2030. The picture on the retail front is equally rosy with current retail stock of 89 msf expected to grow by 50% to reach 134 msf by 2028-end. The next five years will see a surge in organised retail space completions with a notable trend of large-sized retail centres with an average size of over 5 lakh sq ft.

Price Challenges

The real estate, particularly residential, is faced with certain challenges also. The rising property prices and delay in interest rate cuts has put prospective homebuyers on tenterhooks. On the rental market front, the rents have seen price increase dropping by 50% in Q2 2024 (2-4 percent sequentially) compared to Q1. Especially, there are concerns over affordable housing, which is a key to realize the aim of 'Housing for All'. There is a significant dip in demand and supply.

The pre-Covid share of affordable housing sales to the overall housing sales has almost halved at 20% due to rising property prices, high interest rates and discontinuance of interest subsidy on home loans under the Pradhan Mantri Awas Yojana. On the supply side, developers have shifted from affordable housing to premium housing due to rising construction costs high interest rates, and withdrawal of tax benefits, eating into their profit margins.

Reform-led policies

The reform-led policies of the current government are expected to tackle these roadblocks. In its very first cabinet meeting, the new government took a far-reaching decision to build three crore affordable houses, including two core urban and one crore rural houses. And in the upcoming FY 25 budget, it will be restoring the home loan interest subsidy for buyers of affordable housing. It may even liberalise the area and price norms of affordable housing to bring more people under affordable housing and in turn push demand. It is also set to reintroduce 100% income tax rebate for developers of affordable housing to help push supply.

Policy initiatives on skill development to ensure successful execution of construction projects, smart cities, budgetary boost to green financing and incentivisation of green buildings rationalisation of personal income tax and capital gains tax may well be on the anvil. A measure like giving industry status to real estate will unlock great growth opportunities for the sector through low cost funding to property buyers and developers, especially to boost interest rate-sensitive affordable housing .

Rationalising GST

The government will be rebooting key reforms to strengthen real estate sector. Ahead of the Budget, Finance Minister, Nirmala Sitaraman has announced policy changes in GST to address operational challenges of small and large businesses through a tech-based progressive legal dispute resolution. The GST Council has recommended to exempt GST on accommodation services (co-living/student housing/hostels) charging up to Rs 20000. This will prove to be big booster for co-living segment of residential realty.

The upcoming budget may also favourably look at rationalising GST on housing. The government may well come up with measures to strengthen RERA and enhance digital platforms for property transactions. In a major policy reform, RBI has launched the PRAVAH portal for promoting ease of business by streamlining regulatory approvals and clearances. This will help speed up regulatory responses, lower compliance barriers, and enhance transparency.

Considering the commitment and continuous focus of government on boosting real estate and infrastructure sectors as engines of economic growth, it should do well on the policy front to achieve long-term sustainable growth of the real estate sector, meeting the goal of making it a USD 1 trillion market by 2030 and achieving the Amritkal (2047) target of topping USD 5 trillion mark.
NBM&CW - July 2024
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