India's real estate sector has long been known as an opaque market. But three developments in the year gone by will shake up the sector and push it toward greater transparency this year.
On 1 May last year, the Real Estate (Regulation and Development) Act 2016 became operational. Exactly six months later, on 1 November, the Benami Transactions (Prohibition) Amendment Act 2016 came into force. Shortly after, on 8 November, Prime Minister Narendra Modi scrapped high-value banknotes to fight corruption and tax evasion--a move that will especially hurt the real estate sector, which has been the repository of black money or unaccounted wealth.
The three policy moves will transform the sector and lead to consolidation activity, as smaller developers or those who rely on bribes and illegal wealth to execute projects or those who are inefficient and unable to complete projects on time will look for stronger partners.
“The market has shrunk but the share of top and branded players will increase over time,†said Vikas Chimakurthy, director at Kotak Realty Fund. “Tier II and Tier III developers will get killed in terms of market share.â€
Ajay Jain, executive director of investment banking and head of the real estate group at Centrum Capital, concurs with Chimakurthy. Jain said the demonetisation of high-value banknotes will make the sector more regulated and organised in the long term.
“Bad elements will be weeded out and players will consolidate, with only reputed developers who transact with transparency remaining in the industry,†he said.
Jain also said that, in the short term, the sector will suffer some pain as black money--often paid in high-value notes--played a major role in the sector. “Now with this route having come to a halt, developers are trying to offload their inventory to improve liquidity. Developers with sizeable land parcels will face difficulty as land prices will fall. It will eventually lead to eradication of corruption and bribery in the sector, particularly while obtaining approvals,†he said.
According to a note by real estate consultancy firm JLL India, large institutionalised players will see minimal impact but smaller developers are concerned because many of them depended on cash transactions. “We are very likely to see a clean-up of non-serious players due to this ‘surgical strike’ on the parallel economy,†it said.
Pankaj Kapoor, managing director at real estate consultancy firm Liases Foras, said that luxury housing is likely to take a major hit because of demonetisation. He added that this will prompt developers to focus more on low-ticket housing units catering to end users.
New law, Benami property
The first stage of consolidation will begin when real estate regulatory bodies start taking shape. The new law to govern the real estate sector mandates all states to set up regulatory bodies to monitor the market and requires developers to become more transparent in their operations.
It also requires developers to keep 70% of customers’ advances in an escrow account, so that they don't use the money raised from one project to buy land or start work on another project--a common practice thus far. This rule will make it difficult for smaller players to sail through project development cycles. Demonetisation will amplify the problems as it turns off--at least for the time being--the funding channel from unorganised sources.
“The impact of RERA (Real Estate Regulation Act) will further discipline the industry, which will be good for its health in the long term,†JLL said.
While the new law will, undoubtedly, impact the sector for the better, the move to amend a 28-year-old law to attack the so-called benami transactions is equally significant. ‘Benami’ property refers to an asset that is not held in the name of the person who may have actually paid to acquire it. Various estimates suggest that there is more unaccounted wealth held in benami properties than in the form of cash or high-value banknotes that the government banned.
Wave of consolidation
The three measures have come at a time when the real estate sector, especially the housing segment, has been struggling for the past couple of years due to project delays, high prices, tepid consumer sentiment and poor sales.
The market had somewhat adjusted to the new reality as developers and land owners formed joint ventures or signed joint development agreements with bigger, branded players to implement projects. The national capital region–one of the worst affected real estate markets in the slowdown–has seen many examples of such tie-ups lately.
Industry observers say that instances of joint ventures, joint development agreements and sale of distressed assets will rise as smaller developers will find it increasingly tough to survive.
“We will definitely have more numbers of distressed projects up for sale in the market,†said Amit Goenka, who runs a real estate-focused financial institution under Nifco. “This will be a good opportunity for equity investors–financial institutions or fellow developers–to come back in a big way.â€
Goenka also said that there will be limited project launches in coming months and those too will be from the bigger brands. “We have seen instances of people, who had thought of launching or were in talks for a tie-up and had a roadmap for development, abandoning projects and renegotiating terms of the deal as they wait for markets to take its own course,†he said.
Kalpesh Maroo, partner – real estate at BMR Advisors, cites an example to buttress the argument that smaller, weaker players will find it difficult to survive.
“Let’s say a developer had a land parcel and wanted to launch a project of 50-70 apartments. He could have done that a year ago but not now. He will either have to form a joint venture with an organised player, develop the project jointly or go for an outright sale,†Maroo said. “Such players will be stamped out over time and RERA will accelerate the process.â€
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