PROPERTY INSIGHTS India Quarter4, 2018
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PROPERTY INSIGHTS India Quarter4, 2018 INDIA REAL ESTATE OVERVIEW Introduction Economy During the July-September quarter, growth of the Indian economy eased to 7.1%, primarily due to the challenges brought about by higher oil prices, resulting in a much higher import bill and the continuing weakening of the rupee. Private consumption, after picking up in the fiscal’s first quarter, slowed to 7% in the second quarter, while investment demand accelerated to 12.5% in the second quarter, indicating a revival in investment activity. International Monetary Fund (IMF) has pegged India’s growth at 7.3% in the current financial year, against a global growth of 3.9%. Inflation has remained well below RBI forecast, which targets to keep the rate at 4% in the medium term. During the April-October period, industrial output grew 5.6% as compared to 2.5% over the same period of the previous year. In October, it stood at an 11-month high of 8.1%. Despite the concerns regarding rising NPAs and the liquidity crisis, there has been a slight cheer for the economy in general. With a decline in global crude prices and with India’s inflation continuing to trend down in the third quarter of the fiscal year, the signs look positive for GDP growth to be sustained despite the country likely to enter a period of relative inactivity in the wake of the impending general elections. Introduction GDP growth rate & Repo Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP Growth Repo rate Source: World Bank, RBI The structural reform process started in the country has yielded fruit in the form of continued improvement in the World Bank’s Ease of Doing Business rankings. In the latest rankings, India jumped a massive 23 spots to the 77th position. This marked a total improvement of 53 spots in the last two years. The jump was underpinned by significant improvements in laggard areas such as construction permits, cross border trade, access to credit and starting a business. India in fact, was among the top 10 countries in terms of improvement for the second year in a row and was ranked number 1 among South-East Asian Countries and BRICS nations. The tables below showcases India’s progress on the rankings and the year-on-year improvement across major parameters (2017 to 2018) which were instrumental in India’s progress India’s Ease of Doing Business Rankings. 2014 2015 2016 2017 2018 142 130 130 100 77 Key performance indicators 2017 Rank 2018 Rank Dealing with Construction Permits 181 52 Starting a Business 156 137 Enforcing Contracts 164 163 Trading Across Borders 146 80 Getting Credit 29 22 Getting Electricity Connection 29 24 Introduction Key performance indicators 2017 Rank 2018 Rank Registering Property 154 166 Paying Taxes 119 121 Resolving Insolvency 103 108 Protecting Minority Investors 3 7 For the real estate sector, the reforms initiated in the form of single window clearance in Delhi and online building permit system in Mumbai along with similar reforms being undertaken by other states bodes well for domestic developers, with the commercial markets doing exceedingly well even as the residential sector continues its slow journey towards recovery. Improvement in credit points towards the fact that new startups and the SME sectors have been able to access structured finance better through financial inclusion and an improved credit cycle. We also expect more improvements in contract enforcements and property registrations as these are critical for business investments and protection of ownership rights. With the new Insolvency and Bankruptcy Code in 2018, we expect India’s rankings to improve even further in the next edition. Regulatory Overview The government has extended the CLSS (Credit Linked Subsidy Scheme) for MIG-I & II category of homebuyers. Previously, having increased the carpet area of apartments under the two categories, the government had managed to bring in a lot of apartments of higher sizes under the scheme cover. RERA: Taking Stock More than a year into the enforcement of the Real State Regulatory Authority (RERA), Indian states have achieved varied levels of progress. While states like Maharashtra, Karnataka, Gujarat have fully operational RERA portals, with an established conflict resolution mechanism, several states are lagging in implementation. Maharashtra has taken the lead in forming its RERA portal and has the highest share of registered projects followed by Gujrat and Karnataka. Apart from these, other states like Telangana and Haryana are yet to see substantial project details on the portals. But slowly and steadily we are seeing an increase in the number of registrations in these states. On the other hand, West Bengal has steered away from the national RERA policy, and notified its own state policy- WB-HIRA (West Bengal Housing Industry Regulatory Authority). The following table lists down the number of projects registered with states. State No. Of Projects Registered Maharashtra 19,194 Karnataka 2,292 Telangana 140# Tamil Nadu 857 Haryana 521 West Bengal 328 Gujarat 3,880 Uttar Pradesh 4,500 Note: As accessed from state RERA portals on January 05, 2019. #With the website becoming operational recently, registration data is slowly being uploaded to the portal. Also, the website only requires only those projects to be registered which received permission on or after January 1, 2017. Impact on Residential Sector Discussing the impact of the NBFC crisis on India’s residential sector Over the last five years, the residential sector has been reeling under slowing sales and mounting inventory, which was further exacerbated by demonetization in 2016, followed by the regulatory changes brought about by the implementation of RERA and GST in 2017, both of which while being gamechanger moves also led to a virtual re- invention of existing business practices in the sector in 2018, making this year, one of disruption and change. The commercial office sector, on the other hand, has been growing at a rapid pace, with occupiers being relentless in their uptake of space. Following the strong showing by the Indian office markets, the stable price regime in the residential sector and slowly recovering buyer confidence on the back of structural reforms also led to some green shoots of recovery in the residential asset class during the first three quarters of 2018. There was a definite pick-up of both launch activity as well as sales momentum. However, towards the latter half of the year the NBFC crisis, precipitated by the IL&FS default brought in to focus the asset-liability mismatch on NBFCs’ balance sheets. NBFCs had become the primary source of funding for the residential sector from refinancing existing loans to funding new projects as well as meeting the last mile and bridge funding needs of developers. In the wake of banks having reduced their lending exposure to the real estate sector in general, NBFCs had been able to raise money from banks and other sources to help the sector tide over its credit needs. The liquidity issues largely arose due to the NBFCs taking on short-term borrowings which were used to make long-term loans, thereby creating low-seasoned loan books which caused the mismatch. Share of NBFCs in active loan sanctions to RE has increased 100% 90% 30% 80% 35% 48% 55% 57% 70% 62% 60% 50% 40% 70% 30% 65% 52% 45% 43% 20% 38% 10% 0% FY13 FY14 FY15 FY16 FY17 FY18* Banks NBFCs Impact on Residential Sector The result in the wake of the IL&FS crisis has been two-fold in nature. NBFCs stopped disbursals in the short-term across the board – tranche disbursals of ongoing loans were stopped, new loan sanctions were not disbursed and ongoing transactions put on the backburner. The other impact was that the NBFCs were no longer able to raise money from banks and other financial institutions who were now shying away from lending to them. This led to an increase in the interest rate of commercial papers of such NBFCs, which made fund-raising more expensive for them. The impact on the residential sector was also immediate. With working capital loans stopped, many had trouble progressing with ongoing construction. Others who had planned new launches based on such funding agreements, had to put off their project launch. The impact overall is likely to be long-term. NBFCs, particularly non-deposit ones had operated with only minor regulatory oversight by RBI. They had provided loans to developers for land purchase and even helped in early stage funding through structured loans. This points to more defaults by NBFCs as in the current, slowly improving sales environment and the over-leveraged developers, existing developer loans can become seriously impaired. The government, though has taken note of this and there has been a spate of easing norms by the RBI to help NBFCs tide over the liquidity crisis. From allowing banks to lend more against government securities held by them to increasing the share of loans with maturity over 5 years to 20% of loan book being securitized and reducing the minimum holding period for raising funds via securitisation of loans of original maturity above 5 years, these are likely to help NBFCs tide over the crisis in the short-term. However, there is a long-term need to revisit regulatory oversight of NBFCs as well as introducing reforms for rating the NBFCs’ loan portfolio as well as lending norms to be followed by NBFCs themselves In a nutshell, the impact on the real estate sector has been summarized below: Ÿ A freeze on funding will impact developers’ cash flows, thereby impacting their ability to launch new projects.