An agenda for reviving the realty market

For the past couple of years, real estate analysts have been repeatedly announcing some green shoots of realty's revival. Unluckily, the green shoots have failed to sustain themselves, merely being false dawns.

Today, it's clear the market downturn is cyclical as well as structural.

Does that mean there is little hope for a bounce back in near future? Not really! There are many initiatives that could help turn the tide – if followed by diligence, robust implementation and a sharp focus on the required outcomes.

Demand drivers required

Consider the basics. There is little problem on the supply side. What has been challenging is the insipid demand from homebuyers, which has failed to take off despite rate reviews and other incentives from the RBI and banks.

Of course, one cannot forget that after half-a-dozen rate reviews by the RBI, the banks only reluctantly pass on the rate cuts once – that too after some prodding from the authorities.

Developers on their part have taken cognisance of the robust demand in the affordable and mid-income segments. Accordingly, they have been launching projects in these segments, catering to the customers' demands.

As a result, there has been faster movement of inventories in such segments. Despite this, the uptick in sales is still not as good as it should be. While part of the demand lag could be put down to the cyclical aspect that does not capture the whole story.

Structural issues have also dragged down demand. For example, the deep disruptions caused by demonetisation, the subpar implementation of GST, well-meaning but stringent RERA norms and the ongoing NBFC crisis have all contributed in some way or the other to the lacklustre interest from homebuyers.

Today, ready inventory has some appeal for buyers (and a few investors too), especially when offered without the millstone of GST, which only compounds their cost burden.

On its part, the government has been trying to address the demand side problem through steps such as the recent reduction in corporate tax rates from 30 per cent to 25 per cent as well as an accommodative monetary policy by the RBI.

Nonetheless, as mentioned earlier, interest rate reductions are not passed on as speedily to customers as rate increases.

Similarly, the reduction in corporate tax rates does not help consumers until companies pass on these benefits to them. Therefore, there is a considerable time lag before the benefits of such initiatives gradually trickle down to homebuyers.

Tenancy, REITs and more

But there is another initiative that will benefit both buyers and builders in the coming days – the proposed Model Tenancy Act, which can play a pivotal role in the rise of organised rental housing.

If implemented properly, this Act could also help attract institutional investors in rental housing.

In this connection, a report from realty consultants Knight Frank and law firm Khaitan & Co. reveals that the country has almost 11.09 million urban housing units lying vacant.

Interestingly, just 10 states and Union Territories account for 78 per cent of total vacancy levels – or 8.64 million units.

Once the tenancy law is operational, it will play a key role in institutionalising India's rental housing, which remains largely unorganised currently.

The in-depth report, 'Institutionalising the Rental Housing Market in India – 2019' analyses the Centre's Draft Model Tenancy Act, 2019.

The report affirms that introducing a legal framework for institutionalising rental housing will help in offering huge purpose-built rental stock by harmonising the landlord-tenant equation and balancing the interests of both parties.

In the long term, this can attract institutional investors, apart from individual ones who would also be interested.

It needs to be mentioned, though, that some loose ends in implementation still need to be addressed before it can create an efficient rental housing system in India.

Presently, existing laws are inimical to the interests of landlords, deterring them from renting their premises. The draft Tenancy Act envisages an independent specialised mechanism in dealing with issues of rental premises.

Another measure keenly awaited by the market is REITs (Real Estate Investment Trusts).

Through REITs, big and small investors can all invest in the realty market by holding REIT shares, which have a provision for being listed on the stock exchanges.

Unlike direct investment in realty companies that carry greater uncertainties, REITs will permit relatively safer and more rewarding investments in Indian properties via sums as small as Rs 200,000 for securing shares invested in commercial units.

All these measures only comprise some of the cogs in the real estate sector's wheels of fortune. For the sector to truly bounce back to the sunny days of some years ago, it needs an uptick in various service sectors such as healthcare, hospitality, tourism and finance, among others.

The direct and indirect demand that can be generated by such sectors can then lift-up the realty industry in a big way.

Fortunately, the Centre is making strenuous efforts to boost market liquidity in the past few months.

With the Union Budget due in February, the realty and other allied sectors will be keenly awaiting some good news that can truly lift market sentiment, signalling a proper bounce back and the steady return of homebuyers.

(The author is Director of Eros Group, a New Delhi-based realty major)