'$1.37bn pumped into real estate in smaller cities in 2015-18'

'In the absence of direct bank or NBFC funding, builders are unable to complete the stuck projects leading to a pile of approximately 5.75 lakh units stuck/delayed in top cities.'

The fact that housing units worth a whopping Rs 4.5 lakh crore in top seven cities are stuck under various stages of non-completion indicates that there is a dire need to create stress-asset fund which will help bail out lakhs of distressed homebuyers,' says Anuj Puri, chairman, Anarock Property Consultants, a real estate services company.

According to research by Anarock, the overall unsold stock in India's top cities together have reached nearly 6.57 lakh, of which nearly 37 per cent belongs to the affordable category -- the highest among all budget segments.

"The major reason why there is ample unsold stock in the affordable category is because the number of new launches has been significant in this budget range over the last few years," says Puri in an interview with Rediff.com's Prasanna D Zore.

Among other things, Puri says that the private equity investors are still bullish on the real estate sector, especially commercial, but non-banking finance companies and housing finance companies "have literally frozen their funding (to the real estate sector) since IL&FS default and RBI's continuous tightening of the norms."

What kind of broad trends -- in terms of new projects, inventory, and demand vs supply for housing and commercial sector -- are we witnessing in the real estate sector since the last two/three/five years? 

Significant trends in residential and commercial realty over the last 4-5 years are:

Residential

• Affordable Housing - blue-eyed boy of Indian residential: Following government's push over the last five years -- in line with its vision to provide Housing for All by 2022 -- there has been significant increase in activity in this segment. Above all, it has raised the stature of the segment from 'down market' to 'respectable', and even patriotic, via various sops, incentives and schemes.
• Branded players take centrestage: Post structural reforms like DeMo, RERA & GST, branded players are gaining ground in Indian residential space. As per Anarock Research, of the total new supply in H1 2019 (approx 1,39,480 units) across the top 7 cities, nearly 53 per cent (approx 73,925 units) were launched by branded developers and remaining by non-branded entities. In contrast, in H1 2016 -- before DeMo and RERA -- non-branded players comprised a whopping 60 per cent share of the overall new launches.
• Shrinking apartment sizes: Call it the preference of the new-age millennials or the developers' aim to make properties more 'affordable' for most, the top seven cities collectively saw the average apartment sizes shrink by over 17 per cent between H1 2014 and H1 2019 due to rise in demand for affordable units.
• Big players eye 'Affordable' segment: Most top-branded developers have moved beyond their previously unwavering focus on luxury or ultra-luxury housing and now include the affordable and mid segments in their portfolios. Puravankara's affordable luxury brand Provident Housing increased its new supply in Q4 2018 jump to 10.59 mn sq. ft. as against 6.63 mn sq. ft. a year ago. Meanwhile, its premium offerings under Puravankara brand saw a 5 per cent decline over the same period. 
• Ready-to-move-in properties have maximum buyer interest, with Anarock's Consumer Survey indicating that 36 per cent property seekers are intent on buying RTM homes.

Commercial

• High demand & supply for Grade A office space: In terms of market traction, commercial real estate is the most buoyant sector in last 4-5 years across major cities. Demand for Grade A office space is seeing new highs and vacancy levels declining in prime locales.
• Co-working -- the new poster boy: While IT/ITeS sectors continued to dominate commercial realty, there is continued expansion of co-working spaces. As such, co-working space witnessed 23 per cent growth in office space take-up in Q2 2019 over the preceding quarter. Collectively in H1 2019, of the total 28 mn office space absorption in top seven cities, almost 5 mn sq. ft. of flexible workspaces were leased across top cities.
• Commercial realty more attractive for institutional investors: Private equity investors have been steadily drifting away from the residential sector and are increasingly focused on commercial office segment. For instance, in H1 2019, commercial real estate received 65 per cent inflows, amounting over US $1.4 bn while residential sector saw merely US $270 mn inflows. Back in 2015, inflows in commercial were merely US $905 mn throughout the year.

Why are the PEs and NBFCs reducing their exposure to the real estate sector in India?

PEs are still bullish on Indian real estate (particularly commercial) while NBFCs/HFCs have literally frozen their funding since IL&FS default and RBI's continuous tightening of the norms thereafter. That said, unlike earlier, PE players are now doing their due diligence before giving out funds.

Of the total funding received by the realty sector in H1 2019, private equity inflows equalled over US $2.1 bn while remaining US $140 mn was by the NBFCs/HFCs. PE funding last year stood at approx US $2.6 bn. The slight decline was largely due to the general elections which were already predicted to cast a shadow on the funding scene in Indian real estate.

Alternately, if we compare to H1 2018, funding from NBFCs/HFCs this year has seen 73 per cent decline -- from US $520 mn in H1 2018 to US $140 mn in H1 2019.

What impact is the turmoil in the NBFC sector having on the financing of homes given that many NBFCs that financed home loans aggressively are facing serious financial problems?

The liquidity crisis is one of the major pain points of the realty sector as of now because of which several projects are stuck or delayed across the top cities. In the absence of direct bank or NBFC funding, builders are unable to complete the stuck projects leading to a pile of approximately 5.75 lakh units stuck/delayed in top cities.

With RBI further tightening the noose around the NBFCs, they are reluctant to lend to developers. If we look at the overall NBFC sector then those with strong corporate background are doing quite well while those NBFCs with high exposure to real estate are facing major issues including DHFL, Edelweiss, Indiabulls Housing Finance, etc.

What government measures could help the real estate sector come out of the turmoil/slowdown it is facing right now?

Demand to create stress-asset fund has been put before the government previously also because the sector has been reeling under one of its worst liquidity crisis -- further aggravated by the NBFC crisis in 2018.

The fact that nearly 5.75 lakh housing units worth a whopping Rs 4.5 lakh crore in top seven cities are stuck under various stages of non-completion indicates that there is a dire need to create stress-asset fund which will help bail out lakhs of distressed homebuyers.

What boost could the sops given to the affordable housing sector in the Union Budget offer to the segment?

Affordable housing got a shot in the arm in the Union Budget as the government announced major tax benefits to help stimulate demand in the segment. Interest deduction up to Rs 3.5 lakh on housing loan for affordable housing (priced < Rs 45 lakh) taken until March 31, 2020 will help attract first-time homebuyers.

Further, nearly 1.95 crore houses are proposed to be provided to eligible beneficiaries under Pradhan Mantri Awas Yojana -- Grameen between FY20 to FY22. The finance minister underscored that the completion of houses that previously required 314 days/house in 2015-16 has come down to 114 days since 2017. If so, the target of Housing for All certainly looks a bit more achievable.

How many affordable housing units have been sold from the time the affordable housing scheme was launched till date and what was the average price of these units? 

As per Anarock Research, the total absorption of homes in the affordable category between 2013 to 2018 was over 5.95 lakh units across the top seven cities. NCR, MMR, and Pune accounted for the top three active markets in terms of both supply and absorption.

Could you tell us about the number of new projects launched across India juxtaposed with unsold inventory numbers to give our readers a sense of the demand supply matrix that currently exists in the sector? 

Since 2014 till date, about 6,57,000 units have been launched in the affordable segment across the top seven cities (Bangalore, Chennai, Hyderabad, Kolkata, Pune, MMR, and NCR). MMR saw maximum supply in this category, followed by Delhi NCR, Kolkata, and Bangalore. 

In terms of the overall unsold stock, top cities together have nearly 6.57 lakh unsold units of which nearly 37 per cent belongs to the affordable category -- the highest among all budget segments. The major reason why there is ample unsold stock in the affordable category is because the number of new launches has been significant in this budget range over the last few years.

Which Tier 1, Tier 2 cities and towns in India are offering the best value-for-money housing today?

Among the top cities, Bangalore, Chennai, Hyderabad, and Pune are viable options for investments as property prices are relatively lower than other metros and commercial activity is also significantly high here.

Further, today, real estate investments are no longer restricted to metropolitan cities. Our latest Consumer Sentiment Survey revealed that about 26 per cent of respondents prefer to invest in Tier 2 cities. Affordability is one of the major reasons catalysing the demand in these cities. Interestingly, nearly US $1.37 bn was also pumped into real estate markets across various smaller cities between 2015-2018.

Top cities on the radar include:

Lucknow: Riding high on development of various infra projects and the burgeoning medical tourism over the last few years, the 'City of Nawabs' has emerged as one of the major Tier 2 realty hotspot in the country. Several locals who migrated to Tier 1 cities for better job prospects are also showing keenness in investing in their hometown as property prices here are much more affordable than their city of work.

Bhubaneshwar: As per RBI's Residential Asset Price Monitoring Survey (RAPMS), Bhubaneswar outperformed all the other cities in terms of affordability. The city has the lowest median HPTI ratio of 54.3, which means buying a home in the city would be close to 54 times the monthly salary of the individuals.

Ahmedabad is another promising market. Besides other factors, infrastructure upgrades have been at the forefront including the Outer Ring Road, BRTS, and metro rail projects. GIFT City is another important factor catalysing the growth of Ahmedabad's real estate market.

Indore: A prominent education hub, Indore is a fast-developing city in Central India. Interestingly, about 1 per cent of the influence area of Delhi-Mumbai Industrial Corridor (DMIC) passes through Madhya Pradesh, covering cities like Neemuch, Mandsaur, Ratlam, Dhar and Jhabua, which are close to Indore. Additionally, the presence of IT majors like TCS and Infosys on the Super Corridor has given a significant fillip to the realty quotient of Indore.

Chandigarh: The first planned city in India after independence, Chandigarh boasts of several factors that have made it popular among homebuyers. These include sound infrastructure, good connectivity to Delhi, and ample healthcare facilities.

Give us a sense of NRI demand that is coming to India to take advantage of the tepid demand in the real estate sector.

Residential slowdown in Indian real estate since the reformatory changes prompted several NRIs to wait-and-watch or look elsewhere for making investments. But now, as evident in Anarock's latest study, NRIs are finally coming forward to use the erstwhile slowdown period in India's luxury residential market to their benefit. Stagnant prices and best-buy deals have lured them to buy luxury homes in the city of their preference, invariably leading to a decline of 12 per cent in its overall unsold stock in one year.

One major trend witnessed during this period is that NRIs looking to buy luxury properties are mostly buying it for self-use purpose. Alternately, those looking to invest in Indian realty market are also considering other lucrative categories such as affordable and mid segments within residential or even alternate asset classes such as commercial.

Given the general slowdown in the Indian economy, would you advice the youth today to buy homes or prefer staying on rent?

The buy vs rent is a debate that has never reached a solid conclusion. After all, both have their own benefits.

Certainty and security are things that we all seek. Buying your own home gives that in plenty and it's emotionally rewarding too as it provides a sense of rootedness. It also allows personalisation. Besides getting to own an asset, you also get to claim benefits on income tax.

The principal repayment of your home loan is eligible for deduction under Section 80C. Lastly, owning a house can be set for a reverse mortgage during your golden years, making for a much-needed source of income.

Talking about renting, it comes with greater flexibility, HRA benefits, and less expenditure on maintenance. All said and done, both have their benefits, and there is no clear winner.

The decision is very personal, and it ultimately depends on your personal preferences and lifestyle. However, before deciding anything, take stock of your finances, debt-income ratio, and need vs want of owning a home, for investments are not done in a jiffy.