What Did 2017 Mean For Real Estate Developers, Brokers?
The year going by has been a mixed bag for real estate developers and brokers. The rising unsold inventory has been the biggest challenge staring in the eye of the developers and consequently the brokers too. After the rude shock of demonetisation in November 2016, the industry was trying to recover from the setback, when other short-notice policies further slowed down the pace of sales in almost all the cities. Even cheaper home loans could not push homebuyers to make a purchase. Let us take a look at what characterised 2017 and how real estate agents took to it:
The triple tsunami
The prominent developers have identified the trio – the Real Estate (Regulation and Development) Act, 2016, Goods and Services Tax (GST) and Bankruptcy and Insolvency Code as the 'triple tsunami' that caused a turmoil within the real estate sector. Not only did it leave the industry and stakeholders struggling amid the slump, it also caused confusion over deadlines, compliances and encumbrances. One can say that developers did get a breather after the real estate law came into force in June this year. However, the states took a lot of time to frame state-specific draft rules, get the approvals and then set up the state regulatory authorities. In the meantime, developers struggled to divide their attention between their unsold inventory and compliances.
How did this affect brokers? Well, brokers were hard-hit, being the intermediaries in the sales. No beeline for property meant that brokers too had to sit back and reassess their business strategies. Further, RERA made it mandatory for every practicing real estate agent to register with the authority. Not just were registrations delayed, it led to a lot of them doling out heavy amount for such registrations. Furthermore, RERA mandates them to renew their registrations within a stipulated period of time. The rules of the game were long and convoluted and it made brokers sit back and study amidst the slump.
The GST left most developers in the lurch. Introduced as a taxation reform, GST, did address a lot of pain points. However, along came confusions, clarifications for which were being sought throughout the year. And, before the year came to an end, an anti-profiteering board was set up by the Centre. This certainly is the right step forward, however, it will not be instrumental in bringing down the property prices. Brokers, again were similarly affected. There was a pick-up in terms of sales but the slowdown cannot be dismissed. Not just developers, brokers too needed to study the impact of GST on their business, dealings and revenue.
However, the good part is that the developers are now rid of the multiple taxation – on various construction materials they purchased, the developer paid customs duty, central sales tax, excise duty, entry tax, etc. – creating various instances of multiple taxation. The cumulative burden of which was then passed on to the buyer. With input tax credit, a developer's profit margin can improve although construction materials have not seen a major change in tax rate. As a result, brokers too could hope for a good time for their business as the impact of this tax reform takes shape.
What does the industry think about these wave of policy announcements?
Despite the issues, the real estate law did bring in some positivity among the developers. When the Bombay High Court recently upheld the constitutional validity of the RERA, Aniket Haware, MD, Haware Builders, said, “RERA is a blessing for the real estate sector as there was a need for regulations to protect homebuyers' interests. The Act, among other things, mandates that all developers or promoters register themselves under a state level regulatory authority so only genuine builders who plan the entire project from start till the end strategically and in an ethical manner will survive in the market. Great decision by HC for the developers who fail to complete their project due to natural disaster or floods will get a leeway of maximum one year but it also depends on case to case basis. Buyers can claim compensation for delay in possession and imposition of severe penalties in case the developer fails to complete the project within the specified deadline.”
However, there were some objections, too. For instance, Surendra Hiranandani, CMD, House of Hiranandani says, “The implementation of GST and the real estate law, too, within a short span, without having adequate infrastructure in place, has actually contributed more to the economic weakness that we are witnessing currently. To put things in perspective in the last one year we have lost five to six months owing to the disruptions caused by the implementation of policies within a short span of each other without having a proper framework in place. Owing to lack of holistic approach, the end cost to consumers will continue to rise, posing a severe challenge to the affordable sector.”
“The government must look at addressing the shortcomings plaguing the real estate sector at the earliest if it wants to ensure success of its housing policies,” he adds.
What did brokers have to say?
Amit Wadhwani, director, Sai Estate Consultants says that 2017 will be remembered in history as one of the most challenging years for developers as they survived GST, demonetisation and RERA. The SME developers were the worst hit in tier II and tier III cities. Prices are expected to remain stable in 2018 as the real estate community expects more clarity on RERA reforms and GST, although unsold inventory in luxury segment might not recover suddenly in 2018. While the real estate sector is gradually progressing, the consumers expect seeing green buildings, smart cities, affordable housing schemes under PMAY and increased carpet area in 2018. Overall, vacancy levels for commercial property have changed little through 2017 at around 14 per cent pan-India and will hover at about 15 percent during 2018. Rental appreciation is expected in prominent office corridors of Bengaluru, Gurgaon, Hyderabad and Pune in 2018. In the GST era, warehousing and smart cities have emerged as an attractive asset class for global investors and private equity players. A green revolution in real estate is expected in 2018 with green buildings, usage of green materials and waste management techniques as real estate buildings contribute to 46 per cent of carbon footprint and government wants to adhere to the targets set by the Paris agreement in reducing them.
Not that consolidations are new in the sector, but, with every passing year, the number of joint ventures (JV) and joint developments (JD) are going up. Over the last few quarters, many developers headed for development partners. For example, Ace Developers (NCR), Vihang Group (Mumbai) and Lotus Green (NCR) tied up with Godrej Properties; Neptune Group (Mumbai) and Lotus Green (NCR) partnered with Tata Realty while Omkar Group (Mumbai) tied up with Shapoorji Pallonji Real Estate. IREO (NCR) tied up with Hines and Eros Group (NCR) opted for Bharti Realty as a development partner. Logix Group (NCR) went for ATS Builders, BU Bhandari Builders (Pune) opted for Prestige Group. Rohan Lifespaces (Mumbai) went for Radius Developers. These are just to name a few.
Consolidations mean brokers would need to stand on their toes to prove their merit but it wouldn't harm their existence in anyway. Much of the impact of consolidations on brokers would be visible only in the next year.
PE investments: Gateway to FDI
A developer's funding needs to be strong especially after the real estate law coming into force. The law is all set to ascertain that developers have and maintain the funds received for a certain project and use it for that project's development. Any diversion would be scrutinised and penalised. Therefore, developers would need to identify their source of funds. Private equity funds (PE) are increasingly becoming popular. Between 2008 and 2016, PE investments jumped manifold. In 2010, for instance, bank lending was a major source of developer's funding. It constituted about 60 per cent of their finance for the construction of a project. By the end of 2016 and 2017, PE investments constitute about 70 per cent of the funding source while banks provide a little over 20 per cent.
The Foreign Direct Investment (FDI) has declined over the years given that offshore investors to deploy their funds through debt or structured-debt routes which were not a part of the FDI inflow.
Increased expenditure on compliances
While homebuyers may be worrying about property prices, developers have had to worry about stock supply and absorption and conducive product pricing. Not just that 2017 paved way for numerous expenditures such as compliance cost to keep up with the real estate law as also GST.
For instance, project management has become inevitable and harder. Shubika Bilkha, Business Head, The Real Estate Management Institute, says, “With collections by way of advance bookings drying up under the new regime, developers have exhibited a concern with respect to managing their business cash flows. For a number of real estate companies, this stipulation requires a restructure of their current operating processes and perhaps a change in marketing and sales strategy. Project management has now become an essential aspect of the development process to allow developers to outline the scope of the project, determine the timeline for delivery with the associated cost for effective cash flow management, ensure optimal management of vendors and quality control in the procurement and construction process.”
Besides, there is increased need to hire the services of lawyers and chartered accountants to study and interpret the law for specific real estate businesses. Developers also need to set aside an emergency fund that would help them to pay for penalties for delayed registration with the RERA, defaults in delivery if any or any such unforeseen circumstances.
As brokers spent on RERA registrations, another challenge for them was to pitch homes that would now be a little pricier owing to compliance costs of developers. Nevertheless, quality is what buyers are ready to pay for. In 2017, RERA and GST's impact on prices was not visible and brokers had enough time to map their strategies for the future in 2018.
A thrust to affordable housing
Many developers came forward to contribute in the affordable housing segment, after the segment was given an infrastructure status and tax benefits were announced. However, it became a tough call for many developers because they did not see ample benefits to willingly come forward. The Pradhan Mantri Awaas Yojana (PMAY) depends a lot on private developers but the government's share of funding that is Rs 1.50 lakh per unit is not sufficient. Incentives in the form of working capital loans or more land should have been provided to make it a promising ground for the private developers. Needless to say, former urban development minister, Venkaiah Naidu had to promote the private sector to come forward and show some interest in developing affordable homes.
For brokers, affordable homes are easier to pitch given that a majority of homebuyers are hunting for affordability. Luxury homes took a backseat in 2017 as the Centre pushed the cause of affordable vigorously. Again, brokers could only wait to see developers willingly taking up such project constructions that would see homebuyers lining up.
Focus is on one
With Jaypee Infratech being declared bankrupt, the mantra of investing in a reputed developer to buy a home has somewhat been tarnished. The impact of such scrutiny would surface fully in 2018. However, with the real estate law, slump in real estate and the bankruptcy code, developers have had to focus their attention on a narrow belt of projects rather than simultaneous launches.
The impact of bankruptcy also pressurises brokers. When the reputed brands compromised on their repute, brokers operating in this market had a hard time keeping their wits together. Even those who were working with other developers found it difficult to point out the USP unless it was a ready-possession homes. Of late, ready-to-move homes have been the centre of opportunity for most real estate brokers to leverage their businesses.
In a sector that is going through a slowdown, 2017 saw developer working on their marketing and advertising strategies. More and more developers are creating their social profiles and letting homebuyers know what makes them unique and also, connect with them one-on-one.
Brokers are not far behind. In 2017, practicing brokers took a step forward to list properties on leading real estate portals, came up with their own website, blogged, networked for further visibility. It also rendered an organised image. This could take place only because reforms, fence-sitters and the slump gave some window space to all stakeholders to sit back and chalk the route in 2018. Brokers have joined the digital league just like in the developed countries but organised brokers continued to steal the pie in terms of credibility.
Digital media is being widely recognised as the best way to get lead generation.
The year 2017 has been a roller-coaster ride for all stakeholders but it did discipline a lot of them with stringent rules and penalties for violations. Industry experts believe that 2018 would be an interesting year with sales picking up in the few months from now.