The year 2014 has been quite fruitful for the real estate sector in terms of business sentiment, although the real effect of many of the policies and amendments announced in 2014 will be felt only in 2015. Starting with the Union Budget FY14-15, from affordable housing being considered on par with infrastructure to relaxation of rigidities in the Land Acquisition and Real Estate Regulatory Bill, India’s new Prime Minister has been offering the real estate sector in India consistent doses of energy.

The winds of change are now blowing more perceptibly. Inflation, including the house price component, has reduced to the lowest level in recallable history. Property buyers are back in force in most cities as enquiries have rebounded and developers are finally reading the writing on the wall more accurately and coming in with the kind of supply that is relevant to demand.

Meanwhile, multinationals that were hesitant to foray into the Indian market because of the uninspiring political environment are now pulling back the files on their plans for India and getting their entry vehicles in gear. Going by the recent reports of recruitment agencies, many more jobs will be created in 2015—especially in the IT/ITeS, manufacturing and services sectors—and demand for homes will increase visibly. Additionally, REITs are hitting the market at long last, and only a few details need to be sorted out before they get the funding wheels spinning.

2015 will definitely be a good year for the real estate sector on three counts:

• The threat of inflation has completely submerged and borrowing rates are sure to go down from the current levels. This will encourage potential buyers planning to avail home loans to finally take the plunge. Also, with property prices staying stable and good deals being offered by developers in order to clear their inventory, fence-sitters will be further encouraged to press the ‘buy’ button.
• Economic activity is gradually picking up, and the Central Bank anticipates GDP growth to reach 6.5% year-on-year in the next financial year (FY15-16). Corporate India has already made it clear that there will be more hiring of talent to help tackle rising business activity. Put together, this means a rise in jobs and incomes, which in turn is favourable for both residential and commercial real estate.
• The market has witnessed a re-orientation and developers are now largely focusing on affordable homes. This will go a long way, though definitely not all the way, in bridging the existing wide gap between demand and supply of affordable homes.

Residential Real Estate

In 2014, new launches of residential units fell consistently every quarter as a consequence of subdued demand and high prices. While this was largely the case with high-end projects, the affordable housing segment began to gain favour. This segment was firmly lodged under the priority schemes of the government and central bank, and buyers found comfort in investing in such projects given the smaller ticket sizes and improving connectivity in the suburbs of major cities.

In the second half of 2014, many large developers, who in the recent past concentrated on the mid- to high-end segment due to better margins, were seen eager to play the volumes game and entering into affordable-segment projects in the deeper suburbs. This heartening trend lay the founding stone for bridging the wedge between demand and supply in the major metropolitan cities. Since developers are sitting on close to 30 months of unsold inventory in the mid- to high-end segment, we also saw an increase in cash flows because of this new focus.

In 2015, developers will become more earnest about right-sizing and right-pricing their offerings. Smaller, yet better-designed and more efficient homes will define the residential real estate market in 2015, and selective corrections in some of the over-priced cities will help bring about faster sales for stagnated supply of larger configurations. Townships will become more prevalent and the supply of luxury homes will moderate to align with the slow demand dynamics for these offerings.

Pricing Trends

A large portion of the total unsold residential inventory is still under-construction while completed projects have only moderate vacancy. Home buyers looking for ready-possession property will therefore find limited room for negotiations compared with buyers who can wait for some time to get possession. The attractive schemes that were doled out by developers in under-construction projects during the festive season of 2014 are likely to continue into 2015.

The new year will see home buyers benefiting from reduced borrowing rates, increased developer-focus on affordable homes, largely stable prices, and better job and income prospects.

Affordable Housing

Affordable housing will clearly be the flavour of the season in 2015. While the ruling government at the Centre and the central bank have clearly spelt out their intention to push for affordable housing, it is the state governments that will need to implement. The recently concluded elections indicate that better governance, planning and good implementation are factors on which performance will be evaluated, and affordable housing is an important yardstick for sure.

While affordability is a subjective term that assumes different meanings in different markets of India, every city has its own affordability threshold and benchmark. Developers active in each of the primary cities are now fully aware that they must address the demand for affordable housing in their cities and stop focusing excessively on high-end and luxury offerings.

Affordable housing is in itself not a difficult format to deliver; the challenging part for many developers will be to align this format with their existing brand image without impacting it. Quite a few prominent developers already have a budget housing strategy, but they have evolved this strategy over time and ensured that the creation of such projects becomes a natural extension of their brands. For the newer entrants who have focused exclusively on higher-end housing, the process will begin now—and for all but the die-hard firms that will not budge from their ‘creamy layer’ orientation, the process is unavoidable.

Coming anywhere close to negating the affordable housing gap altogether would take about two decades of focussed supply – and going by previous market learning, it is unlikely that developers will retain their current focus on affordable housing once the economy picks up sufficiently to make higher-end housing desirable once again. However, as long as the current momentum and orientation prevails, we will at least see some good headway being made on this front in 2015.

Real Estate Capital Markets

Year 2014 saw gradual growth in demand for Indian real estate, particularly after the general elections in May. Concurrently, fund raising activities picked up, and this momentum will continue in 2015 as well. We will see less of one-way investments and more partnerships between investors, developers and other land owners. Joint venture and club funding will become the preferred mode as 2015 progresses. With improvement in the economic situation, Pune, Chennai, Hyderabad and Kolkata will start attracting sizeable investments alongside the top-three metros of Mumbai, NCR and Bangalore.

This will be a notable change from dynamics seen in the past, wherein only these three cities ruled the roost. In fact, we will see Grade A commercial properties in tier-2 and tier-3 cities appear on the radar of investors, though a full focus on these opportunities will probably not take place in 2015.

Attractively-placed office assets and high-demand residential categories, especially well-located mid-income projects, will continue seeing considerable investments in 2015. While investors may continue to show limited interest in retail real estate, we will see increased interest in the hospitality sector compared with the previous year.

REITs got a green signal from the government in 2014, and this will help ease the pressure on the balance sheets of cash-starved developers. However, the listing of new REITs will be slow and steady. While REITs will succeed over the longer term, they need to pass through the challenging phase over the next two years.