A FICCI Survey on ‘Impact of Global Financial Crisis on Indian Real Estate Market’ calls for an eight-point Action Agenda to boost Indian Real Estate and increase the flow of Foreign Capital.
The agenda pinpoints the need for the following measures and policy changes:
1.Availability of Adequate & Cheap Long Term Finance
2.Simple Legal Framework & Single Window Clearance
3.Land Reforms
4.Special Incentives for Housing Projects
5.Emphasis on Infrastructure Development
6.Check on speculation in land prices and control on end-use of land
7.Stricter laws for defaulting developers to boost confidence of consumers
8.Discourage fly by night developers and encourage developers to move to organized sector
 
Impact On Commercial Real Estate
According to the FICCI survey results, while scarcity of funds and slimming of liquidity has affected the supply side, high interest rates have dwindled the demand.
 
The corporates are postponing their expansion plans as they are expecting the prices to fall further. Instances of deferment in projects and delays in execution of ongoing projects are numerous. An increasing number of developers are now shifting focus to demand based developments as there already exists an oversupply in the market which has resulted in developers sitting on unsold stocks.
 
The IT industry is continuously experiencing a slowdown and with further fall expected, there may be further constraints on residential as well as commercial demand since IT/ITES segment accounts for 70% of the total commercial demand.
 
Therefore in the present circumstances, the commercial real estate prices are expected to go for a sharp correction in the short to medium term.
 
Impact On Residential Real Estate
A steep rise in the interest rates increased the equated monthly installment (EMI) of loans and has brought down demand of residential properties.
 
As stated by the respondents, after having reached its peak, residential real estate in India will now witness a steady down cycle for next few months. There is time and cost overrun in the existing projects while new projects are being deferred. This would eventually lead to a reduction in price in the coming four quarters and the market is expected to turn in favour of the end user.
 
The developers seem to have finally realized the need for affordable and mid range housing with emphasis on the quality of product to survive the current slow down as there is a dearth of low cost affordable units. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high end housing.
 
Buyers are waiting in anticipation for the prices to fall. Further the investors are expecting higher returns to cater to the high risk factors which in the given scenario are too much to ask for.
 
Survey Highlights
 
Indian Real Estate sector faces severe liquidity crunch in the aftermath of the financial meltdown in US.The market capitalization of 14 listed Indian real estate companies as on 3.12.07 and 3.12.08 witnessed over 80% erosion caused due to the global liquidity crisis, investors dumping real estate stocks and slump in the Indian stock market.

The second quarter (Q2) Y-O-Y net profits of few listed real estate companies have fallen very sharply. The fall is in the range of 4% in the case of DLF Ltd. to as high as 79% in the case of Parsvnath Developers.

Commercial and Residential real estate prices are expected to go for a sharp correction in the short to medium term.

Current situation calls for undertaking demand based developments and rationally pricing properties to propel sales in real estate.

Focus will shift to mid range and affordable housing with a considerable correction in prices of the existing residential projects.

Voluntary reduction of property prices are not on the cards of developers. Barring very few developers who have already reduced their prices, majority feel that their properties are rightly priced. They may cut prices by 10-15% and not beyond only if the situation doesn’t improve in next few months.
Developers to try out new strategies to revive sales, expand product portfolio and increase their cash flows. Strategies include festive discounts, freebies like stamp duty waiver, furnished spaces; free gifts to buyers, investment in new asset classes like warehousing, hospitality and logistics to ensure wider portfolio of assets for the investors, liaise with other realty firms through joint ventures and partner with co-developers to take on large scale developments.

It was felt that projects need to be highly inclusive and should contain a mix of uses that meet a wide range of customer needs (e.g. providing for an entertainment component, a restaurant and a hospital in a residential development)

Despite slowdown in real estate, majority of the real estate companies would stick to their core area of business i.e. real estate development as they are highly optimistic about the long term demand, higher returns and turnaround of the real estate sector. Big real estate players to enter affordable housing segment in a big way.

To beat the slowdown, some prominent companies are considering entering new areas like Coal Mining, Big ticket irrigation projects, Transmission lines, Telecom and Core Infrastructure projects.
Due to higher risks of investing in real estate, the real estate sector will witness lower PE deals in the next 12 months, as funds will not be easily accessible, valuations are expected to go down further and the costs are going to be very high for developers. PE will not be able to liquidate their funds at the expected rate of return and hence the deal numbers would be significantly lower as compared to the past performance.

In the current real estate market scenario, the balance of power has shifted to the investors. PE Funds will put forward their own terms and conditions like guarantees and assured rates of return. In view of higher risks due to adverse market conditions and the ongoing financial crisis, investors expect Internal Rate of Return (IRR) of above 25% from Indian real estate projects.

PE investors have changed the nature of their investments in the real estate sector as a whopping 70% of the respondents surveyed by FICCI said that PE funds would prefer to invest in specific real estate projects rather than the stocks of real estate companies. This shift is due to the fact that PE investors would like to bid on specific project where they see the potential of earnings with lesser risk.
As per the survey, the future real estate asset class preference for investors is likely to stand as follows: Rank 1 – Affordable and Mid-Income Housing, Rank 2- Commercial Office Space (Non-IT / ITES), Rank 3 – Retail, Rank 4 – Hospitality.

Some respondents have also expressed preference for investing in the new asset classes that are emerging of late, which include healthcare, education, logistics & warehousing, airport and port based business districts.
 
The following are the detailed suggestions by the respondents to the FICCI survey:
 
1.Availability of Adequate & Cheap Long Term Finance
 
–        The govt. should lower the interest rates thereby making home loan rates cheaper so as to boost demand for residential properties and make them affordable to masses
–        Allow access to ECBs for construction funds with some restrictions in terms of average maturity
–        Relax the Press Note 2 regulations in terms of the project criteria and allow smaller projects to access capital as well, which mean that smaller investments could also start coming into the country.
 
2.                   Simple Legal Framework & Single Window Clearance
 
–        Simplify the legal framework for holding land in India. Multiple state laws need to be changed, and a clean, transparent and minimalist legal framework should be adopted.
–        Real estate sector should have centralized and uniform rules & regulations rather than the current state wise rules.
–        Single window approval for projects in the minimum possible time. Delays in approval and clearances are the biggest regulatory challenge for the builders and developers. Therefore, the duration of the sanctioning process of lands and projects should be reduced
 
3.                   Land Reforms
 
–        Make the land records transparent and put them on an IT platform i.e. Computerization of land records so that the efficiency of the market can be improved and frauds can be reduced.
–        Setting up title verification agencies.
–        Release of more urban land at reasonable prices for optimum utilization of scarce urban land
 
4.                   Special Incentives for Housing Projects
 
–                                Awarding higher FSI for building integrated township projects
–                                Reducing State Government levies like VAT and high Stamp Duties
–                                Decreasing the land rates to promote construction of more affordable houses
–                                Tax benefits for the developers undertaking affordable & low cost housing projects
 
5.                   Emphasis On Infrastructure Development
 
Government should immediately take up implementation of infrastructure projects across the country. Real Estate sector has always bore the brunt of inadequate infrastructure, road / rail connectivity of peripheral areas to main urban centers. Faster implementation of infrastructure development in the outskirts of cities where new projects are supposed to come will boost demand for real estate properties and give the much required momentum to reverse the slowdown in the sector.
 
6.                   Check speculation in land prices and exercise control on end-use of land
 
7.                   Bring in stricter laws for defaulting developers to boost confidence of consumers
 
8.                   Discourage fly by night developers and encourage developers to move to organized sector, as it contributes to GDP & also help in generating direct & indirect employment.
 
According to FICCI feels that the recent interest rate cuts should have been deeper to give a massive push for affordable housing. Besides that the upper limit of the special package for home loans up to Rs 20 lakhs announced by Public Sector Banks should be increased to Rs. 30 lakhs as the present limit of Rs. 20 lakhs would benefit projects in South and East India. Housing in the price range of up to Rs. 20 lakhs are available in limited numbers. Therefore to boost the sentiments of middle income buyers and to spread the benefit cover to a larger number of property buyers, an upward revision in the loan limit should be considered. The special home loan package announced by the PSU banks must be extended to all home loan borrowers, existing as well as future borrowers within the loan limits, as the current interest rates are simply too high to be affordable.
 
Home loans under this scheme should be offered till March 2010 and not till June 30, 2009 to encourage buyers to come back to the market with greater force.
 
Private sector banks should also follow suit by cutting down interest rates on home loans significantly to benefit both existing and potential home loan customers.
 
FICCI is of the view that as the right climate for a revival of real estate sector has set in now, banks should consider lending funds to developers selectively so that existing and new projects do not face significant delays.

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