Saturday, 2 April 2016

10 reasons that will fuel homebuying

Though the full implementation of Real Estate Regulation & Development Act 2016, may still be months away, yet RERA that  protects and empowers homebuyers, making the entire home buying process fair and transparent, aided by other key reforms, has already turned homebuyers’ sentiment and market perception positive. Here are 10 factors that will give the much needed boost to residential real estate.

1 More disposable income
Over the past two years, one major reason for homebuyers taking a back seat, has been the worsening job market, drop in disposable income and uncertainty over paying capacity  in view of high EMIs. But there are promising times ahead, especially with the hiring activity growing by 10 per cent last year and there were salary hikes of 10-12 per cent. According to, this year’s outlook promises pay hikes in the range of 10-30 percent. The Seventh Pay Commission announced by the Centre is set to trigger a substantial hike in salaries, thereby pushing up disposable income. The salary hike of government employees will have a positive rub off on the pay packet of private sector employees. Although, the IT limit has not been hiked in this year’s budget, yet hike in HRA limit of standard deduction of Rs 24,000 p.a for not availing HRA, will also push up disposable income.

2 Softening of interest rates
High interest rates have also been proving to be a dampner for housing for quite some time. But from this year onwards, things are likely to change for better, with interest rates set to drop to single digit level. Lending rate cuts hold the key to the recovery of residential real estate. After the Finance Ministry cut the FY '17 fiscal deficit target by 40 bps to 3.5 per cent of GDP and with economy in deflationary mode, RBI may well announce 25- 50 bps rate cut in its April policy review. All this is expected to provide relief to prospective homebuyers by way of lower EMIs. Some developers have already come up with schemes like no EMi till possession, low EMIs for first few years and  zero per cent interest on loan to lessen the EMI burden of home loan seekers.

3 Three cheers for consumer protection
Lack of consumer protection and large-scale delivery defaults due to slowdown had badly hit the buyer sentiment. But  the passage of Real Estate Regulation & Development Bill 2016, aimed at empowering and protecting the real estate consumers through measures like escrow account for real estate projects and early resolution of disputes, while at the same time reining in the errant developers with stiff penalties, will restore the confidence of home buyers, thereby triggering home sales.

4 More liquidity for developers
The ongoing real estate slowdown, especially in the residential sector, got precipitated in the past with the severe liquidity crisis faced by the developers. However, with speedy reforms undertaken by the government, floundering funding environment is looking up. Due to relaxation in FDI norms over the past two years, the entire real estate stock is now accessible to foreign investors.This is already having a positive impact on the liquidity front, with substantial increase in  FDI in real estate. Even the PE investment touched Rs 14,974 crore last year, clocking a record growth of 33 per cent.
Industry players expect PE players notching up a bumper 2016, with more and larger deals. On the domestic front too, things are looking up with Kotak Realty Fund raising $ 250 million, Indiabulls Real Estate Fund raising Rs 500 crore and JLL India arm set to raise Rs 120 crore by April. The liquidity environment will further look up with RERA set to open the doors for cheaper bank funding. The abolition of Dividend Distribution Tax on REITs in 2016 budget will provide access to new source of funding.

5 Focus on execution to increase
The failure of real estate developers to execute projects on time, jeopardising the investment of homebuyers, was a prime reason for the slump in real estate market. But going forward, the increased capital inflow through PE and NBFCs will strengthen the execution capability of developers. Piramal has offered Rs 15,000 crore of open credit line to sekect builders. Moreover, large firms are entering the scene as development managers for stressed developers in return for a share of revenue and profits. RERA will further improve execution as it envisages strict deadlines for completion of projects and higher penalty for defaulters. Moreover, with RERA set to be implemented in states in the next few months, builders will rush to complete pending projects to avoid stringent provisions of the RERA Bill.

6 Deals, discounts and freebies
Because of the weak home sales due to recession, developers desperate to push up sales, have been offering attractive deals to prospective home buyers. These deals are in the form of discounts and freebies like cars, air conditioners, modular kitchens, besides waiving off registration, club and parking charges. They have also been offering newly launched  residential properties at reduced price. But all this could not boost the confidence of investors and home buyers  to invest. But in the present scenario, when these deals come with the financial protection through RERA, the trust deficit of buyers, will get bridged and they will get encouraged to invest in residential real estate.

7 Increasing affordability
The ongoing reforms coupled with budgetary policy initiatives like 100 per cent service tax exemption for affordable homes, additional yearly rebate of Rs 50,000 on housing loan interest for first-time homebuyers in the affordable segment have significantly contributed towards strengthening the affordability of home buyers. And going forward, the increased disposable income through salary hikes, together with lower interest rates, will strengthen the affordability for homebuyers.

8 Policy push to housing sector
In line with its aim of providing ‘Housing for All by 2022’, this reform- oriented government through its policy prescription, is giving a forward thrust to the housing sector. Already housing for weaker sections and slum redevelopment has been brought under CSR to give impetus to the supply of affordable housing. Promotion of affordable housing for EWS through credit-linked subsidy and promotion of housing for urban poor is also being given a push. The government has cleared a Rs 82,000 crore plan for rural housing under which three  crore homes are to be built by 2022. In order to boost rental demand for affordable housing, the budget has hiked the limit of deduction for rent paid under section 80GG of IT Act.

9 Fear of price rise
Residential property prices have stayed muted over the past 6-7 quarters because of weak sales and large unsold inventory. According to Credai prices have come down by 15-20 per cent during this slowdown period and there is no scope for further reduction in prices. But now this depressing scenario  is set to change with RERA providing consumer protection and boosting homebuyers’ sentiment, in turn providing much needed momentum to home sales. And as sales pick up and inventories go down, prices are bound to firm up. According to a latest Knight Frank report, ‘Residential Investment Advisory Report 2016’, about a dozen investment locations across six top cities of Mumbai Metropolitan Region, NCR, Bengaluru, Chennai, Hyderabad and Pune, will witness price appreciation over the next 5 years. RBI says that price increase is already happening in 10 major cities.

10 An attractive asset class
Due to prolonged slowdown in the sector resulting in depressed prices, the interest of end users and investors had dwindled during the past over two years. It got  partly shifted to financial assets. But now a number of recent developments have once again put real estate back on the radar of end-users and investors. The volatile stock market and lowering of interest rates has taken the sheen off the attractiveness of stocks, mutual funds or FDs. The revival of real estate market with commercial realty and now followed by residential realty ( particularly after RERA), has increased the attractiveness of the asset class, especially as the prices are on an upward swing. According to Stuart Roberts, CEO, Asia Pacific, Cushman & Wakefield, with a number of reform measures Indian real estate is on the radar of international investors.

Credit : Vinod Behl