RERA will rebalance the builder-buyer equation
The year 2017 started on a rather cautious note for the domestic real estate industry. The sector had already been witnessing demand headwinds since the past few years, which got further compounded with the demonetization drive in November 2016, leading to negative consumer sentiments as prospective buyers deferred purchase decisions in the expectation of sharp correction in housing prices. It took some time for customer confidence on the pricing stability to build up, thereby negatively impacting sales during this period. Just as the impact of demonetization was seen to be receding by the middle of 2017, the Real Estate Regulation and Development Act (RERA) with full provisions was implemented from 1 May 2017, and subsequently the Goods and Service Tax (GST) became applicable from 1 July 2017, resulting in the buyers continuing to adopt a wait and watch approach. This further curtailed sales volumes of the developers.
Introduced with the intent of bringing in more transparency in the sector and rebalancing the lopsided builder-buyer relationship, RERA has been a ray of hope for the buyers facing delivery delays and developer apathy as it offers them a level playing field. While delay in its implementation by many states and uncertainties around the rules has led to deferment of project launches since May 2017; on-going projects too haven’t been an exception pending their registration under RERA as in this case, too, the customers preferred to remain on cautious mode. Thus, even though RERA and GST are expected to be long-term positive developments for the organised real estate sector, the transition process had seen some negative impact on sales volumes.
It is being seen and the trends too point towards buyer preference for finished inventory in 2017. However, contrary to buyers expectation, the prices of real estate have not witnessed any significant correction that could have led to revival in demand with prices static at elevated levels. As a result, 2017 saw muted demand from the buyers, despite the decline in interest rates and various efforts by the developers to push demand.
Looking ahead in 2018, the real estate industry is expected to consolidate and stabilise as both buyers and developers get accustomed to the new regulatory framework. With the impact of demonetization subsiding and clarity on GST implementation emerging to a large extent, RERA will have a sustained impact on the way the industry operates. While there are adequate provisions to protect customers, implementation of the same in letter and spirit will be essential to build back the confidence of the consumers in the real estate sector.
New project launches are likely to be limited in the backdrop of a demand-supply mismatch. The focus will be more on execution and liquidation of existing stock, and buyers can expect a further push by developers to bring back demand. This is already visible with the value of sales for the last three quarters of FY18 rising while a concurrent rise in collection is not visible. This indicates that developers are resorting to marketing schemes like possession-linked plans and subvention schemes to push sales. While prices are expected to remain stable, customers can expect to draw additional benefits like complimentary parking space, free club membership, zero first-year maintenance charge among other benefits to improve the value proposition of their purchase. However, for the industry, to have revival prospects and be on a stronger footing, an overall sustained improvement in sales volumes from the current levels would be essential. This will also help new supply additions to revert to earlier levels.
Regarding affordable housing, the segment has largely been under-served so far despite strong latent demand due of various reasons such as the focus of organized developers on the mid-market and premium segments, high prices and weak affordability among the target segment. This segment has, however, witnessed noteworthy action in 2017. In order to address challenges in this segment, the government has provided the right focus on this by granting it ‘infrastructure status’ and by expanding various benefits to both customers and developers in this segment. The incentives to developers include income-tax exemptions on profits from affordable housing projects and subsidy under the affordable housing partnership scheme. The benefits for customers include additional income tax exemptions and one-time credit linked subsidy for housing loans taken for affordable housing projects. This segment is expected to grow with continued support and so will the supply to cater to the inherent demand.
The implementation of RERA without doubt is a right step in regulating and developing the industry since despite various teething issues reported by consumers with respect to its implementation by the states, the new rules provide a strong consumer-friendly framework which can boost buyers’ sentiments and assuage concerns regarding project delays and fund diversions. However, it remains to be seen how effectively the states implement the rules to protect customer rights. If the provisions are not implemented in letter and spirit, it may dilute the effectiveness, thereby maintaining status quo. Moreover, with an extended pause for the policy rates, no material reduction in rates is likely over the near to medium term.
On a more positive note, buyers can expect 2018 to be a year of consolidation and stabilisation with higher supply in the affordable housing segment likely to increase and address affordability concerns. Developers, on the other hand, may continue to push sales through various marketing schemes like possession-linked plans and subvention, in the absence of any meaningful decline in house prices.
Shubham Jain is vice-president and sector head-corporate ratings, ICRA Ltd