Residential realty likely to witness weak sales, commercial & retail segment to record stable growth in 2017: Care Ratings

Highlights:

1. The residential real estate sector is likely to witness low sales in  2017 on back of buyers waiting for more interest rate cut from the Reserve Bank of India (RBI), deferral of house buying decision among IT professionals due to global slowdown

2. The sales and leasing of the commercial real estate is likely to record stable growth during the year and the investment into the segment will remain strong during the year 

3. Retail real estate market will see a sizeable addition of retail spaces, the highest post 2011 and  there would be surplus space with developers at the end of 2017

As the Government of India gets ready to implement the RERA act in March this year, the country's residential realty market is projected to witness weak sales while commercial and retail real estate segment are likely to remain stable in 2017, Care Ratings said in its latest report.

The upper house of Indian Parliament, Rajya Sabha had passed the Real Estate Regulation and Development Act (RERA Act) in March 2016 which is primarily aimed at bringing in transparency to the sector and is being touted as a pro-consumer law.

According to Care Ratings, the residential real estate sector is likely to witness low sales in the current year on back of buyers waiting for more interest rate cut from the Reserve Bank of India (RBI), deferral of house buying decision among IT professionals in cities where IT companies are located due to global slowdown. 

"With high liquidity in banking system post-demonetisation, the buyers would be on a wait-and-watch mode expecting further cut in borrowing rates," cited Care Ratings in a research report on Monday.  

"End-user markets like Pune, Bengaluru and Chennai, which has more buyers employed in the IT and outsourcing industry, the global downturn could lead to some deferral in buying from this segment," it added. 

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The ratings agency noted that investment centric residential real estate markets such as Mumbai and National Capital Region (NCR) are likely to record weak sales during the year on the back of impact of demonetisation leading to cash crunch and deffering purchases.  

"Markets like Mumbai and NCR, which are investment centric property markets would continue to see tepid sales, with most buyers adjusting to the demonetisation shock and deferring purchases in expectation of correction in prices of the properties post-demonetisation," Care Ratings said in a report. 

Additionally, with the implementation of RERA Act, the residential real estate sector is expected to witness large scale consolidation.

"Smaller developers would find it difficult to meet their cash flow requirements due to prohibition on pre-sales until a project is registered post approval with the regulatory authority. This would require the small developers to merge or tie-up with large developers and then co-develop properties,"it said.  

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However,  the sales and leasing of the commercial real estate is likely to record stable growth and the investment into the segment will remain strong during the year. 

"During the year 2017, the commercial real estate segment is poised to see lot of interest especially from the investor point of view. Major realty funds and private equity funds have been acquiring Grade-A properties across the top business centers of the country in the past few years with an eye on rapid business expansion which would lead to demand for commercial and office space," Care Ratings said. 

Grade-A buildings are classified on the basis of their location, providing good access and proximity to public-transport and infrastructure, and are professionally managed by property managers. They represent the newest and highest quality buildings and infrastructure and attract high profile tenants and command the highest rents.

"The  market would see inflow of investments as REIT finally enters its implementation phase," the ratings agency said. 

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Real Estate Investment Trust (REIT), is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs allow investors to invest in portfolios of large-scale properties and in turn they earn a share of the income produced through rentals generated on these properties – without actually having to go out and buy or finance a property.  

Sectors like IT, e-commerce and BFSI, which have traditionally been major growth demand drivers for the commercial real estate segment, are likely to decline their demand for the commercial real estate on account of cutting down their costs for bring in efficiency, cited Care Ratings.

On the retail real estate segment, it has projected the country's retail leasing and sales to remain stable during the year.

"In 2017, the market would see a sizeable addition of retail spaces, highest post 2011 and this would mean, there would be surplus space with developers at the end of the year," Care Ratings said citing JLL REIS data.

"Rentals would remain stable for high-quality spaces whereas the demand for others may see a sharp decline due to addition of good-quality spaces," it added.

The retail real estate segment is projected to record rise in demand during the year on the back of increase in number of multiplexes.

"...entertainment (cinema) business has been showing sustained resilience which has been a reprieve for the mall developers. With this segment adding more screens rapidly, retail real estate segment may see higher demand from multiplex businesses. International single brand apparel and luxury labels could be the other possible growth drivers going forward," the ratings agency noted. 

The ratings agency citing data from a Cushman & Wakefield report stated that Private Equity Investment in Real Estate (PERE) in India increased 20% to $4.2 billion from $3.6 billion in FY15. 

It further noted the government's recent reforms like relaxing FDI norms, REIT implementation, Union Budget 2017 announcements such as reduced duration for capital gains, change in nominal tax on unsold inventory, giving infrastructure status to affordable housing, would be a boost for investments in the country's real estate sector.

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