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India's property developers tread cautiously ahead of general election
The National  |  May 13, 2019

Rebecca Bundhun

Property developers in India have adopted a cautious approach as they await the general election outcome, following a tumultuous five years for the real estate market under the current government.


Niranjan Hiranandani, the managing director of Indian developer Hiranandani Group and the president of the National Real Estate Development Council, describes the wave of economic and real estate sector reforms in recent years as &ldquotsunamis&rdquo for the sector.


The reforms have included a new nationwide goods and services tax in 2017 and the full implementation of fresh real estate regulation and development laws during the same year.


&ldquoThe impact was severe as we saw home buyers turning into fence sitters,&rdquo says Mr Hiranandani. &ldquoPrice points have stagnated and while sales have started picking up, it has been at a slow pace.&rdquo


Reforms were &ldquonecessary&rdquo for the property market in India to bring in better regulation and transparency, Mr Hiranandani adds. &ldquoBut whether all of these needed to be brought in within such a short time frame is a point to think about.&rdquo


Figures from property consultancy Knight Frank show that home sales across eight of India's biggest cities, including New Delhi, Mumbai, and Bangalore, fell to 242,328 units in 2018 from 329,238 in 2013 &ndash the year before the current government swept to power under Narendra Modi. That is a decline of 26 per cent. Last year's figures, however, represent an increase on the low of 228,072 units in 2017 during Mr Modi's rule as prime minister.


Mumbai's average home prices fell by 7 per cent last year compared to 2017, while cities such as Kolkata and Chennai saw respective declines of 4 per cent and 3 per cent in prices, according to Knight Frank.


The property sector forms a significant part of the country&rsquos economy, accounting for up to 6 per cent of gross domestic product, according to a report by real estate consultancy JLL and the Confederation of Real Estate Developers Association of India, which forecasts the industry will make up 11 per cent of GDP by 2020. Real estate is the second-largest employer in India after agriculture, according to government statistics.


When Mr Modi's government first came into power in 2014, it initially gave the property sector a boost.


&ldquoThe fact that the new government came to power with a clear majority raised optimism, and the improved sentiment resulted in both sales and new launches picking up,&rdquo says Anuj Puri, the chairman of Anarock Property Consultants, in a recent report.


However, this was not to last.


&ldquoWith the spate of industry-shaking policies that followed thereafter, new launch and sale numbers declined year-on-year,&rdquo says Mr Puri. &ldquoEach new policy announced by the government brought its own kind of disruption to real estate, and the sector has not yet recovered completely from the ensuing confusion.&rdquo


He says the long-term benefits of the reforms under the Modi government will only transpire if the next government continues to enforce them.


Mr Modi is seeking re-election in the ongoing general election, which will see the results announced on May 23. Expectations are that he and his party, the Bharatiya Janata Party, will come back to power, but not necessarily with the clear majority it won in 2014.


&ldquoOverall, it is a period when all stakeholders wait with bated breath for the final outcome,&rdquo says Mr Puri.


Investors and buyers alike are awaiting the results of the elections before making decisions, while developers are focusing on selling existing properties rather than launching new projects, analysts say.


The market is in a &ldquocautious mode due to the general elections&rdquo, says Shishir Baijal, the chairman and managing director of Knight Frank. But &ldquostable interest rates and inflation remaining largely under control, should lead to increased velocities in the second half of 2019&rdquo.


Looking back at the sector during Mr Modi's tenure, a major shock to the market came in November 2016, when India suddenly announced a banknote ban on the two highest value notes, or demonetisation. The move aimed to reduce &ldquoblack&rdquo money flows in the country, but it led to a liquidity crunch. The real estate sector had been a major beneficiary of both illegal and legal cash flows, so it took a hit. This was followed months later by the roll-out of a new goods and services tax, or GST, which again created uncertainty and slowed economic activity, as businesses struggled to get to grips with the regime.


The real estate regulation and development act - implemented in full in 2017 with the aim of protecting homebuyers - also shook up the sector. Measures include making it mandatory for projects and agents to be registered under a regulator and ensuring developers deposit 70 per cent of the money collected from customers in a separate bank account. Strict punishments are dished out for those that violate the law with developers facing up to three years in jail and brokers up to a year. Before this, the property market had been largely unregulated allowing corruption to seep in. However, analysts say the real estate act created confusion, with developers and buyers holding off on key decisions as they waited to fully understand the law's implications


The consensus is that the legislation will have long terms benefits, as it helps to clean up a sector previously rife with unregulated businesses that exploited customers.


&ldquoThe real estate regulation and development act is a landmark legislation poised to catapult the sector into its next phase of growth, laid on the foundation of being transparent, competitive, hassle-free and consumer-centric, which certainly benefits corporate developers like us and most importantly the home buyers,&rdquo says Amit Ruparel, the managing director of Ruparel Realty, a real estate developer based in Mumbai.


Mr Hiranandani also says he is optimistic that &ldquothough the time from November 2016 has been tough and challenging, implementation of these reforms has started showing improved results&rdquo which &ldquowill be reflected in the rise in sales and the strengthening of demand in the near future&rdquo.


One area that received a boost under the current government is the affordable housing sector. Mr Modi said that he wants to achieve &ldquohousing for all&rdquo by 2022 the government has allocated funds to subsidise low-cost housing with a push encouraging the development of affordable homes.


&ldquoThe government of India has announced various incentives and these have been very positive for the market, and a lot of people who otherwise could not have afforded a formal house and they were living in slums, have now been able to have their own house in a proper area,&rdquo says Sanjay Chaturvedi, the chief executive of Shubham Housing Development Finance Company, an Indian housing finance firm. &ldquoI think the government will reap the benefit from that in this election.&rdquo


Meanwhile, analysts say another factor directly linked to India's election will also impact the property market.


&ldquoIt is no secret that in the past, funds parked by political parties in real estate were sucked out of the system to finance their poll campaigns &ndash and the market is currently facing a serious liquidity crunch,&rdquo says Mr Puri. &ldquoThough new laws now overtly cap the amounts that political parties can accept for campaign donations, they obviously don&rsquot cover all possible avenues of access.&rdquo


As the six-week general election continues, developers hope for a shock-free outcome that will allow the government and industry to build on the changes that have taken place over the past few years.


&ldquoIdeally, the best scenario for the economy would be a stable government,&rdquo says Mr Hiranandani.