Monday, December 29, 2014

Prices May Not Come Down

The Indian real estate sector continues to be a favoured destination for global investors. The urban population will surge in the coming years, which, coupled with growth in employment, education and health care, will push the demand for residential and commercial space.

Urbanisation has been rapid in the past few years, with 'upwardly-mobile' buyers keen to invest and reap dividends from the real estate market growth. Increasing migration to the cities will drive this demand. Also anticipate a rise in sales of housing property following the recent stock market rally and a slew of optimistic RBI rules to allow foreign banks into the country's protected banking ecosystem. Steady housing demand will be a big constant for the Indian economy this year, and the industry will focus on meeting this demand.

However, the real estate sector is burdened with high costs because of which there is little possibility of reduction in home prices in most micromarkets. Construction cost has increased by 40% in two years, while government taxes and premiums have also gone up substantially. This eliminates any scope for reduced prices, despite the weak market. Banks' reluctance to lend to real estate companies has led to increased cost of borrowing, adding to the overall cost. In fact, these factors will also result in an increase in prices in improved market conditions. The housing industry will revive at a faster pace if a stable government is formed after the general elections in 2014.

The Confederation of Real Estate Developers' Associations of India (CREDAI) has identified demand from tier-II and tier-III cities as an impetus for better real estate solutions. With rapid land and infrastructure development in smaller cities and towns, assisted by bank loans, higher earnings and improved standards of living, housing and construction demand will increase here.

The recent move to introduce Reits, or Real Estate Investment Trusts, is a progressive one as well. Reits are a great instrument to tap cash flow into the Indian economy, and help smaller investors access income-generating real estate assets. It will help both developers and investors, through better financing and investment options. This will give the Indian real estate market more depth. Providing tax incentives to REITs for investment in housing, especially the affordable housing sector, will increase chances of its success.

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