Pan-India new completions, absorptions and vacancy – retail
Real estate capital markets
2014 saw gradual growth in demand for Indian real estate, particularly after the general elections in May. Concurrently, fund raising activities picked up, and this momentum will continue in 2015 as well. We will see less of one-way investments and more of partnerships between investors and developers and other land owners.
Joint venture and club funding will become the preferred mode as 2015 progresses. With the improvement of the economic situation, Pune, Chennai, Hyderabad and Kolkata will start attracting sizeable investments along with the top three metros of Mumbai, NCR and Bangalore. This will be a notable change from dynamics seen in the past, wherein only these three cities ruled the roost. In fact, we will see Grade A commercial properties in tier 2 and tier 3 cities appear on the radar of investors, though a full-on focus on these opportunities will probably not take place in 2015.
Attractively-placed office assets and high-demand residential categories, especially well-located mid-income projects, will continue seeing considerable investments in 2015.While investors may continue to show limited interest in retail real estate, we will see increased interest in the hospitality sector as compared to previous year.
REITs got a green signal from the government in 2014, and this will help ease the pressure on the balance sheets of cash-starved developers. However, the listing of new REITs will be slow and steady. While REITs will succeed over the longer term, they need to pass through the challenging phase ahead for them over the next two years.
Real estate regulation
On the regulatory front, Indian real estate will continue to faces a fair share of problems in 2015.There are currently still a number of vital regulations and initiatives related to real estate that have been gathering dust on bureaucratic tables. These need to be fast-tracked and implemented in 2015, because they are crucial for the real estate sector's growth and graduation from opaqueness to transparency.
While many believe that there is little done by the currently ruling government for the real estate sector, there is a positive sentiment underway owing to small but significant steps taken in the right direction by the new government.
In the recent past, two landmark policies that were introduced by the central government were the Land Acquisition, Redevelopment and Rehabilitation (LARR) Bill and the Real Estate Regulatory Authority (RERA - yet to be ratified). However, after almost a year of these two bills being introduced, there has not been much progress. This is largely due to tough clauses included in both these bills, which were actively debated throughout 2014. Some of those clauses were seen as limiting the ability of the industry to function smoothly.
The newly-elected government has astutely identified the limiting factors within the two bills and attempted to rectify them rather than introduce new regulations that would merely add to the burden of ‘lip-service' reforms. In that sense, the present government has done its homework before taking up the task of resolving issues of the real estate sector.
Once finalised, the revised bills will appear more investor-friendly and create a favourable environment for developers, buyers, and investors to operate in 2015as the key changes mooted in the two bills are:
- Land Acquisition, Rehabilitation and Resettlement Act (LARR)
The single-biggest hurdle that the entire real estate sector will face in 2015 is related to land - the very foundation stone of all real estate. The finite and all important commodity of land is caught in a regulatory stranglehold that we hope to finally see loosened in 2015 – especially given the incumbent government's vision of establishing 100 Smart Cities, which gives rise to serious questions about feasibility. The creation of these 100 smart cities will entail significant volumes of land - massive, contiguous land parcels.
In the manner that the new government has envisaged, these smart cities will essentially be brand-new municipalities on the peripheries of our major cities. With its avowed commitment of launching 100 smart cities, the government is de facto also making itself responsible for making the required land available. How exactly will this happen?
The LARR (Land Acquisition, Rehabilitation and Resettlement) Act was formulated and re-formulated to counter land-related bureaucracy in India. On the ground, it has actually done quite the opposite ad become a deterrent for developers as well as investors to operate in the Indian real estate and infrastructure space.
The real estate sector is desperate to get past this hurdle. It is not just a question of making land available for primary real estate development; the government has correctly identified infrastructure development as they key to accelerated economic growth, and infrastructure is highly land-centric.
The modified LARR Act which was put into effect last year by the UPA government attempted to reduce the bureaucracy involved. However, it failed to achieve this purpose and in fact only increased the existing complexities. Given the new government's sharp focus on 'housing for all', fast-tracking of infrastructure and the creation of 100 smart cities across the country, there is very clearly a pressing need to revisit this Act in 2015. Provisions in the bill such as the significant rise in compensation to original inhabitants, the tedious rehabilitation clauses and other norms need to be relaxed if it is to serve its purpose of untangling complexities and delivering a fair shake to all stakeholders.
* Consent clause: The current legislation requires the acquisition process to go through mandatory consent of at least 70 per cent locals for PPP projects and 80 per cent consent for private projects. This clause is difficult to implement, considering the large number of people involved in the entire rehabilitation process. The fact that the government is planning to renegotiate these clauses is in itself a big positive, as one tight spot has been identified.
* Return of unutilised land: It has often been seen that when land was acquired for a stated purpose and the land-losers were promised employment opportunities and overall development of the region in question, the project failed to take off for several years. This lacuna has been identified, and the timeframe for return of unutilised land has been proposed to be reduced to 5 years from the previous 10 years. This is a strong deterrent for companies or developers who plan to acquire land without having a clear roadmap for its usage.
* Clarity on end-usage: There is a need to clearly identify the purpose of land acquisition so that intervention by the government can be put to right use. For instance, critical projects involving infrastructure and affordable housing require faster clearances and may necessitate timely intervention.
* Expertise of State governments in deciding area threshold: The amended Land Acquisition Act was to cover all private land acquisitions if the minimum area to be acquired was 100 acres in rural areas and 40 acres in urban areas. However, every city and village has different dynamics, and these are best understood by the State government rather than the Centre. Thus, the Act must consider giving States an upper hand in deciding the coverage reveals pragmatism and flexibility.
* Smart Cities beyond PPP: In order to meet the target of an annual outlay of INR 35,000 crores for development of 100 new smart cities, it was obvious that private funding was critical. The government has invited full private funding of projects, with government contribution largely limited to viability gap support.
- Real Estate Regulatory Bill (RERA)
The still-pending Real Estate Regulatory Bill has been hotly contested at every stage, and its approval has been deferred once again only recently. There is no doubt that it must be enacted sooner rather than later so that the Indian real estate market becomes attractive for foreign investors. However, no version of this Bill that has evolved from the various objections and arguments from the industry's stakeholders has been universally acceptable so far. It will require a strong and determined government to push it through.
Three recent revisions to the RERA could conceivably lead to its unilateral acceptance and consequent ratification in 2015:
* Reduction of minimum balance to be maintained in the escrow account of a project has been reduced from 70 per cent to 50 per cent: This amount was from the monies collected from the buyers. This will effectively allow developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects, and will work in their favour by also allowing them to grow their land and/or project portfolio. The 50 per cent mandate will still place enough restriction on developers to divert funds elsewhere and ensure better completion records. (However, for buyers, the concerns regarding funds diversion would be higher, and the Bill would be slightly less protectionist towards buyers.)
* Coverage expanded to the commercial real estate sector: While the previous version of the bill envisaged coverage of only residential sector, the new government wants commercial real estate to also fall under the ambit of the regulatory authority and its clauses. The limited coverage was largely without any purpose and, therefore, it currently stands rectified. Commercial projects under the purview of the bill would provide protection to investors of commercial assets, as well.
* All projects which have not received their completion certificates will also be now covered under the bill and hence this allows larger umbrella coverage for buyers and investors.
Worryingly, while the RERA initially aimed at providing an alternate redressal mechanism, the new provisions are talking of no recourse to other consumer forums. This can lead to pressure on this regulatory body in terms of increases log of cases, though it will reduce instances of multiplicity of suits.
In any case, the recommendations have been made by the ministry and sent to PMO for approval before the cabinet approves it. Thereafter, it will be tabled in the Parliament for passing the bill and making it an act. It is unclear whether the Real Estate Regulatory Authority will finally be ratified as a law in 2015, but the fact that hard discussions are happening is definitely positive, and indicative of the new government's determination to make it a reality.
(Anuj Puri is Chairman and Country Head at JLL India)
