The Indian real estate sector was perceived as a volatile space by global investors until a slew of reforms hit the sector a few years ago. Some of the biggest path-breaking reforms that happened in real estate were the Real Estate (Regulation and Development) Act, 2016 (RERA), the Benami Transactions (Prohibition) Amendment Act, 2016, infrastructure status to affordable housing projects, demonetization, relaxation of norms to encourage Real Estate Investment Trust (REIT) listings, and the Goods and Services Tax (GST). The reforms not only set an order but also eventually changed the perception of the sector as well. And this was reflected in the investments in real estate sector as a whole which has been on an upswing after 2014.
However, the residential real estate segment has seen more of an up-and-down journey after the reforms set in. Prices became stagnant and demand started dipping soon. Liquidity crisis in the NBFC sector which started with the default of IL&FS in September 2018 worked as the last nail in the coffin when it came to PE investment in the residential real estate sector.
Even before COVID-19 pandemic outbreak, the investment level in residential real estate had declined considerably. As per Knight Frank’s recent report titled Investment In Real Estate, during YTD 2020, there was only one PE investment in the residential sector worth USD 40 million. The investments in 2020 witnessed a 91% YoY drop compared to USD 469 million during the same time period last year.
In the light of coronavirus induced lockdown and the subsequent pay cuts, job losses, bankruptcies, slowdown in GDP growth in India along with already low sale growth, the demand from homebuyers is expected to dwindle further in 2020.
The supply side story is equally disturbing. Gone are the days when PE, NBFCs, banks and customer advances acted as a source of finance for everything right from acquiring land to approval and then construction. Today, RERA has made it impossible for customer advances to come in before the approval stage.
PE funds are not showing much interest in the residential sector and NBFCs don’t have much requisites. In the coming times, only developers with deep pockets will be able to conduct business in the residential segment.
2020 will see further consolidations, with the non-serious and over-leveraged developers going out of business. Many residential developers will start monetizing their land parcels and rent yielding assets to clear off debts and strengthening their balance sheet.
Here is complete Investment In Real Estate report by Knight Frank.