One year since demonetisation, real estate outlook positive: Colliers International

[ecis2016.org] One year after the government banned high-value currency notes and replaced it with new denominations, we look at how this move and other policy changes have impacted various segments of the real estate sector

It has been a year since demonetisation was announced on November 8, 2016 and was touted as a surgical strike on black money. Although, in the aftermath of demonetisation, the GDP growth has come down to 6.1 per cent and 5.7 per cent in Q1 and Q2 2017, respectively, the good news is that the Business Confidence Index has risen to 64.1, from 56.4 in Q1 2017. Additionally, due to the continuous efforts by the government, India also jumped to 100 from 130, in the ‘Ease of Doing Business’ rankings, making it the first country to record the highest jump in the World Bank’s rankings. In line with many other forecasters, Colliers Research also views that the fall in GDP was just a temporary phase and the stage is now set for the Indian economy to grow faster.

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As per Colliers Research, the demonetisation wave seems to have settled down and the prospect for the real estate sector looks promising. During the last one year, apart from demonetisation, the real estate sector also witnessed several significant policy reforms, such as the implementation of the Real Estate (Regulation and Development) Act in several states, the nationwide implementation of the Goods and Services Tax (GST) and amendments in the Benami Transactions (Prohibition) Act.

Impact of demonetisation on different real estate sectors

Commercial markets: Investors remained active

In line with our earlier prediction in the report titled ‘Real Estate Sector: Aftermath of Demonetisation’, the commercial leasing market remained unaffected by demonetisation, while commercial strata sale was impacted to a certain extent. In the first nine months of 2017, about 28.9 million sq ft was leased, which was almost at par with the last year’s numbers. There was a temporary slowdown in the overall transaction volumes, in the first few months post-demonetisation. However, a year after demonetisation, investor activity seems to be picking up, on the back of improved investor confidence and several major transactions have been concluded. According to Colliers Research, Grade A income yielding commercial leased assets should remain in demand in the coming months, as REITs are likely to start listing in 2018.

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Residential sector: Affordable housing was in vogue

Sales in the secondary residential market, especially in the luxury segment, were impacted post demonetisation. However, the transactions in mid-segment and affordable housing remained less impacted and buyers’ preference remained tilted towards ready-to-move-in houses. As per Colliers Research, the residential sector was impacted more, because of the implementation of RERA and GST. The developers were occupied in RERA and GST compliance and buyers were also in a wait-and-watch phase, over the implementation of these two rules.

Due to continuous support of the government and its push towards the Pradhan Mantri Awas Yojana, the affordable housing segment should pick up and more developers and investors will try to invest in this segment.

“The residential real estate sector had been under stress, even prior to the announcement of demonetisation. For a sector that was accustomed to cash dealings, demonetisation resulted in a massive slowdown in sale transactions in the immediate aftermath of the announcement,” said Amit Oberoi, national director, knowledge systems, at Colliers International India.

Industrial sector: Positively impacted, with investment on the rise

Like any other sector, the industrial, logistics and warehousing sectors went through a slump, over an initial couple of months, owing to the cash crunch brought about by demonetisation. However, of late, the growth of the sector has accelerated with the rollout of the GST. Implementation of the GST acted as a catalyst, for the rise of the warehousing market in India, by eliminating multi-layered tax system and state borders, thus, creating a fair marketplace across the country. According to the Central Statistics Office data, the Index of Industrial Production (IIP) also noted a significant growth of 4.3 per cent in August 2017 over the index of August 2016. IIP registered a cumulative increase of 2.2 per cent during the period April-August 2017-18 over the corresponding period of the previous year.

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“Consolidation in the warehousing sector is expected to gain momentum in the short-to-medium term, as most of the large corporates are now focused on optimising their resources with a twin-pronged approach of improved inventory planning, coupled with demand forecasting. This is expected to lead to a phenomenon, wherein, warehousing demand is expected to outpace supply. Hence, quality warehousing space is the need of the hour,” says Shyam Arumugam, associate director, office services, Colliers International India.

Several international companies are optimistic about the Indian logistics market, with announcements from various global players to increase their capacity of transporting goods back and forth from Indian cities in 2017. Canada Pension Plan Investment Board’s (CPPIB’s) acquisition of a majority stake in IndoSpace, for about USD 500 million, marked the largest industrial and logistics deal in India. In our opinion, the e-commerce logistics businesses are highly optimistic on rising demand for supply chain services in India and many companies like Amazon, Delhivery and 4tigo Network Logistics secured an infusion of funds for their warehousing activities. Also, the warehousing occupiers like Amazon and DHL announced plans to expand their warehouses shortly.

Long-term forecast for real estate, post demonetisation

“All these policy reforms, especially RERA and GST, are helping in aligning the real estate sector to the international standards of doing business. We are hopeful that the government will make the real estate approval processes easier and shorter, as a part of its ease of doing business initiative. It will encourage the entry of more foreign entities (developers and funds) in the Indian market and more liquidity for the Indian developers who have an established track record. This should lead us to a new era of lower interest rates, fair competition and a more predictable business environment. At the same time, it will lead to a higher threshold for entry into the real estate business,” says Surabhi Arora, senior associate director, research, Colliers International India.

Colliers Research remains positive about the prospects of all commercial, industrial and residential real estate markets in the long run and expect more funds from institutional investors and banks. Moreover, growth in e-commerce, retail, fast moving consumer goods (FMCG), auto and auto ancillary and the chemical and pharmaceutical industries, are driving the demand further and will boost the enormous warehousing volume growth.

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