[ecis2016.org] Although the industry sentiments for Q1 2017, signal a recovery for Indian realty, limited clarity on reforms mars future outlook, says a FICCI-NAREDCO-Knight Frank Real Estate Sentiment Index Report
After a drastic dip in sentiments, from October to December 2016, the first quarter of 2017 has begun on a positive note, signifying the transient impact of demonetisation. Nevertheless, the stakeholders in Indian real estate continue to remain in a ‘wait and watch mode’, according to the Real Estate Sentiment Index for Q1 2017 (January–March 2017), by FICCI, NAREDCO and Knight Frank India.
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Ambiguity over the impact of various policy interventions, like the Real Estate (Regulation and Development) Act, 2016 (RERA), Benami Transactions (Prohibition) Amendment Act, 2016 and the Goods and Services Tax (GST), are weighing high on the stakeholders’ minds and as a result, the future score, though positive, is not showing an increasing trend, says Dr Samantak Das, chief economist and national director – research, Knight Frank India.
“On the other hand, these policy measures have infused life among institutional funds, including banks. Stakeholders feel that these initiatives by the government, will play a major role in attracting institutional funds, whose participation in the sector was at a modest level. The residential sector is reeling under pressure and the developers mirror those sentiments. Going forward, RERA will change the manner in which the sector functions. In the office market, stakeholders believe that the growth in office space transactions will be plateaued. However, there will be an upward pressure on rentals due to limited quality supply,” explains Das.
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Key findings of the report
- Post the policy intervention by the government in November 2016 that shook the real estate sector, the current sentiment score of 53 has seen a substantial uptick from the drastic fall seen in Q4 2016 that had pushed the score to 41, which was the worst in the last three years.
- Lack of clarity on various policy measures by the government in the next six months, has put the industry in a ‘wait and watch’ mode.
- Despite the future scores (58 for Q1 2017) reflecting a positive sentiment, it is still below the Q4 2016 score of 62. This can be attributed to the lack of lucidity of various policy initiatives of the government, like the RERA and Benami Transactions (Prohibition) Amendment Act, 2016 and the GST.
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Residential sector sentiment fighting hard to stay afloat
- The residential sector is going through a difficult phase and the stakeholder sentiments reflect the same. Developers are unclear about the processes and systems under RERA and will take time, to recalibrate their businesses, accordingly.
- There is a striking recovery in the sentiment for residential sales in Q1 2017, with nearly 64% of the stakeholders of the view that residential sales are going to improve in the coming six months. Reasons such as increasing transparency in the sector, lower interest rates by banks, attractive prices and a robust economic outlook, have uplifted the sentiments of the market.
- In contrast to this, the Q1 2017 survey reveals that 60% of the stakeholders are not too optimistic about price appreciation in residential real estate over the next six months. Huge inventory, along with slow sales velocity, are some of the major reasons for this stagnation in prices.
Office market – persistent demand and a lackadaisical supply
- Stakeholders believe that new office supply, will sparingly hit the market in the coming six months. This belief seems to coincide with market realities. New completions in all major cities in India was very less in 2016, due to which occupiers were unable to close transactions, despite strong demand.
- The office markets in key cities, have been growing from strength-to-strength in leasing volumes, in the past few years. However, due to challenges being faced by the IT sector, a core driver of office leasing in the country, 83% of the stakeholders believe that there will not be much increase in leasing space. This will lead to transactions holding steady in the next six months.
- The lack of office space is also likely to put an upward pressure on rentals. This is corroborated by the fact that even with a higher base, 50% of the respondents feel that rents in prime office buildings will further inch upwards, in the coming six months.
Zonal sentiment score
- All the zones, barring west, show de-growth in sentiments in Q1 2017. This optimism comes from the fact that Maharashtra, being one of the largest states in the west, is the front runner in putting systems and processes in place for RERA, which, in turn, has uplifted zonal sentiments towards the future.
- Both, the developer and financial institutions, have a positive outlook for the future, with their scores pegged above 50. However, the lack of clarity on recent developments, has adversely impacted the developers’ sentiments, leading to a drop in their scores in Q1 2017.
- Financial institutions registered a slight uptick in sentiments in the first half of 2017, which can be attributed to the increasing transparency in the real estate sector through various policy measures.
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