India’s potential new government’s policies can boost real estate sector

INDIA: With its general election underway, India’s real estate sector is prepping for the potential optimism of a new government being sworn in and with it, potential new policies that can become key drivers of growth in the real estate sector in the next five years.

According to Ramesh Nair, chief operating officer, Business of Jones Lang LaSalle (JLL) India, these policies include economic and employment plans.

“Last year and 2012 were not the best years for the Indian realty market, and the slowdown had an impact on all asset classes, except in a few pockets. Revival is no doubt the need of the hour. While all eyes are on the general elections, the real estate sector is holding its breath for the potential optimism that is expected once the results are out,” said Ramesh.

This optimism, he said, is expected to boost transactions and lift homebuyer sentiment. However, Ramesh said so far none of the campaigns has outlined a comprehensive proposal for the recovery of the real estate market, specifically in terms of providing more housing and managing interest rates.

“In India, the property market is a key election financier, and considerable amounts of unaccounted money are being pumped out from the real estate sector to fund the elections,” he said. “Before the polls, developers are expected to provide liquidity to politicians so as to finance their campaigns. Many developers who are funding possible candidates are delaying their projects due to the lack of liquidity.”

Ramesh said the timing was bad and reduced housing absorption has already adversely impacted developers’ liquidity and in turn, developers’ funding ability.

“Political commentators also note that certain properties are sold below market rates in order to generate cash for the election campaigns. [Hence], many developers cut down on new launches and focus solely on selling existing inventory,” he said.

Many assume property prices will shoot up post elections, but Ramesh said this expectation is unfounded, as there are too many factors at play, regardless of which party wins.

“Election results do not make or break a market, but they do affect market sentiments to a significant degree. Over the last few quarters, political uncertainty has significantly weakened buyer confidence in many regions.

“A decisive win for any of the alliances will uplift homebuyer sentiment and the property market will see a return of buyer demand due to the re-instatement of confidence. Post elections, if the road to recovery is unhindered, property buyers may very well re-enter the market in good numbers.”

New infrastructure activities have a tendency to boost prices of residential property in the immediate vicinity, and the manifesto of one of the parties in the electoral fray mentions several initiatives in the infrastructure space, with an intended US$1 trillion (RM3.27 trillion) spent on upgrading India’s infrastructure over the next decade.

“It also commits to the significant expansion of, and improvement to, the Indian railway network including covering cities by high-speed rail,” he said. “The manifesto also mentions upgrading the infrastructure of the port sector, developing inland waterways to strengthen infrastructure, and encouraging public-private partnership for the creation of world-class airports.”

Ramesh said the key factors currently at play for the Indian real estate are unsold inventory, absorption and interest rates. He said it is unlikely that these factors will change immediately post polls, regardless of which party wins.

“Over the longer term, what will matter most to the real estate sector is the hard relook at foreign direct investments in housing, real estate investment trust legislations and the effective implementation of the real estate (regulation and development) bill,” he said.

According to Ramesh, the Reserve Bank of India will play a key role in the post-election scenario by either bringing down interest rates for home purchase, allowing flexibility to reintroduce subvention schemes, or restructuring debts for debt-ridden developers.

“A combination of bottomed-out property prices, low interest rates and a return of buyer confidence can create the perfect environment for recovery. If the incoming government is able to keep interest rates low and employment generation high, it will provide the platform for a far more stable and investment-friendly real estate market,” he said.

This article first appeared in The Edge Financial Daily, on April 4, 2014.

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