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Indian real estate: A decade that went by and the decade that awaits

The year 2019 marked the end of an eventful decade for Indian real estate. What has been interesting is that among the conventional asset classes, all have undergone a massive transformation.

The year 2019 marked the end of an eventful decade for Indian real estate. What has been interesting is that among the conventional asset classes, all have undergone a massive transformation. However, the fortunes of each could not have been vastly different than at present.

The decade that went by

The Indian office markets were just coming out of the post-GFC slump with 2010 being the year when the commercial office sector finally reversed itself and put itself on a slow yet steady growth path. Through this decade, the office sector has gained renewed momentum to reach here when 2019 was the biggest year yet in terms of supply and space take-up with leasing activity slated to cross the 60 million square feet (sf) mark. The momentum doesn’t look like it’s slowing down in 2020 as well.

The residential sector on the other hand was the panacea for the real estate sector in the post-GFC period. With commercial developers making a beeline for the residential sector, 2010 marked the big rise in the pan-India residential launch activity with the year recording the highest annual launches in the decade with close to 300,000 units across the top eight cities. With associated investor activity in residential as well as the demand for housing picking up steam, the sales momentum also reached a peak in 2010. Throughout this period, between 2010 and 2015, launches consistently outstripped the sales in the residential sector causing a rise in the inventory overhang.

Combined with the rising consumer activism in the wake of project delays, unfulfilled promises regarding project quality and a general breakdown of trust between the developer-buyer community, the last half of the year has been one of struggles for this asset class. The spate of regulatory changes in the form of demonetisation, RERA and GST made 2016-2017 as the watershed years for the residential sector. In 2017, launches fell to a low of just around 100,000 units with the associated sales dropping to below the 100,000 units point for the first time in the decade. 2018 and 2019 have turned out to be years when the fortunes of this sector showed some improvement across the key metrics of sales and launches as the structural reforms and government support started bearing some positive results. Throwing the ongoing NBFC crisis in the mix, the situation remains a concern with a sustained revival in the residential segment necessary for the health of the overall real estate sector.

What’s Next in the upcoming decade

We expect that while the residential sector will improve its performance given the strong reform push with all such reforms like the RERA and IBC achieving optimal efficacy, the next decade will also be marked by the tech revolution and the changing business dynamics. With India destined to move up in the World Bank’s Ease of Doing Business rankings over the next decade, we expect that transparency and agility fostered by structural reforms will be key to improving the flow of private, institutional capital to the residential sector in particular. Innovation in product offerings will create separate sub-asset classes within the residential sector, with affordable housing being a prime example. Rental housing will gain a strong foothold with a focus on build-to-rent models and alternative models like co-living and student housing.

Technology-driven homes and construction methods will drive project-level innovation around themes of sustainability, while price movement will be in sync with buyer expectations creating feasible price discovery models. We definitely expect that sales activity, being the barometer for sector sentiment, will pick up steam even as consolidation plays out in the form of financially sound, serious developers remaining in the fray. Evolving business models structured around sales of completed assets will gain further momentum with institutional players increasingly likely to adopt them.

Affordability remains a key point and the government level support and interventions will surely give a positive push to this. The next decade will also serve as proof of success for the stressed funds set up by the government for completion of stalled projects. The financial closure of such projects and handover to the affected buyers will be a key ingredient to restore confidence in the residential segment in the next decade.

We are in for a rollicking ride in the next decade!

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