Real estate - 2016 round up and outlook for 2017

The year 2016 has come and gone so fast! For the Indian real estate sector, it was a big year of news and policy level changes. As we, all are preparing for 2017; let us take a look at the major milestones and trends that defined the past 12 months and will have a significant bearing on prospects of the market as well.

1. Various policy reforms jiggled the market, but everyone agreed over their long-term positive implications:


The year started with hope and optimism with the union budget announcement that seeks to set in place the foundations for a robust economy in the longer term by prudent fiscal management. While the whole economy was going through the policy reform, real estate sector remained in headlines due to many policy level changes. Real Estate (Regulation and Development) Act 2016 (RERA), Benami Transaction Prohibition (Amendment) Act 2016, amendments in Real Estate Investment Trusts (REITs) regulations, Goods and Services Tax (GST) and Demonetisation, were the ones that were considered to have the potential to change the way real estate sector work. Besides these, a couple of announcements seemed to be made in the passing but is extremely crucial to this sector. These were the intent to digitise land records, change in arbitration norms for construction industry and setting up of a government committee to look into the strategic sale of government assets that include land and manufacturing units. All these changes are perceived to be the game changers for the industry in coming years.


2. Office market done well in 2016 and prospects are bright for 2017:

Interestingly, commercial sector remained un-impacted from all the changes and done well this year with about little less than 40 million sq ft of office absorption. Technology industry driven markets in South has done extremely well this year especially Hyderabad that managed to attract major IT giants. Apple, Google, Amazon committed large investments plans. Bengaluru continued to be its growth trajectory and maintained its number one status among all the key cities. New supply was not able to cope up this sprawling demand and resulted in an increase in office rents in most of the micro markets. In the technology driven markets like Hyderabad, Bangalore, Pune and Chennai Demand-supply gap is likely to remain a concern in coming quarters. While a few grade A office buildings are likely to see completion towards the end of 2017, we expect upward pressure on rents at least in the first half of the year.

3.Institutional Investors looked for Grade A stock fiercely – REITs listings can be a realty soon:

Institutional investors have been active over the last 12 months. There started by the was high demand for Grade A income yielding leased commercial assets. The trend started with large funds like Blackstone that invested heavily in commercial assets over five years. Following suit, some other funds such as Canada Pension Plan Investment Board (CPPIB), Maple Tree, Tishman Speyer and Morgan Stanley were also looking for leased assets investment aggressively in India. Besides these, couple of domestic players is also pursuing the suit. Looking the way institutional investors accumulating commercial grade A stock REITs does not look like a distant dream now.


4. Residential sales dwindled and ready to move in inventory was the flavour of the year – Trend to continue at least in short term:


For the residential sector, 2016 was not one of the best years as prevailing caution affected investors as well as end-users in the real estate market, due to the predominant economic risks. Despite huge demand, transaction volumes remained low in 2016. Pressures of increasing unsold inventory and a liquidity crunch resulted in fewer project launches in most of the cities. There was an increase in the incentives being offered to sell the property, such as innovative payment plans, discounts, and gifts with bookings. However, such incentives have not proved to be much of a booster and ready to move in apartment remain the most preferred one among end-users. Instead of green field level, the overseas investor community also preferred to invest in under construction residential projects looking for funds to complete their projects. This was primarily because of the ease of exit through capital inflows and residential sector being in the less-recession-prone asset class. The focus has now shifted to less capital-intensive projects having small ticket size investment with a 3 to 5-year project cycle.

5. Co-working spaces made their presence felt in the market:

With the technology startup boom that has started in 2015, co-working space and hot desking trends are revolutionizing the office real estate. The co-working spaces were not only pioneered by start-ups, entrepreneurs and free lancers to fulfill their need to work in a suitable cost effective environment, large occupiers are using them for their transitional offices requirement. With over 100 operators already started their operation in Indian market, this is one trend that is likely to catch up further in 2017.

6. Overall Long-term outlook is positive!

Although it’s hard to forecast the real estate market that is highly sentiment driven in India, several factors will drive the future trend. Recent demonetisation that became the front-page news and a most debatable topic of the year is one of the major factors that may drive the short-term trends. While everybody agreed that the measure would help the economy in the long term, the short-term consequences were harsh for the residential real estate sector as the overall transaction volume come to a halt. The commercial market which is so far un-impacted by the demonetisation drive may also see an impact in the form of shortage of supply and increase in rents. Transaction volume in the residential sector will remain constrained, but the current oversupply in the market will be mitigated in the coming quarters, as very limited new projects are being launched. Yet, things are looking up in the coming year, with end users may start looking the market again. Having said that, I am a firm believer of the positive impact of all these reforms and believe that these are just small hurdles and the overall property markets should come on the edge of recovery shortly.