It is fair to say that the performance of the Indian real estate market in the short to medium term has been disappointing. We have seen some major changes in the regulatory structure, currency issues and it is taking some time for the markets to digest this. So, while there are still issues with supply and demand there does seem to be hope for the future.
Real estate stocks rebound
An almost throwaway comment in the Reserve Bank of India’s monetary policy announcement on Thursday caught markets by surprise. Banks are now able to invest in Real Estate Investment Trusts (REITs) which will not only give the sector an additional income stream but also improve liquidity. As a consequence the BSE Realty index which covers the real estate sector on the Indian stock market bounced by 2%. This may not seem like a massive boost but bearing in mind the recent performance of the industry as a whole it is a welcome relief.
Indeed, if we look back to the start of this year the stock market real estate sector has returned an impressive 33% on the back of recovery hopes.
Is the recovery just around the corner?
While there is no doubt that the recent changes to the real estate sector introduced by the Indian government have been welcomed, they are still taking some time to filter through. There were initial concerns that the Real Estate Regulatory Authority (RERA) would be something of a damp squib bearing in mind the history of delays across the Indian regulatory sector. However, a relatively obscure prosecution by the RERA saw directors of a real estate firm arrested and found guilty of cheating customers. This has given hope that the recent regulatory changes could be a lot more than just hot air.
One issue which needs addressing is the fall in real estate net revenues which have reduced by more than 30% over the two-year period to December 2016. Over the same period interest rate costs as a percentage of total revenue have increased from 17.81% up to 21.54%. This means that more and more company funds are being used to cover interest payments leaving less for investment and every day costs.
As we touched on above, recent policy changes by the Indian government have made a significant difference to sentiment surrounding the real estate sector. In the eyes of many investors we are on the verge of a recovery but so far improved figures have yet to materialise. Indeed in the short term it looks as though some developers will hold back on releasing new stock into the market. A recent report suggested that less than 5% of unsold units are actually ready for possession. So, it will take some time to clear this unsold stock and in the meantime developers are less likely to take on new developments.
There is no doubt it has been a difficult couple of years for the Indian real estate market for a variety of reasons. In the longer term there are reasons to be optimistic and the recent successful prosecution of a real estate company found to be cheating customers has improved sentiment. Transparency is the name of the game going forward but there is also a need to get rid of the unsold stock overhanging the market, as quickly as possible.