How is the hike in building materials prices affecting the residential real estate sector?
The building material costs have gone up by 20-30% since the beginning of 2021. Mainly steel, cement, sand and bricks have shown a steep increase in pricing affecting the budgets of various residential developers while labour shortage during lockdown has shot the manpower costs which is yet to come to pre-pandemic level availability. This is acute especially in projects that commenced work before lockdown as they had set budgets which have been upended and borrowing based on these costs will increase the overall costs. In new projects, the profitability margins have stretched thin due to increased costs with price inelasticity due to constraints brought about by pandemic. The cost increase has been affected by pressures in supply chain, increased demand (for material as the activity has picked up across the construction sector) and the constant increase in fuel prices. The same are being passed on to the end customer specially in retail distribution while wholesale dealers are seeing increased forward contract costs creating expensive inventories. Also, the strict clampdown on material movement from China is affecting prices especially in finishing products and materials. Given that the residential market is on a recovery trajectory propped by both statutory concessions and price rebate, it is risky to pass the costs to the customer by the developer. However, given that the prices rise is unabated, developers have now started to pass on the costs which are reflected in increased pricing by roughly 5-10%. With the global supply chain likely to stabilize by H1 2022 and ease of sudden spurt of demand post lockdown relaxation, pricing of materials will soften unless there is further disruption due to travel restrictions imposed by various countries.
Your take on the government policies and regulations and the tweaks required to propel the residential real estate sector?
The recent policies right from state governments to the central government are the most encouraging and important intervention to assist in propping the real estate sector and inducing demand. In recent times, the best move was to reduce stamp duty rates and in some states to discount the guideline rates that have gone a long way in pushing sales. Inspite of the resurgent pandemic wave, the demand for real estate was unabated and the sector witnessed record sales and launches especially in the residential segment. The savings made in reduced stamp duty assisted by the price discounts given by the developer encouraged buyers to participate in the market and buy larger apartments departing from a budgeted spend pattern. More importantly developers whose statutory costs were linked to premiums and guidelines rates, reaped benefits with reduced compliance costs encouraging them to apply for clearances and launch projects. This in-turn pushed the demand for financing loans from developers and buyers from financing institutions thereby increasing credit off-take inspite of challenging environment. The move though more short term to assist the sector should be seen as long term strategy which could increase the buying volume which will increase the stamp revenue and approval-related revenues for the local bodies and the state governments. This will also increase the investment into residential real estate thereby indirectly helping the Housing for All targets set by the Government of India.
It has been four years of RERA. How is this act benefitting / affecting residential real estate developers in India?
RERA implementation has definitely balanced the scales in residential real estate with the buyers being empowered a lot more than the pre-RERA era. The implementation of RERA has brought out the marked differences in brand perception and goodwill developers enjoy with their customers. Developers with strong brands, a good track record and providing timely possession saw increased goodwill from markets in form of price premiums and increased demand. Developers who failed to provide buyer support had unnaturally delayed projects saw this goodwill dip and impact sales. This can be assessed directly from a number of RERA decreed buyer claims being settled by developers. The MoHUA data indicates that nearly 80,078 cases were disposed of since implementation Uttar Pradesh, Haryana and Maharashtra leading the way. Across India many buyers found their issues being addressed and benefitted immensely especially in cities like Mumbai, Delhi NCR with the intervention of RERA authorities. While the consumers have definitely benefitted, the developer community has seen mixed results. Most developers have had their compliance cost go up and realised the need to carefully curate marketing collaterals and sale agreements. Further, developers have invested to ensure that their channel partners apart from their marketing teams, give out the correct information to buyers. It has become a practice to show RERA registration certificate during sales meet which boost the confidence of the buyers resulting in positive results for the developer. Availability of information for customers through RERA including litigation data for a project has helped the developers increasingly protect themselves from accusations of misrepresentations which has been the core complaint by most buyers in their RERA complaints. Therefore it would be best practice for developers to submit all information apart from the requirement for compliance. RERA also aided the increased speed of decisions for financing as institutions tend to make detailed study of the information available in RERA portals before taking calls on diligence and approving loans. This has helped developers to assess the risk appetite of specific institutions and driven more focused effort with more aligned lenders. However, developers who were involved in repeatedly delayed projects saw outflows due to settlement of cash compensations due to RERA orders to buyers which further stretched the liquidity issues in the system. Further, developers have also been forced to deliver on the promised amenities and habitable areas indicating more accountability. The various RERA orders also have helped clear many doubts and confusion including how investors cannot be differentiated from actual end-user buyer setting up a more positive investment climate. This is the most positive outcome to real estate developers as buyers will commit more easily as they are confident of a redressal mechanism that is both speedy and empowering.
What are the prime challenges faced by residential realty players in India?
The most important challenge faced by residential players in India is the compliance structure. Any developers on an average is required to take 51 approvals as per CII study to complete the residential project. The challenging aspect is to liaise with multiple authorities and manage with the delays in approvals while at same time contending with the fallout due to RERA rules on delayed projects. It is critical that government recognise the same and similar to how infrastructure projects are likely to benefit from the Gati Shakti programme, create a nodal body to coordinate with all the agencies and provide approvals to the builders or developers. This will reduce the compliance issues for both developer and the buyer which in turn can benefit funding institutions reducing the non-performing assets that are created due to approval delays. The next crucial challenge is the land title and legality of allotments of land from state agencies. Digitalisation of land records efforts by various state governments is the first step in addressing this challenge. However, it is often seen that even the state agency allotments are declared void for many reasons, for example, in NOIDA where township approvals are void after the project is completed and handed over. This is critical as it is important to protect the buyers and more importantly the credibility of the developers who carry out the projects based on the allotment granted by the agency. Digitalisation of land records and creating a repository of the approvals will assist developers in taking up the rights assets for development and protect the end customer. The last challenge that needs to be addressed in urgency is the requirement to have a judicial system that is quick in disposing cases. Many developers are caught in frivolous litigation especially those involving land titles that delay the developer project launch or seek approvals. This will affect the investment made by the developer or the backing provided by either buyers or funding institutions. While RERA has protected the buyers rights through quick disposal of claims, no such mechanism exists that address the judicial backlogs involving the developers either as claimants or defendants. It is important that such litigation have time bound resolution which will not only benefit the developers but also the investors and/or buyers.
Economic recovery coupled with ongoing finance crunch has taken a toll on realty developers. Can you please share with us the investment inflow in residential real estate?
Access to capital increased in real estate post the relaxation of the lockdown in 2020 where data has shown that there was a 13% positive change in CRE loans dispersed. The growth was strong till July 2021 but witnessed a slight fall in August – September against same period in 2020. Interestingly while pandemic related lockdown did take a toll on realty developers as cashflow-based funding took a hit, the debt raised fell in H2 2020 compared to H1 2020 as institutions started reassessing the markets and loan securities from June 2020 when the relaxations were lifted. Further between Q2 2021, the lending growth was negative compared to Q1 2021 given that country went into lockdown again. Private equity investment into real estate too had significant growth with 20% growth to approximately USD 6.0 bn over FY 2020 where foreign capital chased opportunities in India while the domestic funds contracted their lending. This clearly shows that the benefits of the capital available were for a few select developers who has a strong track record and continued to execute projects with funds chasing portfolio-level investments with them, while developers who had weak balance sheet and higher debt on books could not cope with the challenges brought in by the pandemic had to resort either to balance transfers or liquidating the projects. Tier 1 cities benefited the most with investments freeing some deployable capital for developers who could plough it back into residential projects while in Tier 2 & Tier 3 cities developers struggled to cope with the impact of restricted lending from traditional sources during the lockdown duration. Most investments in 2020 and 2021 happened in commercial and industrial real estate while last mile funding strategies of various funds pushed investment into residential real estate with SWAMIH fund leading the way in affordable and mid income segment.
Will the recovery phase in residential real estate continue? Your take
Recovery in residential real estate will continue as the statutory concessions will aid the demand alongside the low-levels of home loan interest rates. Given that some correction in the pricing has happened during the lockdown period, interest rates are expected to push north and input costs going up, there would be little for a developer to further reduce the pricing, which will push the prospective buyer to make decisions solely based on the individual’s subjective criteria rather than price benefit criteria. This is already witnessed in various segments across cities where inspite of pricing having improved, sales have picked up. Affordable housing will continue to lead the sales with mid-segment aiding the demand across cities while luxury real estate will continue on slower path of recovery in comparison. Given that the sales have doubled from 2020 to 2021 for the period January to October, the growth is expected to continue well in 2022 though the growth percentage could settle between 10% and 15% over 2021 achieving nearly the pre-pandemic levels of sales. This growth may see slight dip in the short term if the interest rates harden and concessions are withdrawn but the long term growth will continue.