Progressive steps enhance realty sector
Re-election and RBI's repo rate cut on loans has given NRIs the confidence to purchase properties in India
Prime Minister Narendra Modi's government is all set to make India a business-friendly investment destination and for that it is adopting measures that will woo NRIs back to India to boost their investments in realty sector. The recent rate cut is testimony of the same. The Monetary Policy Committee (MPC) has cut the repo rate by 35bps (to 5.4 per cent).
"We believe, the RBI could have been a bit more aggressive with a 50bps cut. Nonetheless, the central bank did explicitly state that addressing growth concerns remains the highest priority while indicating headroom for further policy action," said Kapil Gupta of Edelweiss Research.
The research house expects at least another 50bps rate cut in the current monetary easing cycle given weak global and domestic growth, lack of fiscal stimulus and benign inflation. In addition, the US Fed rate cycle too has turned down, thus easing external constraints on the domestic monetary policy. The risk to the outlook arises if USD strength (CNY weakness) gathers pace amidst rising trade tensions.
With this repo rate cut, it is expected that the banks will pass on a significant cut in the loan rate to the new home buyers who can then make their purchase decision.
"Those home buyers looking at making a second investment can restructure their existing home loan based on the revised repo rate, of course, in the context of the benefit being passed onto the borrower. For first-time home buyers, they can seize this advantage of getting into a home loan transaction at a lower rate and be in a position to pre-pay over time when their income grows in the future and when interest rates climb further over time. The rate cut leading to lower EMIs is expected to work most effectively and help the overall momentum in the real estate industry," said Tushad Dubash, Director, Duville Estates.
Echoing similar sentiments, Samyak Jain, Director, Siddha Group, said: "The RBI's decision to cut the repo rate is a progressive step for the real estate sector. This announcement is anticipated to help reduce home loan rates, which will further encourage people to buy homes. We hope to see a significant rise in investments in the market in the affordable luxury segment."
In line with the general market sentiment, the cumulative 110 bps rate cut in the last four policy reviews favours the Indian economy. The rate cut of 35 bps delivered by the RBI is likely to bring in a balance between growth and inflation, points out Ramesh Nair, CEO and Country Head, JLL India.
Ease in liquidity crunch
The rate cut has a direct bearing on the real estate sector considering that residential sales rely to a large extent on the availability of credit in the form of home loans and buyer sentiment. The improved market sentiments due to the tax deduction schemes, modified tenancy laws, focus on implementation of PMAY, investment in infrastructure announced in the Union Budget 2019-20 coupled with interest rate deductions is likely to boost sales in the residential segment.
Moreover, credit re-structuring measures such as the introduction of repo-linked loans by select banks will positively impact the homebuyers' purchase decisions while ensuring enhanced transparency.
Nair further points out that the decision to cut down rates was expected, owing to the ongoing liquidity crisis and muted economic growth. This said, the RBI has taken the cue from the government's Union Budget 2019-20, where it gave elbow room for fiscal stimulus to NBFCs. Additionally, the global slowdown followed by the US Fed lowering its rate provided yet another indication to the Central Bank.
The real estate sector has already registered a 22 per cent Y-o-Y growth in sales in the first six months of 2019, compared to the corresponding period of last year. Stable real estate prices combined with steadily rising incomes have further uplifted the homebuyers' sentiments in the last few quarters. However, the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers.
Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani, pointed out that the initiatives will support growth and ease the liquidity crunch in the economy.
"We hope that the current rate cut would translate into lower EMIs and help soften home loan rates and also boost sales. It will help to ease the pressure off the market by attracting buyers to invest in the real estate sector.
Real estate sector is one of the few sectors that has the potential to kick start a sluggish economy. The forthcoming festive season will further boost real estate sector."
Going forward, it is imperative for banks to reduce the lending rates and ensure that the home loan borrowers reap the benefits of this move.
Hiranandani further added: "In real estate, which a high-cost sensitive sector, demand will only pick up if the cut is substantial to result in significant cost-savings. The rate reduction will also provide the much-needed stimulus to build upon the various initiatives announced by the government recently about reviving the demand in the realty sector. This will also bring back fence-sitters who were waiting for the perfect opportunity to invest in their dream home."
Increased NRI investments
The UAE's NRIs, who closely monitor developments on political and economic fronts back home, are expected to make more investments in India's real estate sector in the coming days.
"In macro terms, a stable government, progressive economy clubbed with the appreciated dollar in the last few years has led to a spurt in NRI investments in Indian properties and that too largely in cities like Mumbai, Pune, and Bengaluru. In the last three to four quarters, there has been a steady rise in the demand for not only luxury projects, but also for affordable/mid-segment projects mainly due to easy affordability, relatively lesser risk and better rental returns along with gradual price appreciation especially in key markets like Mumbai where a lot of infrastructures is taking shape," said Navin Makhija, managing director of The Wadhwa Group.
"With Rera ensuring transparency and laws allowing 100 per cent FDI in construction, the Indian real estate is seeing an investment infusion from NRIs. Rera and GST have brought in the confidence of NRIs back in the Indian real estate sector.
"Right ticket price, better returns, increasing infrastructure, seamless connectivity, rising influx of professionals and low lending rates are the important factors driving NRI sales in Mumbai. As per the recent market study, residential real estate prices have risen across metropolitan areas."
Real estate experts say that NRIs are mostly interested in buying properties in metropolitan cities such as Mumbai, Pune and Delhi. The Indian population in the UAE has grown to 3.3 million - the largest concentration of Indians outside India.
According to the RBI, the UAE accounted for 26.9 per cent of inward remittances in 2018. The NRI segment of Dubai is a particularly large buyer base for Indian real estate. The rupee's decline in value against the dirham has further boosted remittances and made Indian real estate investments even more lucrative for NRIs.
Luxury as a prime focus
NRIs traditionally invested in high-end luxury properties back home. For end-users, such properties offered them the international lifestyle they are accustomed to. For investors, luxury properties generated sizeable rental income.
While the end-user demand for Indian luxury properties continues, albeit on a more muted note, many NRI investors have now turned their focus to affordable and mid-segment housing.
This is because the Indian government has provided considerable incentives to buyers of such housing, and also because such properties are in higher demand and therefore give a higher rental yield as well as better long-term appreciation.
Sarojini Ahuja, vice-president of sales and marketing at Transcon Triumph, said: "The rupee's decline in value against the dirham, heavy returns, good rental, improving infrastructure are the key drivers. With Rera ensuring transparency and laws allowing 100 per cent FDI in construction, the Indian real estate is seeing investment infusions from NRIs."
NRIs now prefer to park their investment with reliable, organised builders who register their projects under the Real Estate Regulation and Development Act, generally known for transparent business practices.
NRIs generally prefer investing in properties in their home state or city, largely because they are more familiar with those territories and invariably have family or friends who can handle the management and renting aspects. However, more experienced investors with sufficient knowledge about other cities - or those working with reputed real estate consultancies - do foray into other cities as well.
Better rental yields
Rahul Maroo, chief strategist and head international business at Omkar Realtors, said: "The first and foremost reason is the depreciating rupee, which puts more rupees in NRIs' hands, making properties cheaper for them than they were earlier and hence their interest to invest in real estate in India.
"Secondly, a continuation of a strong and stable government and economy for the last five years, and the future five years as well, strong GDP growth, ongoing regulatory reforms with the likes of Rera, and better rental yields is attracting NRIs to invest in properties in India, largely in Mumbai."
Livability index attractive
Overall, NRI investment into the primary Indian real estate market is estimated to grow to approximately $25.7 billion by 2022 from $11.5 billion in 2017. Currently, the property market is already down by almost 10-15 per cent in the city, and a weak rupee has given the NRIs further leverage.
So they are straightaway getting an average profit of 25 per cent on bookings while entering Indian property market. NRIs own about 8-10 per cent of the total real estate market in the country, particularly in Mumbai as per Liases Foras.
Deepak Vazirani, head of international business vertical at Rustomjee Group, said: "NRIs have been fence-sitters of late. They surely have witnessed a lot of changes getting implemented within the real estate industry that have been quite encouraging for them. The formation of Rera to support clients and penalise errant developers is certainly a welcome move for the community."
A key source country of NRI investment is the UAE, which account for 20 per cent, followed by the US (18 per cent), the UK (7 per cent) and Canada (6 per cent).
"Post-elections, a lot of NRIs were awaiting the results and now with a stable formation of government there could be some movement and buying interest that could certainly be seen among the NRI community.
"A lot of category A developers will benefit as NRIs would certainly consider investing their money with quality developers, who will deliver a good product wherein the livability index is higher for a better yield. We will certainly also see certain micro markets and projects getting a booster wherein the ticket sizes are relatively smaller and returns better. Luxury among the NRIs would be clearly seen as an end-use and not an investment anymore," added Vazirani.
As per recent research by ANAROCK Property Consultants, the overall unsold inventory of luxury homes (priced Rs1.5 crore - Rs2.5 crore) declined by 12 per cent to 42,650 units in Q1 2019 from 48,300 units in Q1 2018. Bengaluru led from the front, recording a significant 49 per cent reduction in unsold luxury stock within a year - from 6,370 units in Q1 2018 to 3,260 units in Q1 2019. Bengaluru was followed by Kolkata with a 37 per cent decline in unsold luxury stock, and NCR and MMR each witnessing 7 per cent yearly decline.
Concurrently, unsold stock in the affordable segment saw an increase of nearly 3 per cent as maximum new launches catered to this segment during the period.
Historically, NRIs typically bought luxury homes either for good ROI or for self-use. After a prolonged wait-and-watch period post the recent reformatory changes in the Indian real estate market, the trend is now decidedly skewed towards personal use.
This may not look handsome at the moment, but HNIs and UHNIs are nevertheless refocusing on this segment for three reasons - NRIs' predilection towards an aspirational lifestyle, the potential for better returns when market rebound meets restricted supply in luxury areas, and the fact that price points of most luxury properties are at their lowest, with developers additionally offering lucrative deals.
· Higher potential for capital appreciation for properties located in prime areas
· Higher and steady cash flow (via rental income) of properties in prime areas as against affordable housing in far-flung areas
Anarock's recent survey also indicates that 28 per cent NRI respondents are looking to buy luxury and ultra-luxury properties (priced Rs1.5 crore onwards) across cities. The perennial favourite of several NRIs since long, the luxury segment saw a declining interest post the reformatory changes in Indian real estate market with many NRIs hoping for price cuts.