Industry demand outlook remains stable as sentiments

The real estate industry has undergone a virtual catharsis since 2014 with the imposition of the RERA, GST and demonetisation in the midst of a prolonged correction in demand and prices. The homebuyer has shunned the market due to the industry’s endemic credibility issues and a slowdown in general consumption demand that has affected all industries. This slowdown in consumption is reflected in the fall in Private final consumption expenditure (PFCE) from 66.2% of the GDP during FY12-FY14 to 57.5% in FY15-FY19. The PFCE has fallen even more precipitously to 55.1% in Q1 FY20 according to the RBI’s annual report, 2018-19. Even developer funding that was already a significant challenge not so long ago has become the privilege of a chosen few due to the ongoing NBFC liquidity crisis, leaving majority of real estate players fighting for survival.

Acknowledging the broad-based economic malaise, the government has announced a slew of measures during the September ending quarter to re-invigorate demand and infuse liquidity in the system. We take stock of supply side as well as demand side measures for the real estate sector that shall define this period:

Supply side

• Corporate tax slashed to 22%, effective tax rate now at 25.2% from 30% to 38% earlier. This move is probably second only to the economic liberalization of India that was initiated in 1991, in terms of making India a more investment friendly destination. India’s corporate tax rate is now among the lowest globally and will vastly improve India’s chances of attracting fresh capital organically as well as internationally.
• Liquidity support to HFCs and NBFCs:
• INR 30,000 Cr sanctioned through the NHB to help the real estate sector which is facing a demand slowdown and cash crunch
• INR 70,000 Cr capital infusion into PSBs in a bid to boost lending and improve the liquidity situation
• Stressed asset fund (AIF) of INR 20,000 Cr announced, to finance non-NPA, non-NCLT residential projects in low and mid-price segments, which are more that 60% complete.
• One-time credit guarantee of up to 10% of the fair value of assets purchased by a bank from a stressed NBFC or HFC. The objective of this one-time facility, which will be open for six months or till such date that assets worth INR 1 lakh crore are purchased by banks, whichever is earlier, is to address the temporary asset-liability mismatches of otherwise solvent NBFCs/ HFCs without resorting to distress sale of their assets to meet commitments.

Demand side

• Budget permitted additional interest rate deductions of Rs.1.5 lakh for affordable housing units valued up to INR 45 lakh for housing units purchased before 31 March 2020. Overall deduction on account of home loan interest now at Rs.3.5 lakh.
• The benchmark for home-loans has been shifted from MCLR to Repo rate. The central bank had cut policy rates by a cumulative 110 basis points in the past 12 months in a bid to increase lending, but it only resulted in an approximate 35 bps drop in the banks’ marginal cost of funds based lending rate (MCLR). Shifting the benchmark to the REPO rate will ensure more efficient transmission of rates and support demand.

These measures have played a significant part in improving the sentiments as reflected in the 8% spike in the NIFTY within two trading sessions of announcing the cut in corporate taxes. The residential demand has shown some promise of stabilizing with sales growing marginally YoY, for 3 consecutive half-yearly periods starting H1 2018. However, most of this growth is attributed to increasing traction in the affordable housing segment and ticket-sizes under INR.50 Lakh, where the government’s measures have been focused on. However, the broader residential market, particularly the mid and premium segment, still have a long way to travel on the road to recovery. We expect that the liquidity easing measures taken by the government in this quarter will play their part in alleviating the funding crisis faced by these segments as well. Notwithstanding the challenges faced by the residential market overall, the modest growth in volumes seen in the past 3 trailing half-yearly periods should sustain its momentum for the remainder of the year with the recent regulatory boost given in the September ending quarter.