One year from demonetisation: Real estate sector has revived post-demonetisation owing to reforms and rising investor confidence

It has been a year since demonetisation was announced on 8 November, 2016 and was touted as the surgical strike on black money. Although, in the aftermath of demonetisation, the GDP growth has come down to 6.1% and 5.7% in Q1 and Q2 2017, respectively, the good news is that the Business Confidence Index has raised to 64.1 from 56.4 in Q1 2017. Additionally, due to the continuous efforts by the Government, India also jumped to the ranking of 100 from 130 in ‘Ease of Doing Business’ rankings by the World Bank, making it the first country to record the highest jump in World Bank’s ease of doing business rankings. In line with many other forecasters, Colliers Research also views that the fall in GDP was just a temporary phase and the stage is now set for the Indian economy to grow at a faster clip.

As per Colliers Research, the demonetisation wave seems to have settled down and the prospect for the real estate sector looks promising. During the last one year, apart from demonetisation, the real estate sector also witnessed several significant policy reforms such as the implementation of the Real Estate (Regulation and Development) Act in several states, nationwide implementation of Goods and Services Tax (GST), and amendments in the Benami Transactions (Prohibition) Act.

Colliers International mapped the impact of demonetisation on the different real estate sectors and the following is the analysis:

Commercial Market – Investors remained active
In line with our earlier prediction in the report titled ‘Real Estate Sector: Aftermath of Demonetisation’ by Colliers Research, commercial leasing market remained unaffected from demonetisation while commercial strata sale was impacted to a certain extent. In the first nine months of 2017, about 28.9 million sq ft was leased which was almost on par with the last year numbers. There was temporary slowdown in the overall transaction volumes in the first few months post demonetisation. However, a year after demonetisation, investor activity seems to be picking up on the back of improved investor confidence and several major transactions have been concluded. According to Colliers Research, the grade A income yielding commercial leased asset should remain in demand in the coming months as REITs are likely to start listing in 2018.

Residential Sector – Affordable housing was in vogue
Similarly, in the residential sector, the sales in the secondary residential market especially in the luxury segment were impacted post demonetisation. However, the transactions in mid-segment and affordable housing remained less impacted, and the buyer preference remained tilted towards ready-to-move-in houses. As per Colliers Research, the residential sector was impacted more because of state-wide implementation of RERA and GST. The developers were occupied in RERA, and GST compliance and buyers were also in a wait-and-watch phase over the implementation of these two rules. Due to continuous support of the government and push of Pradhan Mantri Awas Yojana, the affordable housing segment should pick up with more and more developers and investors will try to invest in this segment.
“The residential real estate sector had been under stress even prior to the announcement of demonetization. For a sector that was accustomed to cash dealings, demonetization resulted in a massive slowdown in sale transactions in the immediate aftermath of the announcement”, said Amit Oberoi, National Director, Knowledge Systems at Colliers International India.

Industrial Sector – Positively impacted with investment on the rise
Like any other sector, the industrial, logistics and warehousing sector went through a slump over an initial couple of months owing to the cash crunch brought along with demonetisation. However, of late, the growth of the sector has been accelerated with the roll-out of the Goods and Services Tax (GST). Implementation of GST acted as a catalyst for rise of warehousing market in India by eliminating multi-layered tax system and state borders, thus creating a fair marketplace across the country. According to Central Statistics Office data, the Index of Industrial Production (IIP) also noted a significant growth of 4.3% in August 2017 over the Index of August 2016. IIP registered a cumulative increase of 2.2% during the period April-August 2017-18 over the corresponding period of previous year.

“Consolidation of warehousing is expected to gain momentum in the short-to-medium term as most of the large corporates are now focused on optimising their resources with a twin-pronged approach of improved inventory planning coupled with demand forecasting. This is expected to lead to phenomenon wherein warehousing demand is expected to outpace supply. Hence, quality warehousing space is the need of the hour”, says Shyam Arumugam, Associate Director, Office Services, Colliers International India.

Several international companies are hopeful about Indian logistics market with announcements from various global players to increase their capacity of transporting goods back and forth from Indian cities in 2017. Canada Pension Plan Investment Board (CPPIB) acquisition of a majority stake in IndoSpace, for about USD 500 million marked the largest industrial and logistics deal in India. In our opinion, the e-commerce logistics businesses are highly optimistic on rising demand for supply chain services in India and many companies like Amazon, Delhivery and 4tigo Network Logistics secured an infusion of funds for their warehousing activities. Also, the warehousing occupiers like Amazon and DHL announced plans to expand their warehouses shortly.

“All these policy reforms, especially RERA and GST are helping in aligning the real estate sector to the international standards of doing business. We are hopeful that the government will make the real estate approval processes easier and shorter as a part of its ease of business initiative. It will encourage the entry of more foreign entities (developers and funds) in the Indian market and more liquidity for the Indian developers who have an established track record. This should lead us to a new era of lower interest rate regime, fair competition and more predictable business environment. At the same time, it will lead to a higher threshold for entry in the real estate business”, says Surabhi Arora, Senior Associate Director, Research, Colliers International India.

As per Colliers Research view, the real estate market outlook looks positive in the long term. We are positive about the prospects of all commercial, industrial and residential real estate market in the long run and expect more fund flow from institutional investors and banks. Moreover, growth in e-commerce, retail, fast moving consumer goods (FMCG), auto and auto ancillary, chemical and pharmaceutical industries are driving the demand further and will push the enormous warehousing volume growth to the next level.

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