Only govt investment in infra can save realty: CBRE

New Delhi: Even as India saw a sluggish start to its economy this year with the country’s GDP expanding by just 5.3 percent in the January-March quarter and we are set to witness another not so positive year for the real estate sector in India, Firstpost spoke to Anshuman Magazine, Chairman and Managing Director of property consultancy firm CBRE on the issues plaguing the sector, how buying homes as investment adds to supply constraints and on what the government can do to give realty a fillip.

Outlook for the real estate market in 2012…

I don’t expect any huge movements in the sector, this year. While the market will remain active, I don’t expect the pace to improve, till the overall sentiment of the market does not improve. And that will happen based on a lot of variables - like Manmohan Singh taking over the finance ministry and making some serious announcements like FDI in retail, aviation, etc. If this does happen, then the markets could pick up, in turn boosting investor sentiment which will definitely help the realty sector.

While realty in the corporate space has more or less stayed the same, corporate purchases of office space will get a boost only if the global economy picks up. If corporates do well, they will have more money to buy and it will have a direct impact on our economy.

For residential spaces to gain, bank loan interest rates need to come down, liquidity situation has to improve and more supply of homes has to come on ground.

As I see it, if there is some serious announcement from the government and the country and world economy look up, only then will realty get some prop up.

The main issues the sector faces today…

The supply constraint and infrastructure are the biggest and most pressing problems of the sector. Infrastructure being poor and supply being limited has kept the prices of property high. In residential markets in metros, the supply is poor and demand outnumbers it by leaps and bounds. People want to buy realty only in places that have basic infrastructure like water, electricity and transportation.

The shortage of capital and cost of capital is also very high and prevents developers from getting into building more projects than they already are.

And, while the purchasing power in Mumbai and Delhi may have increased exponentially, our country’s purchasing power is still very low. Till the per capita income across the country does not increase, it will not generate a demand in the sector. Also, if the GDP growth keeps sinking, it will not only have an impact on the ground, but continue to reduce purchasing power deterring people from making realty purchases.

Q) Buying homes as investment also adds to the supply constraints…

The supply constraint in the sector is because of both, actual physical constraints and investors who keep buying flats for investments. Especially for people in urban areas - who may get a bonus or who may have some money in hand - buying realty as an investment seems like a better deal than investing in say the stock markets, which have been quite volatile and unpredictable lately. Investors also don’t have too many option to invest and people generally believe in real estate as a good investment.

This individual investor investment in homes will always happen as long as people have the purchasing power and it is just how it is.

Supply of rentals has increased vis-a-vis the return on value…

The rental market has definitely gotten bigger as there is an increasing supply of homes and office spaces to let out. But, while the supply of rentals has improved, the cost of rentals has come down. There are more people buying property as investors, which has led to the market share of rental spaces increasing, but what it has also done is that it has generated so much supply that one is unable to receive good returns on the space. When the capital value of spaces are so high and there’s lots of supply, anyone renting out a residential development or apartment sees returns that are anywhere between 2-3 percent, which basically means that value for the property vis-a-vis returns are very low.

So, while the options in rental spaces have increased, the return on investment is still very low in India. Here people buy property for capital gains and not yield returns.

What the government needs to do to boost the sector…

The government must invest in infrastructure with a sense of urgency. If people have the basic amenities like power, water, connectivity, they will not mind staying a little away from the city and travel to and fro. But if there are no basic amenities outside of cities, it’s natural that people will want to live in it- burdening the city’s infrastructure which is not made to handle the overload of capacity. If basic infrastructure is in place, the supply of realty can increase and spread further away from overstretched cities.

The government must also improve funding access to home owners. The biggest constraint of housing is funding - one will always think of where they can get housing loans at a low cost. If this option exists then it will stimulate demand.

It is also imperative to resolve the land problems we have in our country and laws of land acquisition, besides doing other things like digitising land records, making it easier to transact in the land market, taxation, etc. A lengthy and tedious land acquisition process will create a constrain in supply and increase prices.

Increasing number of Indian institutions putting their money into realty…

Banks like Kotak, HDFC, ICICI and even NBFCs have all begun putting money into real estate. There has been an increase in domestic money coming into the real estate market and going forward I expect it to only increase. And while there surely has been a jump in this number, it’s difficult to put a number to it as it has been fragmented. While in totality the numbers may not be huge, there has been an exponential increase in number of Indian investors since the past 2-3 years.

Cities will continue to remain growth boosters for sector…

Besides Delhi, Mumbai and Bangalore most of the activity in the real estate market has been around major cities - like Hyderabad, Chennai and Pune - and they will continue to be the “hotspots” in realty so to say. Any growth that occurs in a place is because of economic drivers and jobs being created. And hence the stress on the importance of infrastructure, yet again. For any growth to take place, infrastructure is very very essential.