Property and polls: When houses are sold below market rates to fund campaigns

While all eyes are on the general elections, the real estate sector is holding its breath for the potential optimism that is expected once the results are out. This optimism is expected to boost transactions and lift homebuyer sentiment.

There is no doubt that the actions and inactions ascribable to the current government have made homebuyers and developers anxious. The next government’s economic and employment policies will be key drivers to growth in the real estate sector for the next five years. 2012 and 2013 were not the best years for Indian realt, and the slowdown impacted all asset classes, except in a few pockets. Revival is no doubt the need of the hour.

There is a sense of hope among developers for a positive post-poll scenario. Will things start looking up for the sector after the general elections? Will clarity on the new government lead to businesses investing? So far, none of the campaigns have outlined a comprehensive proposal for recovery of the real estate market - specifically in terms of providing more housing and managing interest rates.

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Cash Crunch Ahead Of Elections

In India, the property market is a key election financier, and considerable amounts of unaccounted money are being pumped out from the real estate sector to fund the elections. Before the polls, developers are expected to provide liquidity to politicians so as to finance their campaigns. Many developers who are funding possible candidates are delaying their projects due to the lack of liquidity.

The timing is certainly bad. Reduced housing absorption has already adversely impacted developers’ liquidity and in turn, developers’ funding ability. Political commentators also note that certain properties are sold below market rates in order to generate cash for the election campaigns. Given this situation, many developers cut down on new launches and focus solely on selling the existing inventory.

Realty After Elections

With just a few weeks to go before the world’s largest democracy chooses its new government, fence-sitting investors and homebuyers will remain spectators for that period and make their moves. Many assume that property prices will shoot up post elections, but this expectation in unfounded - there are too many factors at play, regardless of which party wins. Election results do not make or break a market, but they do affect market sentiments to a significant degree.

Over the last few quarters, political uncertainty has significantly weakened buyer confidence in many regions. A decisive win for any of the alliances will uplift home-buyer sentiment and the property market will see a return of buyer demand due to the reinstatement of confidence. Post elections, if the road to recovery is unhindered, property buyers may very well re-enter the market in good numbers.

Great Expectations

Political uncertainty certainly has a tangible effect on the Indian real estate market, and it is not easy to separate political uncertainty from broader economic factors such as job creation and interest rates. A better vision on infrastructure will help make the market more buoyant. New infrastructure initiatives have a tendency to boost pricing of residential property in the immediate vicinity.

The manifesto of one of the parties in the electoral fray mentions several initiatives in the infrastructure space, with an intended spend and spending $1 trillion on upgrading India’s infrastructure over the next decade.

It also commits to significant expansion of and improvement in the Indian Railway network, including covering a million plus cities by high-speed rail. The manifesto also mentions upgrading the infrastructure of the port sector, developing inland waterways to strengthen infrastructure and encouraging public private partnership for the creation of world-class airports.

The manifesto of this party’s strongest opponent has a lot to live up to. Considering the disdain with which it dismissed the opposing party’s manifesto, what the real estate sector would expect from this party is a dedicated focus on housing and infrastructure investment, given its vision of a 12 percent GDP growth rate.

The key factors currently at play on the Indian real estate are unsold inventory, absorption and interest rates. It is unlikely that these factors will change immediately post polls, regardless of which party wins. Over the longer term, what will matter most to the real estate sector are a hard re-look at FDI in housing, REIT legislation and the effective implementation of the Real Estate (Regulation and Development) Bill.

The Reserve Bank of India will pay a key role in the post-election scenario, be it in bringing down interest rates for home purchase, or allowing flexibility to reintroduce subvention schemes, or restructuring debt for debt-ridden developers. The RBI’s role in deciding whether to ease lending rates in order to make it easier for more people to qualify for a loan - and magnitude of down payment needed to buy a home - will also impact the real estate market.

Undoubtedly, a new stable government will boost businesses and ignite investor confidence. However, the real impact of any changes will not reflect in the economy for at least another one year, and the effectiveness of any new initiative is something only the future can tell.

A combination of bottomed-out property prices, low interest rates and a return of buyer confidence can create the perfect environment for recovery - and even a bull run. If the incoming government is able to keep interest rates low and employment generation high, it will provide the platform for a far more stable and investment-friendly real estate market.

Ramesh Nair is COO - Business, JLL India