A broad-based recovery in residential real estate across the country appears to be some time away as muted demand, weak affordability and declining investor interest besides funding challenges will keep growth in check, an ICRA report said today.

The liquidity crunch faced by the NBFCs and housing finance companies towards the end of CY2018 has impacted the funding availability and cost for many real estate developers. “If the current scenario persists for long into the start of CY2019 also, it may cause credit stress in developers who are reliant on refinancing to support balance sheets heavy on land assets or slow-moving inventory,” the ratings agency said.

New project launches had already been severely curtailed in CY2017 due to the impact of demonetisation and transition issues in Real Estate Development and Regulation Act (RERA) implementation. “Due to the high compliance obligations imposed by RERA, new launches from small developers have reduced. And demand in the premium and luxury category of residential segment are likely to remain suppressed for under-development projects due to the increasing preference for completed properties under the GST regime,” it added.

However, structural changes over the last two years in the form of implementation of RERA and Goods and Services Tax (GST), along with increased government focus on affordable housing, have raised expectations of demand revival in the industry.

“While these expectations have played out to some extent in certain property segments and micro-markets, a broad-based recovery in demand across the country appears to be some time away,” it said.

Elections adding to uncertainty

In the coming year, ICRA expects residential real estate developers to maintain a cautious stance towards new project launches and land acquisition deals, especially due to the constrained debt funding scenario.

The upcoming elections in CY2019 may also keep the fresh project launches in check, considering the uncertainties developers may face relating to timeliness of regulatory approvals for projects.

With RERA limiting the ability of small-scale developers to launch projects, the industry is likely to see more of development management or joint development model of project implementation. The existing gaps in the implementation of RERA in many states need to be corrected for customer confidence to be fully reinstated and the full benefits to be realised.

Demand growth is likely to be sustained in the affordable and mid-income category of projects in Tier 1 markets, especially those where the fresh leasing activity of commercial office space continues to be robust thus creating fresh job opportunities.

Commercial real estate stable

ICRA, however, has given a stable outlook to commercial real estate, which has been growing at a steady pace and has garnered the major share of the institutional investors’ interest in the space over the last four to five years.

This is due to stable demand for office space from various multi-national and domestic corporations, calibrated supply of stock, a more organised industry structure and availability of adequate capital for projects, backed by healthy investor appetite for rental yielding assets.

Most of the tier 1 markets have seen stable levels of fresh leasing and supply additions, resulting in either a declining vacancy or a status quo in vacancy levels. Nonetheless, with significant supply of stock lined up over the medium term, occupancy levels and rentals in this market may come under pressure if the current demand trends are not sustained, ICRA added.

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