Silver lining in sight for the Indian realty sector

India's commercial property segment may be in for some good news but the residential segment seems to be lagging behind. Here is an overview of some key developments that will determine future growth in the country's property market. The months of April and May have been good for commercial leasing across major locations, reflecting an uptick in commercial activity. Commercial projects have low appetite for funding by institutions as an exit from such loans are subject to the vagaries of leasing. Most of the developers have gone slow in developing commercial projects and some of the cash-rich commercial property developers, like RMZ and Embassy, have been buying commercial properties from Unitech, Essar and DLF, besides mega funds like Brookfields. All in preparation of Real Estate Investment Trust (REIT) listing, which recently had yet another positive change by the regulator. Under the new norms, REITs can now invest up to 20 per cent of their fund corpus in under-construction projects, compared to the earlier cap of 10 per cent. While the stock of commercial office space is reasonable in most cities, Bangalore is facing a possible shortage in the coming months of A grade space if development activity does not pick up. When Flipkart signed a lease with Embassy two years ago for office space to be delivered in 2016, one thought Rs 45 per square feet was 10 per cent more than what should have been paid but at current levels, it is looking quite fair. With the e-commerce trend having now become more established as a method of purchase, warehousing activity is getting a boost, with many funds and developers looking for space outside Mumbai, NCR, Nagpur and Bangalore. Given that land acquisition and aggregation has its share of hurdles in India, it will be some time when we see development in this space. However, the activity levels have definitely increased. While there has been positive news on the commercial, warehouse and infra sectors, the cheer is yet to spread to the residential sector. Mumbai seems to have had a move on its launches with fresh approvals coming in. Launches have by and large been in Chembur, Thane and Borivali, with pricing being in line with affordability and homes in the Rs 10-12 million range. NCR is yet to see activity levels pick up, with rental yields near an all-time low level of 2.5 per cent p.a. on an average. Given that borrowing costs are near 10 per cent levels, that is a serious case of under-inflation level growth. And this region continues to have the longest delay in deliveries, averaging nearly 24 months. Chennai has had it a bit rougher, given that the floods of November led to a disrupted cashflow situation, already having dealt with poor sales in 2015. This combined with pressure from the Reserve Bank of India (RBI) to banks to collect loans that are falling behind schedule has led to a surfeit of repossession orders for those who have put up real estate as collateral for business loans. Assets sold in distress have led to a general downward trend of prices and potential buyers are holding back on their purchases, expecting prices to drop for comparable properties. The combined effect has led to slower sales in the first calendar quarter and the trend seems to be continuing into the second quarter. If this trend continues, we could possibly see developers relinquishing/selling some of their joint development projects to pare debt. Bangalore, which has seen a pick-up in sales in the sub Rs 10 million segment in the first calendar quarter has unfortunately been hit with a slew of regulations. These include a change in TDR rules in November, which has still not been resolved, and a change in height rules for CBD construction. The latest is the National Green Tribunal changing buffer zones for lakes and waterways, with Bangalore among the most affected city. This has slowed down plan sanctions and even plan applications. Residential developers desperately need a respite else cash flow constraints that have been piling up will lead to a serious systemic issue for the sector as a whole. All eyes are on the Monsoon, which normally brings a general feeling of optimism. Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore-based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.