The transition to formal funding

Property expert Deepak Varghese explains why there is some optimism within India's real estate segment in his regular 'India Investment Journal' column. As always, come August and it denotes the start of the festive season which translates into four months of consumerism. While the past two seasons were quite lean, this year - on the back of rising optimism in the stock markets led by a seemingly average monsoon, a positive sentiment seems to be rubbing off on the real estate market. This August has seen better than average residential sales across the markets lead by the sub $110,000 segment. This segment has been widely expected to perform this year, given that summer has been reasonably good for the commercial real estate market and it has been seen earlier that when commercial realty performs, residential too shows a pickup, one or two quarters in lag. Given anticipated growth in consumption, the warehouse sector is seeing a lot of interest especially in Bengaluru, Chennai, Hyderabad, outskirts of Mumbai and greater National Capital Region (NCR). If this interest turns into reality, we do expect the wave to spread to the Tier 2 cities by early 2017. That said, the hospitality sector is yet to feel the positive sentiment. While all of the above seems to be positive overall, the underlying concerns of liquidity remain. Lending to the residential segment in the past six months has been over 60 per cent to existing developer loans being taken over with additional moratorium period and a top up. While one might want to believe that the current buying season will tide this over, the larger concern is the near absence of retail investor funds which seems to indicate returns in this sector will par or go under bank deposit rates, in the near term. The prices are already reflecting the correction but the larger trend to be observed is that the market is expecting prices to be stagnant. The dearth of investor monies seems to be attributable to the crack down on black money by the government. Indeed, a good step but it seems to have had an inadvertent side effect on the real estate market - a traditional bastion for black money investment. Going forward, the market also seems to be factoring that the nationwide implementation of GST from early next year will have a further negative impact on black money pools. The real estate market will have to learn how to live without cash investors. This year looks like the year of transition of real estate into the realm of formal funding and a regulatory framework. 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.