Why Commercial Is Doing Better Than Residential Realty In India

(Wikipedia)

It’s no coincidence that the realty and banking sectors have been hit by difficult times almost simultaneously. This can be attributed to the symbiotic association they share. For instance, the crisis-hit Punjab and Maharashtra Cooperative (PMC) Bank: Over 73 per cent of all its loans went to Mumbai-based builder HDIL alone.

Until about 2012, before regulations started kicking in, banks happily obliged builders with grand schemes, promising homes to India’s teeming millions. Buyers then were perceived to be desperate to possess homes at any cost. However, come 2012, amid delinquencies, banks changed tracks and adopted an extremely cautious approach.

However, this wasn’t a great cause of concern among builders as there were non-banking financial companies (NBFCs) to fill the void. Also, they had buyers willing to invest in their plans, which were still only on paper. Developers, in the name of project pre-launches, took huge advances from homebuyers and didn’t have to pay any interest on the funds raised. With the implementation of RERA though, builders were forced to end this practice.

Making the matters worse, a spate of large-scale defaults over the past year by companies like DHFL and IL&FS has triggered an NBFC crisis, drying up another important source of borrowing for developers. Simultaneously, default-hit banks, NBFCs and buyers dragged builders to insolvency courts over non-repayment of dues.

Builders, it would seem, had bitten off more than they could chew. Emboldened apparently by the sheer availability of funds and a positive buyer sentiment, they tried to ‘make hay as the sun shines’ in the decade starting 2000. They didn’t envisage anything to go wrong, especially since the entire country was reposing faith in this asset class. While, the plan of delivering dream homes was brilliant, it needed an equally brilliant execution. Builders failed miserably on the delivery front, despite the best intentions in some cases and in others, even the intentions weren’t good.

Sample this: Even after waiting for several years now, over 42,000 people who had invested in various housing projects of the Amrapali Group, have little clue on the present status. This is despite the Supreme Court trying to find a solution to the conundrum since 2017, when the builder was brought to the insolvency court after large-scale defaults.

The story of nearly 35,000 Jaypee buyers isn’t much different. More and more builders continue to join this dubious league, even as authorities struggle to find a solution to earlier cases. The HDIL case may be an appropriate example to cite here.

Regulations that caused short-term hiccups in the realty sector

With the promise of getting rid of corruption and black money in the country, the Narendra Modi-led central government launched several bold initiatives in its first stint. While these steps might streamline the processes in the long run, they have impacted residential real estate negatively at present.

Demonetisation in November 2016, the rollout of the RERA and Goods & Services Tax (GST), severely impacted demand in the next year, aggravating the already difficult crisis situation. Addressing this difficult situation, the government did offer some succor to the second-biggest employment-generating sector (next only to agriculture) last month when it announced a Rs 25,000-crore stress fund to provide last-mile liquidity to stuck projects. The move — estimated albeit to help only 4.5 lakh buyers, came against the backdrop of India’s economic growth rate slowing to an over six-year low of 4.5 per cent in the September quarter, primarily on account of the realty crisis.

According to industry estimates, there are Rs 1.77 lakh crore worth of stuck projects in the country at present and a Rs 20,000-crore stress fund appears grossly inadequate. Finance minister Nirmala Sitharaman recently announced her government’s plan to infuse a liquidity of Rs 70,000 crore into banks. While this might help ease some stress in the system, it’s unlikely that banks, freshly out of muddy waters on government largesse, would presently loosen their purse strings and lend unabashedly to a distressed sector.

Despite trying every trick in the book, developers, who scared off investors and buyers with defaults and instances of siphoning off funds over a decade, have failed to revive demand in the segment. According to industry estimates, projects worth Rs 9.38 lakh crore (that is five per cent of the country’s gross domestic product) are lying unsold in major Indian residential markets.

This unprecedented crisis in the residential segment has also led to the flight of private equity (PE) investments, which have reduced by half in the first six months of 2019 when compared with the same period last year. PE investments in residential real estate have tanked from over Rs 110.30 billion in H1 2018 to only Rs 56 billion in H1 2019 — the second-worst half-year period since 2015.

The commercial real estate business

The commercial segment, thankfully, is a different story altogether. By comparison, India’s commercial realty is mostly perceived as being impervious to the maladies facing the larger real estate sector. It has ridden the wave of an information technology boom and mirrored the country’s entrepreneurial spirit. HDFC Chairman Deepak Parekh’s recent assertion reflected the faith industry experts have traditionally reposed in commercial real estate. “One never sees a slowdown in this segment,” he said and rightly so.

Unlike in residential real estate, where funds could also be raised from buyers, developers of commercial real estate depend entirely on internal equity and external debt — that is to say, banks and PE funds are their only source of funds. The lending pattern of these two sources depends less on sentiment than hard numbers. So, if commercial realty is seen as doing better, it has a lot to do with the discipline it has shown in dealing with money and delivering its promises.

During H1 2019, PE investments in office spaces increased to more than Rs 142 billion from nearly Rs 104 billion in the same period of 2018 — an increase of over 36 per cent. The response to India’s first REIT by Blackstone-Embassy was phenomenal and there has been a lot of activity in the segment during the first half of the year. Retail and warehousing segments are already doing well and the co-living segment is showing an equal growth potential for times to come.

While India’s residential realty strives to come out of the woods, one can see its commercial peer holding the fort. However, considering that neither of the two segments of the real estate sector is fully immune to a liquidity squeeze, it wouldn’t be unwise to exercise caution.

- by Sunita Mishra

Source : PropTiger