Real estate regulatory transitions impact operational performance, but pave the way for industry consolidation going forward: ICRA


New Delhi, January 16, 2018: The year 2017 for the real estate sector would be defined by the various regulatory transitions witnessed. After demonetisation, which was announced in November 2016, the industry saw two game-changing developments in the form of the implementation of the Real Estate Regulation and Development Act (RERaD Act) and the Goods and Services Tax (GST). Both the RERaD and the GST implementation will improve the compliance and transparency levels within the industry.The relatively stronger player stands to benefit from these changes over the longer term.

Says Mr Shubham Jain, Vice President and Sector Head- Corporate ratings, ICRA, “Notwithstanding the short-term impact that the recent regulatory transitions have caused, ICRA expects the industry to stabilise in 2018 as both real estate developers and customers become attuned to the changed regulatory scenario. Our expectations of consolidation in the industry are premised on the following factors – (i) limited supply addition, especially from unorganised developers, (ii) realignment of business models of developers under the RERaD regime, (iii) impact of the Insolvency and Bankruptcy Code (IBC) on financially weaker developers, (iv) changing customer preference for completed projects, and (v) entry of organised players into the affordable housing segment, which is expected to fare relatively better.”

Regulatory transitions have, in the short-term, adversely impacted the operational performance of the industry, which has been witnessing demand headwinds over the last couple of years due to elevated prices, an uncertain business environment, limited capital price appreciation and weak consumer confidence. Even as the effects of demonetisation started waning over the course of the year, the implementation of the RERaD and the GST, with effect from May 2017 and July 2017 respectively, put further pressure on the industry’s operational metrics.

Adds  Mr Jain “Delays in the creation of requisite regulatory infrastructure and notification of rules by various state governments, as required under the RERaD Act, had created uncertainty, both for the developers and the prospective buyers. The GST implementation also resulted in a short-term impact on sales volumes as the developers took some time to work out costing implications under the new tax regime.”

On the supply side, the developer community has been beset by high inventory levels, resulting in a demand-supply mismatch and delay in new launches. Implementation of the RERaD Act has also encouraged developers to focus on the completion of the existing projects. Furthermore, the regulatory changes resulted in re-evaluation and realignment of their business models in order to be better prepared to meet their delivery commitments.

The above impact is borne out by an analysis of the performance of a sample set of developers during FY2018, which indicates that sales continued to remain under pressure, as the combined effects of demonetisation, the RERaD and the GST added to weak market conditions. Though the aggregate sales value reported for H1FY2018 for the sample set shows a year-on-year growth – largely due to the contribution from one entity, which has seen 255% Y-o-Y growth – which was not broad-based as eight out of 11 developers in the sample set saw sales value decline during this period. New project launches have remained muted during the year, in line with the declining trend witnessed over the last three years. While unsold inventory on an aggregate basis for the sample set is expected to decline over 2017, this reduction is largely driven by limited supply addition and not a material improvement in sales velocity.

The year also saw the Government according infrastructure status to affordable housing, coupled with increased budgetary allocations for the Pradhan Mantri Awaas Yojana (PMAY) and income tax exemptions for affordable housing projects. Such actions have attempted to address many of the demand and supply concerns in the affordable housing segment.

Henceforth, ICRA expects developers to take a cautious approach as far as new project launches are concerned, given the over-supply situation in various markets along with their stressed balance sheet positions. The focus is likely to remain on liquidation of existing stock and reduction of debt overhang before new projects are launched.

The RERaD Act is a right step in the right direction,providing a strong consumer-friendly framework, which can boost buyers’ sentiments and assuage concerns regarding project delays and fund diversions. The Act is also expected to help consolidate the market position of established and larger developers.

The Government has also provided the right focus on the affordable housing segment through various sops to customers and developers. It is expected that with continued support, the supply in the segment will grow and cater to the inherent demand. Housing projects in the affordable to mid-market segment are likely to generate the bulk of the demand in the coming year and in ICRA’s opinion developers with inventory aligned to this would stand to benefit.