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The trends that may define the real estate sector in 2020

The trends that may define the real estate sector in 2020

While the traditional housing segment is struggling due to a funding crisis, alternate commercial models like co-working spaces are gaining traction. But measures to boost demand are needed to help the sector properly recover from the slowdown

The year 2019 has been another difficult one for the real estate sector, which continues to struggle with a funding crisis in the midst of issues plaguing the NBFC and banking sector. The situation has been exacerbated by the economic slowdown resulting in poor housing demand. There have also been structural changes in the industry, as a fallout of events like demonetisation and the introduction of the RERA and the GST in the last few years. The irony is that currently, the real estate sector has huge unsold inventory of 4.5 lakh housing units, even while the overall housing requirement in the country remains high.

As we head to 2020, there are interesting trends that have emerged in the last few years that will be guiding the outlook for the sector.

Housing segment

Housing demand has moved to user segment as against investors. For cities like Delhi, Mumbai the investor:end-user ratio was 60:40 around 6-7 years ago. However, with the return on investment in real estate reducing and many big developers defaulting, investors have moved out of real estate as an asset class. Investor participation in the overall demand has fallen to as low as 5-10 per cent. Even among the users, the demand is clearly for ready-to-move-in projects, with buyers unwilling to take any risk. This trend of the user segment dominating the housing demand is going to continue, at least for the next few years, even with the economic outlook improving.

There has been a strong push by the government for the affordable housing (less than ₹50 lakh) segment. As a result, this segment accounts for around 50 per cent of the total residential housing sales. While a large number of developers are getting into this segment, the government may have to announce some strong measures to further propel demand.

Commercial spaces

Interestingly, even with the residential real estate sector struggling and the economy slowing, the commercial real estate sector has been showing good traction. Total office transaction in H1 2019 was a strong 28 million sq ft on the back of an all-time high of 48 million sq ft in 2018. This spurt in office space demand is being led by the IT/ITES sector. The IT sector in India is moving towards high value segments like artificial intelligence, data analytics and product development, supporting the rise in demand. Rentals have also been inching up with companies like WhatsApp, Apple, Facebook expanding their presence in India. There is large office supply lined up for next year too, hence the rental growth may moderate in 2020.

While the commercial real estate is showing good growth, the rise of Hyderabad as an office option is especially commendable. Bengaluru is known as India's IT hub. But with a huge pressure on Bengaluru's infrastructure, Hyderabad is emerging as an attractive alternative. In 2019, Hyderabad has been a close second to Bengaluru in terms of office transactions. Given the pro-active State government and appropriate infrastructure, Hyderabad's growth will continue going forward.

Alternate models

The first REIT launched by Blackstone and the Embassy group in 2019 has given phenomenal returns since listing. There are likely to be more REIT launches in 2020 as investors try to participate in the gains of the commercial real estate sector. Apart from REIT, fractional ownership of commercial real estate is being taken to the masses through blockchain technology and the marketplace model. The fractional ownership model is similar to a REIT, with certain differences in structuring of the transaction. Both fractional ownership and REIT can emerge as a credible alternative for investing in commercial real estate.

The growth of co-working spaces has been very sharp, with the segment accounting for around 13 per cent of the total office transactions in 2019 from 5 per cent in 2017. Small start-ups as well as large IT players are finding this an attractive model. The debacle of WeWorks' listing has failed to dampen sentiments of the co-working operators in India as they see good demand. The co-living space is also emerging in the form of student living, senior citizen living and similar options. Going by the acceptance of this model, demand for shared spaces is likely to gather further momentum going forward.

Another interesting aspect is the rise of e-commerce in India and the resultant surge in demand for warehousing. While the warehousing segment in India is largely dominated by unorganised players, organised warehousing is gaining traction. This trend is going to strengthen further as regulatory compliance requirements by contemporary business can only be met by the organised warehousing segment.

These trends are going to shape the future of real estate industry in India. However, the immediate requirement for the industry survival is easing of the credit crunch. While measures like AIF (Alternative Invest Fund) for completion of projects in the affordable housing segment and partial credit guarantee for banks buying assets of NBFC will provide some relief, it will only be able to solve a small percentage of the problem.

There is an urgent need for quick implementation of further credit-easing measures. In the new year, if the government comes up with meaningful stimulus to boost housing demand, it will help the industry to recover from this prolonged slowdown. But any recovery in 2020 is going to be slow and painful.

The writer is Chief Economist and National Director-Research, Knight Frank

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