FWD Business takes a ‘Realty Check’ post demonetisation
Text: Rochelle D’Souza Illustration: Jithin Mohan Images: Various Sources
It was about 30 years ago that the real estate sector in Kerala began to grow and flourish. In the years around 1984 – that would go on to be called the ‘Gulf Boom’ – the state witnessed an inflow of foreign remittance from the NRI Malayalee who, decided to invest the surplus of his newfound wealth in real estate. Add this to the states flourishing tourism sector, which contributed to around 20% of its revenue and the growth of the IT sector in the late 90s and it becomes clear why the relatively small state of Kerala has managed to stand head and shoulders above its tier two counterparts and managed to be ranked among the top 10 highest contributors to the national GDP with an average contribution of around $110 Billion each year.
Three decades down the line and the wells of liquid gold in the Persian Gulf are running dry, taking the oil prices down with them. Foreign remittance has dipped and considering the fact that we were a state where 22% of revenue came from the bottle, the government’s move to clamp down on alcohol was the final nail to the coffin which resulted in a sort of butterfly effect that took down with it the tourism and hospitality sectors. So with all these storms battering the state over the last couple years, will its real estate sector withstand yet another blow from new policies like the demonetization, RERA’s and REITs?
1984 to 2014
Kerala also has a unique selling point in comparison to its tier two counterparts -the connectability between its developed areas. Although the state has merely 40% of viable land for construction owing to its geographical positioning amidst the Ghats and the Arabian Sea, its cities and townships have been developed within a hop, skip and jump of each other. Unlike other states, every town and city in Kerala is connected and within an average of about 20-50kms of each other. If one were to look at the stretch between Thrissur and Kochi there are more than half a dozen townships like Kalamassery, Aluva, Angamaly, Chalakkudy and Irinjalakkuda along the way. Each of these townships have immense untapped potential in terms of development and this is where the growth of our real estate sectors lie.
The years between 1972 and 1983 the state witnessed an exodus of Malayalees to GCC states which was popularly referred to as the ‘Gulf Boom’. As per the opinion of builders, realtors and government officials alike, the growth of the real estate sector in the state could be roughly plotted on a graph that begins around the year 1984. The peak of the ‘Gulf Boom’ and the foreign remittance inflow that accompanied it was the stronghold of the state’s economy. Of the $71 billion in remittances sent to India in 2012, Kerala received the highest among the states: $11.3 billion, which makes up for nearly 16% of the total. In 2010, the GCC states contained a total Keralite population of more than 3.5 million, who annually sent home a sum of around $6.81 billion (US), which made up for more than 15.13% of the total Foreign Remittance to India in 2008. (As per the Economic Survey of 2014 by the Ministry of Finance, Government of India).
As per a study conducted by the Kerala State Planning Board, one out of six employed Keralites now works overseas making remittances a key source of income for Kerala’s economy. In 2003 for instance, remittances were 1.74 times the revenue receipts of the state, 7 times the transfers to the state from the Central Government, 1.8 times the annual expenditure of the Kerala Government, and 15 to 18 times the size of foreign exchange earned from the export of cashew and marine products. Foreign remittances augmented the state’s economic output by nearly 25 percent. What does this have to do with the state’s real estate sector? Well, the study also pointed out that NRI families are three times more likely (than the resident population) to invest in real estate, particularly superior housing.
From ’84 onward the residential real estate sector in the state saw its golden age with builders constructing high end properties like condominiums and luxury apartmentsaimed at the Gulf Malayalee. Initially most of the projects were constructed in and around the city, particularly along the waterways and since there were no fixed fairvalue, particularly in the case of flats, the pricing was higher than most of the local population could afford. Most of the NRI population chose to invest their money in properties based in the more urban and developed city of Kochi. Kochi not only witnessed investments in the residential sector, but the late 90s and early 2000s witnessed new developmental projectswhich consequently led to the creation of independent townshipsaround the city in areas like Kakkanad and Kalamassery as so on, which were once a lowly suburbs. “When a large project comes up, take for example Infopark, it brought with it around there comes with it a need for related infrastructure. In the initial years over 20,000 jobs were created and to fulfil the needs of these employeesthere was a need for the creation of related infrastructure like housing, restaurants, shopping complexes and so on. Over time, there areas developed and the land values in the area increased considerably. As I recall, following the construction of Infopark there were more than 30-40 registrations carried out at that particular registration office, 20% of which were property and land registrations.” Says Ernakulam District Registrar General P K Biju.
Up until around 2014 the NRI made up for over 60% of the investments in the residential real estate sector, but with the dawn of the global economic crisis the markets began to witness a lull as foreign remittances began to dip.
Post Demonetization
Demonetization has been getting a great deal of bad press and had been attributed with putting the entire sector at a standstill but the fact of the matter remains that Kerala’s downswing has been in the making since the global economy took a beating in 2014. “The months of October through December witnessed a slowdown in transactions and registrations owing to the demonetisation. There were around 2000 registrations lesser than number recorded during the same quarter the previous year.” said P K Biju. The statistics also showed the real estate sector picking up post demonetisation. As per the figures provided by the State Department of Registrations, the number of sale deeds for residential properties in Kerala between January-March 2017 stood at 34,754 when compared to 33,737 which was recorded at the same time in the previous year.
NRI investments in the real estate sector have reduced since 2014 leading to a surplus of residential properties in the market. When demonetization was put into play, the widespread belief that it had curtailed the real estate sector has led buyers to be apprehensive about investing in real estate which has in turn resulted in a surplus supply. Surplus supply but a low demand equals drop in prices. Factor in the newly introduced price correction in the market along with the acts like RERA to regulate the powers of the builders and ensure transparency as well as the excellent borrowing environment in terms of housing and home loans and what you’re left with is the perfect occasion to invest in the market. “People are adopting a wait-and-watch approach to assess the market situation. In terms of land deals and resales of land plots, there will be a correction in prices. This is the right time for end-users to buy property.” says Praveen Menon, manager of overseas sales at Skyline Builders.
“The current market scenario must be understood with some insights into the cash-economy of real estate transactions, and also, with an understanding of demand mechanism. There has been a removal of 20-30% cash-dealings from the transaction process. This in turn leads to the conclusion that the prices will fall by 20-30%. The reason for such an expectation is the climbing down of prices coupled with at least two other factors such as an eventual interest rate decline and the consequent rise in demand.” said Biju.
Price correction in the marketstand at around 15-20% in the state, particularly in the case of the pricing of apartments, which has seen changes that benefit the buyer. “Once the RERA comes into the place the buyer will be benefited considerably thanks to provisions like that which ensures that they only pay as per carpeted area rather than as per the built up area. There was also been correction in the fairvalue. Previously apartment fairvalues were not fixed and pricing discretion lay in the hands of the builders and the landowners. Fairvalue was previously as little as 30% of the market value. Today it has been corrected to ensure that it is no less than 50% the average market value.” said Abjo Joy, president, Kerala Realtors Association (KRA). “The year 2016 has laid the foundation for the strong future of the real estate industry. Policies like Smart Cities Concept, Housing for all by 2022, GST, RERA implementation, Demonetisation and Benami Transaction Act are all, in effect, steps to sanitise the real estate sector.” he added. What you are left with is housing which is within the reach of the middle class.
The Future
Kochi is not just on the government’s smart city list, but also on the map of many new IT businesses. Apart from being the commercial hub of Kerala, developments such as privatisation of the international airport and upgrade of the sea port have brightened the prospects of the real estate sector in the city.With projects like the Smart City mission which will see an investment of INR 2,076 crore for pan city solutions and area-based development, the Metro Rail project, and the creation of new infrastructure for the IT industry in the city which is expected to create over 90,000 jobs Kochi’s developmental activities will see an inflow of a large floating population, who will soon be the key player in the real estate sector. “The residential real estate in Kochi was initially driven by NRIs with only 30% of end users being locals. But it has been seen in the last quarter, that although there has been a considerable dip in NRI investments the housing demand is robust, and this primarily owing to the investments by the local and floating population in the city. Between the months of September-November there were as many as 26,359 land registration deals in Ernakulam District. The total amount accrued to the public exchequer in the form of stamp duty and registration fees alone was Rs.400 crore, which is only about 10% of the actual value of the transactions. As per the Department of Registrations, in the year 2016 alone the total land deals which have taken place in and around the city of Kochi alone amounted to a whopping Rs. 10,000 crore. Therefore the investment by the local population is quite substantial.” SaidAbjo Joy.
The Skyline executive, claims vertical units are in demand in Kerala owing to the scarcity of land. “Villas are expensive for investors and hence volume sales occur in the apartment segment. It was also noticed that there is a growing number of the local population, particularly among the young generation salaried class who invests in apartments.” said Praveen Menon. The Kerala-based builder has units for sale in projects in 10 major cities in Kerala. The increase in investments from the floating population in the citygoes hand in hand with new developmental projects in the city. New developments increases the floating population in the city which in turn necessitates the need for diversification and expansion of real estate in the area. The development of the area will in turn result in an increase in the land value. “Vypeen island, which has been hitherto neglected, is in the limelight now because of projects like VICT, LNG terminal and SPM at Puthuvype. A few years back, a ‘cent’ of land in Vypeen, Mulavukad and Vallarpadam islands used to cost around Rs 7500 – 10,000. Now the minimum price is Rs 200,000 per cent. Similarly projects like Smart City for which over 400 acres has already been cordoned off by the government, will lead to skyrocketing of land value in and around the areas where it is situated.” P K Biju said.
The onset of developmental activities will result in the demand for residential real estate moving from the hands of the NRI to that of the local population, but at the same time the investments will be more organized and therefore presumably (possibility more certain than probability) corporatized. “With the onset of these major developments, the investments being made into the market will be more corporate in nature from large companies and organizations who intend to set up shop in the city. This would mean an increase in FDI and foreign investment.” said Abjo Joy. The revival of the real estate sector is well on its way in the city, and builders and developers too are awaiting the imminent upswing. “The trend in Kochi is in the process of shifting its focus to affordable house to cater to local populations and ever increasing floating population of the city. Affordable housing is where the money now lies and has immense potential as it is yet to be tapped. This is where the focus of the real estate sector will shift to in the next few years.” said Praveen Menon of Skyline.