With every year that passes by, it is important to assess the events that shaped the year and the impact those events can have in the times ahead. As we near the end of 2018, let us look at how the year was for the Indian realty space.

The story so far

Real estate sector in India was subject to various reforms in the recent past. The year 2016, witnessed policy changes like the enforcement of the Real Estate (Regulation and Development) Act, 2016, the Benami Transactions (Prohibition) Amendment Act, 2016, and Demonetization. These reforms resulted in making the sector more transparent, more resilient against fictitious holder properties, increased foreign investment and increased channels for the availability of clean credit.

The year 2017, observed implementation of the Goods and Services Tax (GST) along with granting infrastructure status to affordable housing and logistics. GST helped simplify the tax implication on the purchase of real estate. Earlier, buyers were liable to pay taxes depending on the construction status of the property. Under the new law, all properties under construction are charged at 12% of the property value. This excludes stamp duty and registration charges. No indirect tax is to be paid on the sale of ready-to-move-in properties.

Having infrastructure status helped the logistics sector avail credit at competitive rates and on a long-term basis. The infrastructure status to affordable housing enabled such projects to avail the associated benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital.

The year 2018 observed amendments to the Insolvency and Bankruptcy Code (IBC). The Code defines a financial creditor as anyone who has extended any kind of loan or financial credit to the debtor. The Bill clarifies that an allottee under a real estate project (a buyer of an under-construction residential or commercial property) will be considered as a financial creditor. It implies that real estate allottees can initiate a corporate insolvency resolution process against the debtor.

What happened this year?

The year 2018 did not witness many policy changes, but certainly experienced the impact of those reforms implemented two years prior. Alongside, the year was also subject to various economic events that helped shape the picture of India's real estate sector.

India's rank in the World Bank's Ease of Doing Business 2019 survey climbed 23 places to 77 among 190 countries surveyed, making it the only country among the top 10 improvers for the second consecutive year. The biggest gain was recorded in construction permit where India climbed 129 ranks to 52nd place. The country has implemented an online single window system, introduced deemed approvals and reduced the cost for obtaining these permits.

A key factor that affects the value of real estate is the overall health of the economy. Real estate follows a directly proportional relationship with the Gross Domestic product (GDP) of the country. If the economy is flourishing so does the sector and vice versa. In terms of GDP, the Indian economy grew at a rate of 7.1% in the second quarter (July-September) of the financial year 2018-2019.

Other important economic indicators include employment data, manufacturing activity, the price of goods, etc.

Interest rates have a profound effect on the value of real estate, because of their influence on an individual's ability to purchase residential properties by increasing or decreasing the cost of a mortgage. The Reserve Bank of India raised loan interest rates twice this year. The marginal cost of funds-based lending rates (MCLR) have continued to rise- 25 bps since June and 35 bps since March of 2018.

With RERA setting in, the realty market has witnessed an exponential increase in the supply of affordable housing this year. New launches and sold units are also higher than that in the previous year.

Commercial real estate and housing sectors comprised nearly two-fifths of the total NBFC portfolio. The liquidity crisis faced by non-banking financial companies (NBFCs) greatly impacted the real estate market. The NBFC crisis is expected to prolong in the next year.

What lies ahead?

According to a Reuters poll of housing market experts, house prices in India will rise at half the rate of consumer price inflation next year, hit by dwindling credit supply. The liquidity crunch might also lead to a scarcity in funds, pushing home loan interest rates higher.