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22nd Knight Frank–FICCI–NAREDCO Real Estate Sentiment Index Q3 2019

17 October 2019

 Despite a slew of measures to arrest the slump by the government and the Reserve Bank of India (RBI) to boost liquidity and revive demand, a latest survey by Knight Frank – FICCI – NAREDCO - ‘Real Estate Sentiment Index Q3 2019’, shows that the current sentiments of the real estate stakeholders in India has plummeted further to 42 in the July-September quarter of 2019 (Q3 2019) from the preceding quarter - a level previously seen during the heightened uncertainty period of pre-election in the first quarter of 2014 and the demonetisation period (41) in the last quarter of 2016. The report further indicates that the future sentiment, or the outlook for the coming six months, has also turned ‘pessimistic’ for the first time since the inception of this survey, a clear indication that the sector is under immense pressure. However, sentiments toward the commercial real estate sector have remained steady, with the outlook for the new office supply strong for the coming six months.

A score of over 50 signifies ‘Optimism’ in sentiments, a score of 50 means the sentiment is ‘Same’ or ‘Neutral’, while a score of below 50 shows ‘Pessimism’.  
Current sentiment score
•The stakeholders continue to be pessimistic and wary owing to the overall economic slowdown and the slump in domestic consumption demand.
•Drying credit  flow to developers due to the NBFC crisis and slowing down of the economy at 5% in the June quarter – a five-year low, has all negatively impacted the current sentiment scores. 
•Measures taken by the government such as the slashing of corporate tax rate to 22%, the liquidity support to HFCs and NBFCs and the creation of a stressed asset fund (AIF) of INR 20,000 crore to boost liquidity and revive demand have failed to infuse confidence in the market; thus, further downgrading the current sentiment score.
Future sentiment score
•Dropping to an all-time low at 49 in Q3 2019, the future sentiment index score is a clear indication that the sector is under pressure. 
•The real estate industry has been in the doldrums for over three years now and the stakeholders see no immediate solution to the sector plagued with defaults, weak demand and the drying up of funding because of the NBFC crisis. The restricted flow of liquidity has resulted in many real estate projects being stuck in the past one year due to lack of funds. Along with the above, the realisation that the slowdown in the economy will further weaken the demand and in turn impend cash flow issues for the developers has marred the outlook of the stakeholders for the coming six months. 
 “The real estate stakeholders’ sentiment has gone in the ‘pessimistic’ zone for the current quarter owing to poor demand side performance, despite plethora of measures by the government. However, it is more significant to note that, for the first time, the stakeholders are wary regards the future six months for the real estate sector and the overall economy, thus pushing the sentiment score in the red. While measures have been announced by the finance minister in this quarter attempting to sort out the supply side challenges, however these measures are mostly focused on affordable housing segment, leaving out the vast majority of non-affordable from the announced benefits. These measures have not helped infuse confidence in the stakeholders, as the real challenge lies in demand side story, where end users are unwilling to make home purchases owing to lack of financial confidence. The supply-side sops will not be enough till the time demand is revived by putting money in the hands of the consumer and his confidence is restored.,” said Shishir Baijal, Chairman and Managing Director of Knight Frank India.  
The future sentiment score for the real estate sector’s performance in the north zone continues to be in the pessimistic zone (48) for the second consecutive quarter in 2019, though marginally improving from the preceding quarter of Q2 2019. 
This north zone’s crisis contagion has rubbed off on the west zone as well, with its sentiment score going in the ‘red’ for the first time. The future sentiment score in the west has been on a constant decline since Q4 2018 (62) and is the lowest (45) in the Narendra Modi government regime. 
Real estate developers are pessimistic regarding the revival of the sector in the coming six months, with the future sentiment index score going in the red in Q3 2019 at 47 points, an eight-quarter low, due to liquidity crunch, high borrowing cost due to NBFC crisis, and inventory overhang. 
 The future sentiment score of 51 of the financial institutions is also the lowest since the Modi government has come to power. The liquidity crunch brought about by defaults of the IL&FS group, have cautioned the lenders against their exposure to the real estate sector. Plummeting to a 22-quarter low, the lenders are exercising caution for the coming six months.
•The real estate industry’s sentiment regarding the economy has remained cautious in Q3 2019, with 63% of the stakeholders opining that the economic situation will be the same or may even worsen in the coming six months
•The wary outlook comes on the back of the strains in the overall economic scenario dotted by issues such as the US-China trade war, hovering geopolitical stress due to the UK leaving the European Union (Brexit) and domestic factors like slowdown in consumption, investment and the tightening on the borrowing ecosystem. 
•Echoing the overall market sentiments, stakeholders maintain a conservative outlook for the funding scenario, with 73% expecting it to worsen in the next six months. The stakeholders see it as a long period of adjustment and hint at exercising caution in lending to troubled sectors such as real estate, automobile and other consumption-driven sectors with a slump in demand.
Dr Niranjan Hiranandani, National President – NAREDCO & Founder & MD of Hiranandani Group said “We had several crises in the past including the fiscal changes undertaken by the government. However, on the backdrop of credible real indicators, we anticipate a large increase in overall housing demand over the next 12 months. The biggest considerations are house prices and interest rates, which have significantly turned in favour of buyers. House prices for both the under-construction as well as the ready possession segment are the lowest in the recent past. Similarly, home loan interest rates are at the lowest level ever even as the RBI is working on better transmission of rate cuts, which shall meaningfully benefit the buyers in near future. The unfolding of such an opportunity ensures that we are looking up to a much stronger market in times to come.” 
Hiranandani further added, “From the supply side, with the short-term liquidity squeeze prevailing in the economy, even positive net worth companies across industries are turning into negative balance sheet. This is one important area that needs immediate attention. The current economic scenario makes it the right time for RBI to announce its one time roll over scheme similar to what was rolled out during the Lehman crisis period in 2009 under the global slowdown scenario. This shall act as remedy to the ailing companies of the current tough times.”
The outlook for the residential new launches, sales and price appreciation have yet again taken a hit in Q3 2019, clearly stating that the slew of measures taken by the by the government have not infused any confidence in the stakeholders.
•A majority 67% of the stakeholders have maintained that given the weak demand due to a cautious sense on the overall economy, stagnant job market and the apprehension to spend, the residential sales will either remain tepid or may even go down further in the coming six months.
•Sentiment regarding residential price appreciation also looks grim, with 86% of the stakeholders opining that prices will remain at the same levels or even drop further in the coming six months.
•Taking cognizance of the slack in the sector, the RBI has cut the repo rate by 25 basis points for the fifth consecutive time in the year, effectively bringing down the repo rate by an aggregate of 135 basis points. However, the stakeholders have expressed concern on the effective transmission of this rate cut to retail consumers in the form of discounted credit.  
•Sentiment regarding the outlook for the new office supply is strong, with 82% of the respondents believing that the coming six months will see new supply additions across the major office markets in the country. 
•The outlook for the office leasing activity remains unchanged in Q3 2019, with 79% of the stakeholders opining that leasing activity will remain steady or may even improve in the coming six months. 
•Stakeholder outlook with regards future rental appreciation has dipped in Q3 2019 with 79% of the stakeholders expecting rents to either remain stable or inch upwards as against the thumping 87% in the preceding quarter. The sentiment, however, is in the positive zone and stakeholders expect rents to inch up in quality office space.  
Sanjay Dutt, MD & CEO, Tata Realty & Infrastructure Ltd.  and Chairman of FICCI Real Estate Committee, said, “Instead of incremental small steps, it is time for a quantum leap on policy planning and implementation. The Government needs to ensure a stable predictable business friendly environment that not just ensures economic growth but also leads to job creation and income stability. Further, moving beyond the accolades of signed MOU’s, fast track efforts should be put to ensure deployment of committed investments. Accelerated use of digitisation is one aspect that can meaningfully lift the current constraints and improve efficiencies as we embark upon this journey. We should aim to build an India story that stands for both “ease of doing business” as well as “sustain profitable growth.”