The Construction Industry will remain buoyant due to continuous demand from the infrastructure segment. Infrastructure development projects are very important for India, as it is in constant need for improvement of cities, roads, etc. It is forecasted that India will need investments worth $1.5 trillion only in the coming 10 years to fill the infrastructure gap and to complete the Government’s target to connect 700,000 villages by road until 2019. Additionally, urbanization creates more housing demand in cities, and the ‘Smart Cities’ project raises demand for construction of sustainable houses and infrastructure. The Construction industry is forecasted to have a CAGR of 5.65% in the years 2016-2020, compared to 2.95% in 2011-2015. Anyhow, the Real Estate sector has seen a temporary lull in the last three years. Now, reforms in the Real Estate sector as well as further FDI relaxations could help it getting into the growth path again. So what exactly is paving the way for India’s Real Estate and Construction sectors?
More people move to towns and large cities, which creates a higher demand for new and modern housing and up-to-date infrastructure amenities. Therefore, the urban share to the GDP is forecasted to grow to 70-75% in 2030. Especially, the infrastructure sector enjoys attention from the Indian Government by implementing policies easing the creation of world-class infrastructure.
In March 2016, the Government passed the Real Estate Regulator Bill. This bill was created to bring more clarity into this highly fragmented sector because many developers and buyers suffered from delays in construction projects or bad trade practices and had no security from the constructor’s side. The bill introduces a regulating authority in each federal state that can be addressed in case of grievances against any builder with immediate effect.
In former cases, builders sometimes used funded money from one project to complete other projects at first. This caused delays in completion which this bill wants to limit by stating that 70% of funds for a specific project need to be put into a designated bank account. This should assure that funds will only be used for the particular project. Any delay in completion now makes the developer liable which means that he has to reimburse the buyer a certain amount of interest rate. Additionally, the buyer can complain to the builder within one year of completion in case he finds any deficiency in the project. This will help the consumer’s side to ensure the quality of work and in addition, they are more secured against malpractices of builders. Misleading advertisements for flats or houses by developers will now be forbidden.
Developers now also have to submit information, such as project plans, government approvals or layouts to the State Real Estate regulatory Authority (RERA) and make them accessible for consumers. This will assure that all approvals are gathered and no faulty statements are made from the developer’s side. Still, loopholes in this bill remain, as it’s not clear what happens if a developer’s approval will get removed but investors already made partial investments into a project. Will they have to be compensated by the developer? And what happens to consumers who already bought a project (apartment, house etc.) which won`t be finished on time? It is not sure yet if this bill will only safeguard new buyers who bought property after it was passed.
Anyhow, as consumers will now have more trust when deciding to buy their own home, investments from the private side are projected to rise. Corporate investors can be more confident now that their investments are used in the right way, which should increase corporate investments into the Indian Construction sector. It is a good time for retail investors and end users to enter the market before prices will increase again due to higher demand.
Foreign Direct Investment into the Construction development sector stood at $24.1 billion from 2000-2015. To increase this number in the future, India has allowed 100% FDI in city and township development projects. Just recently, it has relaxed FDI policies in other sectors, e.g. Defence and Pharmaceuticals, which could lure project assignments in the Construction Industry. Furthermore, as FDI in Real Estate Investment Trusts (REIT) was completely forbidden, the regulatory body, Sebi (Security and Exchange board of India), now wants to open up this segment with allowing such trusts to invest 20% in under-construction assets and having more sponsors. This should open growth opportunities for the sector as more people will shift their investments into REITs in India from other countries.
Overall, the Construction Sector has a prosperous outlook, not only due to the ‘Smart Cities’, Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and ‘Housing for All’ projects, which should attract a lot of foreign investment. The Government is also promoting foreign investment into the infrastructure and Real Estate sectors to reach project targets and make India a country with great infrastructure and a great place to live. Making it easier to invest into the Real Estate sector will additionally help the Construction Industry.
To read more about the Indian Construction Industry, click Construction Industry Newsletter.