India Inc. property expert analyses the pattern shifts in the Indian real estate sector due to changing laws and market trends. If one were to think that the pain in the Indian real estate industry is a matter that started in 2016 due to demonetisation and was made worse in 2017 due to the implementation of the Goods and Services Tax (GST) and Real Estate Regulation Act, one would like to consider the fundamental changes in the IT, telecom and local digital businesses, the impact of which had a domino effect on the real estate business. What started off as seemingly innocuous right-sizing of work force from IBM to TCS in the winter of 2013 continued as a year-on-year exercise. It is now an acceptable norm that such things will happen, given that even Cognizant Tech that seems to have entered the social media, mobile and deep data fields ahead of traditional technology businesses have not remained untouched by the systemic change. The telecom sector has been undergoing change from voice to data dominance, financial drag by high capital expenditure and the emergence of disrupting new entrants like Reliance Jio. If that was not enough of a change, core sectors like power, steel and infrastructure started turning sick with more than five of the top 10 borrowers nationally being from one of these sectors. Now if bank loans were going bad on the wholesale side and small and medium enterprises (SMEs) linked to large corporates were affected by slowdown of their principals, the counter-balance was the rapid growth of fintech, given that there were well experienced resources willing to join start-ups as their traditional jobs were vanishing. Given that each passing year had one sector or two going through a change, it meant that the real estate sector had consumption pattern shifts. If one could try to pick a trend, one could possibly see the rise in absorption of commercial real estate from 2014 as the sectors of social media, mobile, gaming, data analytics and the likes were on an expansionist mode. They were the happening fields globally and India had the talent that attracted international firms to grow their Indian arms and business associates. Since change was constant for the employees of these various sectors and businesses associated with these sectors, residential real estate purchase was resorted to only if it was an absolute necessity. That gave rise to increased production of homes that cost less than the equivalent of $100,000 and all the way down to small units costing $25,000 equivalent. Prior to this period, given the rapid rise in real estate prices, a majority of the homes built exceeded the equivalent of $125,000. Business rapidly digitising and the need for a strong doorstep delivery mechanism led to the emergence of logistics businesses that started transforming warehousing spaces. Also, there was more disposable income in the hands of the youth due to deferred purchase of homes and assets and there emerged the retail/mall category of various sizes and themes. Entry barriers were reasonably low in the real estate sector, considering that local laws and rules deterred large domestic players from entering newer markets. If they did, they chose reasonably larger projects as the mid-size and smaller projects were dominated by a multitude of local players. The prolonged shift in real estate consumption patterns over 2014 and 2015 had strained the financial resources of the small and mid-sized local players and the triple impact of demonetisation, GST and RERA finished whatever stamina was left. The past three-four years saw the emergence of alliances between international financial institutions specialising in real estate sector assets with larger domestic players - FIIs like Blackstone, Canadian Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Agency (ADIA), Brookfields Asset Management, GIC & others, with Blackstone emerging as the largest owner of Indian commercial real estate. With the change in the buying behaviour of the younger generation, malls and retail too underwent changes with Ascendas, Xander and others beginning to aggregate these assets from local players. Come GST, the smaller warehouse clusters typically near state borders have become redundant, giving rise to an opportunity to build well-developed large format clusters, something that was earlier focussed on only by Blackstone, Indospace and Brookefields in association with some large domestic developers. Assetz Developers announced a $800-million mega-private equity deal with LOGOS, focusing on the warehousing sector nationally while Total Environment, also of Bengaluru, announces a Rs 800 crore ($125 million) structured debt deal with Brookfields across their residential projects in multiple cities. The National Capital Region (NCR) developers continue to struggle with their inflated borrowings and stagnant sales due to increased consumer activism. Unitech developer MD remains under judicial custody, with the court seeking the deposit of a minimum of an amount equivalent to $125 million before his bail plea is accepted. Historically, NCR has been the market of some of the largest developers which means their ballooned debt is now a challenge on the books of banks. The judiciary is also adopting a hard stance against the developer community. Mumbai, on the other hand, may have excessive supply in the Parel belt, but developers with projects in New Mumbai, Borivili and beyond and Chembur-Thane belt are seeing the sales meter ticking reasonably. Hyderabad seems to have started with a near clean slate with one of the better infrastructure projects and has been attracting reasonable interest across all real estate sectors - even more given that land prices are not overly high and availability is plenty. While residential sales were showing hopes of picking up in July and August - September and October have been extremely disappointing in sales. Given that the market by and large hibernates post December 15, the year 2017 has been the most disappointing year so far in this decade in terms of sales. While past participation was predominantly by institutional funds partnering with large domestic or by large contracting companies - again focussing on large players, the stage now seems to be set for international property developers to enter the market as there seems to be a near level playing field. We could also see the emergence of some special situation funds entering this space, given that dollar yields look quite interesting and despite all the changes, the rupee has been quite stable since the current government took charge. That said, land laws and development plan sanctions are still seen as challenges compared to developed countries. As an aside, an interesting public-private sector cooperation model can be seen in an emerging Gurugaram (NCR) developer - Signature Global, which has been founded by professionals from the financial services sector and backed by some domestic financial institutions. They claim to have sold over 5,000 units of affordable homes (ranging from $25,000 to $75,000) in the past two years in association with the Haryana government, with the first development coming up for delivery in March 2018 followed by four more projects being delivered in 2018. Deepak Sam Varghese is founder-director of Moonbeam Advisory.