Real estate is in limbo. Not only now, but for a long time. Probably from the time the economic downturn began in 2008. Anyway when the global financial crisis gripped almost the entire world economy, how could India’s property market have remained insulated from that?
That was, however, just the beginning. What followed later, only aggravated its woes. From rising home loan rates to stagnant — and even falling – property prices, nothing worked in its favour. The result being that after some time homebuyers and investors both preferred to remain in the wait-and-watch mode.
However, the biggest blow to the realty market in India was perhaps dealt with not by policy reforms, but by builders themselves. After all, who would have liked to invest in a piece of property if one was not sure of getting the possession of one’s flat even 10 or more years after booking it? And as the number of disputes with the builders rose, along with rising court cases, real estate started losing its sheen.
Citing the example of financial and insurance industries, industry experts observe that in India, such industries have been heavily regulated for a long time. However, real estate, despite being hailed as India’s sunshine industry, was given a free run, resulting in rampant malpractices of every kind, eventually denting homebuyer sentiments to all-new lows. This meant that buyers postponed property purchases waiting for the sentiments to improve and investors walked out of real estate en masse as demand and, thus, returns on investment dropped beyond viability.
Thankfully, policy reforms followed, accompanied by GST and RERA, which was aimed at taming the unscrupulous builders and fly-by-night operators. However, that was too late as most damage to the market had already been done. Moreover, these reforms themselves impacted the market initially.
“It is critical to accept that the various must-have reformatory changes that have contributed to the slowdown were necessary to transform a sector synonymous with unethical practices. However, while this regulation-led clean-up was indeed required, these unfamiliar reforms created turbulence from which the Indian housing market has yet to recover,” says Tanuj Shori, Founder and CEO, Square Yards.
The Modi government for the last few years has been doing its best to give a boost to the sagging realty market. From the Housing for All by 2022 to various incentives to both home buyers and realtors, to 100 Smart Cities, all such initiatives were expected to ameliorate the woes of real estate. However, the market is still stressed.
The various reasons for the slowdown in the realty market, according to industry experts, include unenticing — and, in some markets, even negative — returns on investment for residential real estate, slowdown of the Indian economy post various reformatory changes, buyer’s distrust of incomplete projects, unattractive loan-to-value ratio, high taxes on under-construction homes, lack of momentum on employment generation, enduring backlash of demonetization, and a growing appetite among investors for other asset classes.
Industry experts say, there are many reasons for a subdued real estate market today. One key reason being the asset ticket price mismatch. In fact, there was a time not long ago when most Indian builders wanted to build only upper-end luxury residences, blinded by the idea of high unit profits and a never-ending demand from HNIs and executives moving up the ladder.
“Initially, with rapidly-increasing incomes in a fast economy, many home buyers upgraded from mid-segment to high-end luxury ones, setting off a cycle of home resales and new purchases, both in the primary and secondary markets. However, as reality struck and the economy began to consolidate, most of the upper end residential inventory with immense capital values became irrelevant to home buyers. Therefore, if you notice, across the country, upper segment and luxury residential projects with high unit prices comprise most of today’s unsold inventory,” informs Shori.
The liquidity crisis in real estate is another heavy foot on the brake pedal. There are developers who received 40-50 per cent of their project funds from NBFCs and completed half of their projects. As the financiers are now unable to fund the remaining half, projects across the country have stalled, stranding millions of new home dreams and sentiments.
It is not that sales are not improving. In fact, the housing market has improved over the last few quarters. For instance, if we take into account the latest property trends in the 7 major cities of India — Chennai, Bangalore, Kolkata, NCR, MMR, Pune and Hyderabad — then barring Kolkata, property prices in all other major cities have increased marginally over the past one year, while housing sales have recorded an increse of 32% during the same period. However, this trend varies from market to market, and there is still unnsold inventory of around 6.65 lakh housing units across the 7 major cities of the country.
Talking about this imbroglio, industry experts say that there are ‘good’ and ‘bad’ developers in every market, and buyers have faced the fallout of making uninformed choices while investing in under-construction homes.
“However, that alone cannot account for all slackness as there is an ample supply of ready-to-move-in projects which buyers can opt for. In these projects, completion risks do not exist at all and we are in fact seeing a gradual resumption in demand. The problem is that end-user demand alone is not enough to get most of the massive unsold inventory moving again. That requires investors to get involved, and they have been put off by lack of capital appreciation and low rental returns,” says Anuj Puri, Chairman, ANAROCK Property Consultants.
The Way Ahead
Buiders in India have mainly defaulted on under-construction homes, which has made homebuyers wary. However, industry experts observe that buyers are not limited to opting only for under-construction homes — there is a vast array of ready-to-move-in options available to choose from. But even under-construction housing can become attractive again if funding options open up for developers to complete their projects.
“We need a sound financial bail-out mechanism in place for the existing buyers who have invested in stuck projects. There needs to be a more uniform tax treatment for ready-to-move in and under-construction homes. To rejuvenate overall demand for housing, we also need a rebooted job environment, more tax breaks for homebuyers and more attractive home loan interest rates. The slowdown is a complex issue arising out of many issues, and no single action can unravel this Gordian Knot. It needs to be a package deal of reforms aimed squarely at reviving consumer demand. As we have seen, the slowdown is not limited to real estate, but extends to other high-ticket items, like automobiles, as well,” says Puri.
Realty consultants say demand for residential real estate can be put back on the rails only when a home seeker sees more sense in buying than in renting. “This requires financial capabilities for a down-payment and long-term EMIs, both functions of job security, which is a big gap across industries today. Homes have to become affordable both in terms of prices and taxes they attract. Returns on investments in residential real estate must improve and, trust in developers with under-construction homes should be regained,” suggests Shori.
Thankfully, with the Model Tenancy Act about to take shape and form, even owning homes for renting them out is likely become attractive again. Also, with rebounding sales, prices are expected to start rising again, making housing more interesting for investors. These developments have again made developers as well as property consultants bullish.
“Going by various market readings, we expect the real estate market to turn the corner in another 12-18 months,” Puri says.
Whatever be the case, in a bid to help revive real estate, the Modi government has again announced many sops for it. Finance Minister Nirmala Sitharaman, for instance, has recently given the ailing real estate a Rs 10,000-crore booster shot (which can be leveraged by another Rs 10,000 cr or more) by creating a special window to provide last-mile funding requirements for non-NPA and non-NCLT housing projects that are stuck due to lack of funding.
Industry experts, however, say that even this may not be enough as only 2.5 lakh units (out of close to 4 lakh units) across budget segments can legitimately avail the Modi government’s new provisions, and luxury projects may have to wait even further.
Moreover, only government lifeline and policy reforms are not enough. A majority of homebuyers have lost their confidence in real estate and feel short-changed. Therefore, apart from such incentives and booster shots, the builder community also need to work hard and honestly to regain the confidence of homebuyers and investors. Unless that is done, reviving the fortunes of real estate will really be a hard nut to crack!