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Slump continues in real estate

Loknath Das December 4, 2019 Real Estate Comments Off on Slump continues in real estate
Slump continues in real estate

More than a year ago, future of the real estate market in India was believed to be promising following the implementation of Real Estate (Regulation and Development) Act, 2016 (RERA).  The best part of this Act is that it envisages safety to the buyers and its implementation immediately led to fall in property prices in many cities. This way, the Act turned real estate market into buyers’ market. The falling prices lured the local (J&K) investors to lay hand on the ‘opportunity’ and they mostly started investing in under-construction properties.

Today we have a good chunk of investors from J&K region who have parked their hard earned money, and the loan taken bank loans to invest in real estate market, especially in housing projects. The investment has been done mostly outside the J&K region. Most of these local investors, mostly Kashmiris, have normally twin objectives to meet. First, they want to secure an alternative safe living place at a time when living a normal life has become a challenge in the region. We have already witnessed such kind of situation in 2010 and 2016 when life and property witnessed destruction in the valley. Second, they simultaneously want to secure high returns on investment as some time back investment in real estate was believed to be a golden investment.

Notably, the overall real estate market is going through a bearish phase as it was impacted by two major ‘black swan’ events. In May 2016, the Real Estate (Regulation and Development) Act or RERA was enacted. And six months later, the government demonetized high-value currencies.

Interestingly, the growing appetite of people here to have housing property, more precisely residential flats, outside J&K has equally attracted local property dealers and they too started expanding their real estate ventures outside the geography of J&K, mostly in Delhi, Punjab, Uttar Pradesh and Haryana.  This combination of local property dealers/builders and the local investors has become a convenient means of flight of capital from J&K to other parts of the country.

Initially, this looked prosperous for both. But over a period of time, the investment has lost sheen and many investors found their money locked in the troubled waters of the real estate sector in the country. Those who have invested in under-construction properties are the worst sufferers.

Now, the investment has turned a matter of worry for them as the property builders/dealers have failed to give possession of the property to them in the given time period. The builder has either failed to complete the construction or has got entangled into some legal dispute over the property under-construction. In both cases, it’s the investor who is suffering as his money is at stake.

Through this column, I have been warning in the past also that investment in the under-construction property may face stressful time. Getting possession of the property would be a major worry and investors will be left at the mercy of the builders/property dealers. I have been receiving various nature of queries particularly from those who had paid local property dealers in Delhi, Noida, Haryana or in Punjab for purchasing flats, particularly residential flats, under construction. They are yet to get possession of the flats as the builders have been delaying completion of the flats for want of funds.

This is actually a unique situation all over the country. Buyers have paid almost 70 to 90% of the cost of the property under construction, but are struggling to get possession. The builders have left the construction midway as they have no funds in hand to complete the construction.

There are incidences where some home buyers who had paid substantial amount for under-construction flats have formed a group among themselves and started completion of the under construction flats as the builders have run short of funds to complete such projects.

Basically the real estate market is in a slump. Currently, the returns on investments in housing real estate have dropped from two or even three-digit values to low single-digit or, in many locations, even negative returns over the last few years. The massive burden of heavily delayed and terminally stuck housing projects has hit the confidence of investors/ home buyers. Currently, under-construction properties are depreciating assets and prices are yet to sink to their ‘lowest best’. Further, price correction is almost inevitable.

In the given market condition, Reserve Bank of India (RBI) has laid down stricter norms and guidelines for banks dispensing housing loans. In recent times, the loan-to-value (LTV) ratio – the amount of loan that can be given for a property of a certain market value – is now restricted to 70%, whereas it previously ranged between 80% and even 90% of the property value.

Precisely, buyers availing home loans now have to pay 30% of the property cost upfront. When too many aspiring buyers either don’t have that kind of money on hand or prefer to hoard it because of uncertain economic headwinds.

GST has replaced the multiple levels of taxation previously applicable on a home purchase, but the increased simplicity has not resulted in better cost-efficiency. Under-construction homes attract 5% GST for premium (mid-range) properties. However, this does not include ITC benefits, which would have reduced the overall cost of the unit. Over and above, 5-7% stamp duty and registration charges apply to both under-construction and ready-to-move homes but the cumulative extra cost on under-construction homes effectively negates most of the price advantage they used to offer.

Of course, owning a home continues to be desirable for most of us. Here it’s the sense of financial security rather than for return on investment or obtaining a status symbol which drives this desire.

To conclude, let’s be straight way own the fact that real estate sector is in a vicious cycle of the overall slowdown. Buyers continue to remain averse to investing in under-construction homes. Projects get delayed because of lack of funding, and slow or no construction progress has further dampens buyer sentiment.

In other words, people are still shying away from buying a house, especially the one which is under-construction. Even they are not ready to invest in unsold inventory of the builders. New launches of housing units has also witnessed a 24% fall in third quarter of the current financial year. Given the uncertainty hovering over the economy, better is to defer house purchase decisions.


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