By Divya Shukla
In India, real-estate is the second most preferred choice, after gold in hedging the risk of inflation and promising good investment returns. Buying homes had been a popular trend among Indians for investment purposes. It has seen a rise for half a decade (form 2002 to 2007), with metro cities (which include Delhi, Mumbai, Bangalore, Kolkata, Chennai and Hyderabad) witnessing sky high prices till late, and less developed cities also taking part in the trend. In fact, some of the metro cities prices were comparable to New York, Tokyo, and London city.
The industry contributes around 5-6% of GDP, (around $50 billion dollar annually to our $1 trillion economy), which is Asias third largest. With a rising population, India’s transition through a demographic-dividend phase and improving living standards, this asset-class had been generating handsome returns in the past.
Unfortunately, it will not be a cake-walk any more for the retail-investors to buy a home, which plays a major role in the sectors growth. There have been several factors that have led the realty sector into such problems, with the ban of 80/20 schemes by RBI and the Land Acquisition Bill being the main ones.
At first, the property prices started falling in the last quarter of 2008, in anticipation of increasing policy rates building up in the market. The rate was at its lowest in April 2009(4.75%), after which the RBI observed its impact on inflation and decided to increase it. There was continuous revision of the repo rate upwards since March 2010. This trend prevailing in the policy rate coincided with a steep fall in property prices, with inflation and job cuts making it all the more difficult for the industry to regrow.
The 80/20 or 75/25 housing loan schemes had been a major reason for the real-estate bubble. It helped real-estate industry to scale up their sagging sales and further explore new sites for their projects at (low) costs funded via the home-buyers. It was a win-win for the builders as the loans were in the name of the buyers, so even if they move out of the project, it was the end-buyer who had to suffer in the last. On his last day, therefore, RBI Governor, D.Subbarao, in a move to prevent Indias very own sub-prime crisis, has asked the banks to fund in accordance with the construction linked payment plan. This has dampened the realty sectors investment sentiment, but, will help keep a check on artificially inflated property prices. It is a step to protect the buyers especially when we lack a realty regulator, nevertheless a big setback for the industry.
To this, the new Land-Acquisition Bill, (passed on 30th August 2013) has made it difficult to acquire land, and the retrograde treatment for compensation to the land-owners will cut pockets of the builders deeply, especially when there is no new demand of houses being projected in the near future future. In order to preserve their profit margins, the Bill will make affordable housing more difficult, as the increased cost will be passed on to the buyers.
Also, The LARR Bill is expected to majorly affect the development of large infrastructure development projects, industrial projects, integrated township projects if they are brought under the ambit of this law (next year by January), as quoted by Economics Times in an interview with Sanjay Dutt, Executive Managing Director of South Asia,
Cushman & Wakefield. According to a source, we will see more joint development projects happening, wherein the profits as well as the resources and the risks will be shared which is prevalent in many Tier-1 cities. Besides that, only the forthcoming festive season has some hope for them, where they will be offering new schemes (with innovative payment structures) and discounts on the unsold inventory in order to lure the investors. Though, all this will hamper the sectors growth, it will act as a blessing in disguise for us by keeping a check on real-estate bubble.
A graduate with a Major in Economics degree from the renowned University of Delhi and is about to enroll for Masters program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).