India’s sinking real estate sector

By Nitya Pandit

The highly capital-intensive sector of real estate witnesses outrageous debt levels most of the times. Even real estate giants like DLF are affected by the current state of this sector.  The company explained that the decreasing sales of houses and demonetisation are the primary reasons for its condition which seems to have hit the rest of the market rather hard as well. At this juncture, real estate agencies need to adjust to the Real Estate Regulatory Act (RERA) on the market and may have to shift their focus to constructing affordable housing.

Current state of the real estate sector in India

The current condition of India’s weak real estate sector is the result of developers failing to sell their land as planned, thus facing the challenge of reviving on-the-shelf projects. In Noida, Unitech stopped its projects’ construction 4 years back and is now chasing a default amount of Rs. 4,686 crore. The builder has lost consumer confidence as they were not able to deliver their housing projects for 10 years. Similarly, in Noida, Jaypee Infratech has been facing great pressure from consumers due to their delay in delivery. These developers need to revise their timelines and increase transparency. They are also heavily dependent on external financing to break off this ongoing tension. With all this chaos in the sector, many developers have had to change the focus of their business strategies, in order to gain back their consumers’ trust.

According to the Managing Director (Strategic Consulting) of the property consulting firm JLL India — in Bengaluru and Pune, IT companies impact the office and residential real estate demand. Hence, with the increasing job losses for those in the IT industry (due to the growing presence of artificial intelligence and increased automation) the commercial demand may see a drop. Also, factors like demonetisation, the presence of goods and services tax and the implementation of Real Estate Regulatory Act (RERA) has caused the new unit launches to decline by 5.48% by the end of March 2017, in the residential real estate market of Pune.

This current condition of the market can be traced back to 2013, when the sales of residential property decreased specifically in the National Capital Region and marginally in Mumbai, right after 2 years of strong growth. This decline in sales was the result of high-interest rates and a delay in projects’ delivery. Only a few years ago, a situation of oversupply existed in most major cities of the country. In 2015, calculated on a quarterly basis, the average number of people who joined any company’s payroll had declined to 28-32%, less than 2 years back.

Factors behind the gradual stagnancy

Developers are facing an increased inventory of unsold residential units, resulting from static sales and cancellations. Also, adding to the developer’s woes is the government’s delay in completion of land acquisition requirements. For example, Mumbai’s residential sector is suffering as the prices — that were once rising — have dropped by nearly 20%. The inventories are high and developers, not being granted approval by the authorities, are only focusing on completing their current projects.

Additionally, the RERA has brought in stricter regulations and vagueness in the sector. It can be inferred that the entire sector is experiencing stagnation due to lack of buyers. The residential market is suffering from a liquidity crunch because of delayed construction and delivery. Developers also have a backlog of debt from the boom years that happened earlier this decade.  

What role will government policies play?

The Regulatory Authority that will formulate the rules and regulations according to the RERA shall bring in greater transparency and stricter compliance. While this could result in higher real estate prices for the new projects, it could also stabilise the prices until the pending projects gets over. Possibly, the implementation of this act could cause the total costs of the development of projects to rise, leading to fewer launches and higher prices. Also, ongoing projects which include the unsold inventory and the ones under construction will have to adhere to the RERA. This implies that players in this market will face the challenge of arranging funds to complete such projects not only in the allotted time but also according to the new regulations.

Since projects that target the mid to high price points are currently put on hold, investors are now choosing to focus on long-term cash flow opportunities such as affordable housing. The Income Tax Act permits builders to have 100% tax-free profits on constructing affordable houses that are built after March 2019 and in 3 years. Along with this act, the low-interest rates for people in the income bracket of Rs 18 lakh will incentivise the developers to shift their focus to affordable housing. This shift, given the current widening gap between demand and supply in this sector, could possibly lead to an economic boom in the future.

Rays of hope amidst rising challenges

Regardless of this entire situation, DLF’s rental assets are in a good state, as rental rates, as well as periods of lease, are both improving. To build a better future, the company will be regulating its cost of construction and marketing. DLF is planning to sell 40% of its stake in DLF CyberCity Developers Ltd. in order to raise Rs 12,000 crore. On the other hand, according to an Edelweiss Research report, the company’s home sales will lay low until late FY18 and will have negative operating cash flows for a couple of future quarters.

It is expected that the country’s real estate market will increase to $180 billion by 2020. According to CBRE’s Asia Pacific Estate Market Outlook 2017 report, the reason for the maturing consumption patterns possibly is the increasing urbanisation due to upcoming retail developments. Also, JLL’s research report ‘On Point’, focusing on India’s Stock of Commercial Real Estate, shows that India’s per capita income has been rising, leading to increased consumption of durable goods. Thus, the real estate market will see a rising trend given the urbanisation and growing household income. However, the options to survive through the current state of this sector are less and difficult. Firms either need a revival in the property sector or a stake sale in order to come out of the vicious debt trap.

Featured Image Credits: Hindustan Times