Disruption In Real Estate Market In India

India is emerging as an important business hub with potential sustainable economic growth along with favorable demographics. The demand for real estate is largely determined by both, business prospects and demographic trends. Historically, the sector was unorganized and there was no centralized supervising authority to guide this sector that had been suffering from lack of transparency in transaction values.

However, recently, the sector has exhibited a trend towards greater transparency accompanied by various regulatory measures by the Government of India. In fact, the past few years have witnessed several challenges and have also been quite eventful for the Indian property market.
As a practice, Indian real estate developer constructed projects through pre-sales on acquired lands under capital-efficient agreements with landowners and bank loans. This was in a limited to geographic location and focused on a city or a region.

Following 2005, the capital increasing from overseas and several funds were arranged in equity-like structures with developers mainly in green field assets. This increased the land prices and developers made striking profits in land aggregation arbitrage, which led them to deploy these gains for more land acquisition.

The unexpressed housing order was stimulated by home loans and sales of new projects were largely successful. Investors into real estate made huge gains on their investment. This encouraged dramatic housing demand which had little leverage impact for real estate developers due to its equity linked structure. In the process, commercial banks started reaching their maximum exposure limit to real estate sector and it became difficult for the developers to get fresh funds for land buying.

This has opened up an opportunity for the alternative lenders like non-bank finance companies (NBFCs) which started offering construction finance at a premium of 5-7 per cent and developers repaid alternative lenders from project cash flow and also refinancing them from new ALs. These practices continued till 2016 and helped developers finance their expansion plans. The prevailing comfortable liquidity in the sector coupled with easy customer advances, low regulation and low sales risk made many unknown business owners to make entry into the sector without experience and healthy track record. Several projects were considered with support coming from the parallel economy. These unplanned weak pricing parameters initiated an oversupply of projects in various parts of the country. Crucially, construction finance took a back seat in order of priority for funds deployment and there was piling up of unsold stocks of property in the absence of buyers.

In 2017, this sector had a massive blow as regulatory changes like demonetization, enactment of RERA, and the introduction of the goods and services tax (GST) had an impact on the slowing down within the sector. These measures froze liquidity in the sector and developers started realizing higher costs of doing business. Within a span of a year, initial RERA orders and IBC cases started hitting developers’ cash flows further and construction started slowing down across the board.  Later as the crisis gripped the Infrastructure Leasing and Financial Services (ILFS), fresh loan sanctions came to a halt, loans were recalled and disbursals were put on hold even for sanctioned projects.

The sector practically is trapped in the grip of delayed delivery of projects, deprived of funds, high unsold stocks and a growing amount of large stalled projects which are estimated to be at over 5.50 lakhs homes across top seven cities. Prices of homes reduced resulting in softening of the market. This has led to many buyers’ loan value becoming higher than the present home value. As a result, this has lowered their capacity for personal consumption.

Today the crisis of the sector is so severe that the government needs to evolve multiple remedial measures combining capital infusion, capacity building on the supply side to resolve the unproductive assets, incentives for new entrants and tweaks in the regulatory framework. There is a need to wipe the slate clean and look ahead.

Though the Government in its budget proposal, proposed infusion capital in the realty sector, it would be unlikely to serve smaller firms outside the metros and mini metros and needs to be backed by other measures that are executed at a fast pace. Only then will there be a proper resolution of unproductive assets, which will have a positive spillover effect on the economy. The need of the hour is to take some hard decisions to avoid a housing- led crisis similar to that of the USA in early 2006.