Indian Real Estate: Why The Industry Has Stagnated and What Lies Ahead

By Mr. Hardik Agrawal, the CEO & Director of RadhaMadhav Developer

The real estate sector in India has been in trouble for a while now, and if the latest reports are to be believed, the struggle may continue for a little while longer. According to the Composite House Price Index for 2018, house prices fell by 1.8% when compared to 2017, when adjusted for inflation. What’s more, the Real Estate Sentiment Index for the second quarter of the year says that stakeholders have downgraded the outlook for the real estate sector to “pessimistic”, at least for the next 6 months.

Meanwhile, there continues to be widespread anger among home buyers as projects across the country are getting stalled, with delivery dates delayed by years. In this article, we’ll take a look at why the real estate sector is witnessing such a scenario in the first place and what can be done to improve the situation.

The current state of affairs

Here are some of the big reasons why the real estate sector is struggling to grow:

The slowdown of funds over the last decade

The root of the problem in the real estate sector has been the slowdown of funds post the housing crisis-led global recession in 2008. Post-recession funds to the real-estate sector dried up across the globe. While this wasn’t fell as intensely in India, nonetheless there has been a steady decline in the number of project launches since 2007. In particular, the speculative funding has dried up, especially since investors have revised their ROI (Return on Investment) expectations. In residential real estate, for instance, ROIs have dropped from two and three digits to low single-digit figures (2-3%). In some cases, the ROI has even become negative.

Consumer sentiment

This is another big reason for the struggle within the real estate sector. With the number of projects that have stalled over the past few years, customers are no longer keen to buy properties that are currently under construction. They would much rather pay a premium to purchase a property that’s ready. This creates a huge working capital issue for real estate developers because they no longer have access to customer funds to actually complete construction. This, in turn, leads to even more stalled projects, thereby perpetuating a vicious cycle.

What’s more, consumers now believe that the real estate industry will continue to struggle for the forseeable future, and that prices will fall further. They are trying to postpone purchases in the hope that prices will fall further, which means demand is highly constricted.

Finally, most home owners today are millennials. Given the fact that they’re constantly moving, owning a home no longer has the prestige value that it once did. They are quite happy to keep renting across different locations, rather than make a huge upfront investment. This is also contributing to the demand slump.

GST, demonetization and economic uncertainty

The government’s recent reforms have created more turmoil for the sector. For starters, demonetization brought a huge blow to the industry, which relied on unaccounted cash as a major source of investment. Then there’s GST (Goods and Services Tax). As of now, under-construction properties attract GST (either 1% or 5%) whereas ready-to-move properties do not. Given the current consumer sentiment, this is just another reason for them to veer towards purchasing ready-to-move properties.

Finally, there’s the overall economic uncertainty, driven by stagnating growth and employment. In an environment where people are insecure about their jobs and employment prospects, they are unlikely to undertake heavy-duty investments in real estate.

The way forward

It’s very clear that the real estate industry needs urgent help. While the Government is taking some measures — such as attempting to reduce the interest rates and the GST on under-construction properties — this alone is not enough.

There has to be a concerted effort to improve the demand sentiment in the industry. On the one hand, the Government needs to take effective measures to improve employment opportunities and job security as a whole, which in turn will have a positive ripple effect on the sector. At the same time, the Government needs to take steps to rebuild the lost trust of consumers — its recent move to create an Alternate Investment Fund for completion of stalled projects is in the right direction. Only when the demand sentiment shifts, will the real estate industry find its way back to the buoyancy and optimism of the pre-2008 era.

Corporate Comm India (CCI Newswire)