Real Estate industry is one of the highest employment generating industries in the country giving employment to almost 7.6 million people. Not only that, the contribution of the sector towards the economy is as high as 6% of the GDP. It is no wonder then that any downturn in the industry adversely affects the supporting industries like cement, paints, steel, chemicals, tiles etc. and vice-versa!
The real estate sector in India has undergone sea-change in the decade from 2005-2014. 2005 was the year when Foreign Direct Investment (FDI) was allowed in the sector and since then, the country’s residential as well as commercial landscape has changed. However, in recent years the sector is stagnating due to a host of factors, including governmental regulations as well as the economic downturn prevalent in the past couple of years.
Let us share with you some hard-core facts about the industry, which are making builders and developers lose their sleep. Do consider the fact that all these points are not stand alone facts, they are all interrelated and a reason for each others’ existence.
1) Unsold Inventory
Even though the government is aiming for ‘housing for all’ by 2020, the current level of unsold inventory is really troubling. The leading residential real estate markets of the country are: Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bangalore, Chennai, Pune and Hyderabad. Out of these, the unsold inventory in MMR stood at 2, 13,743 units, while in the NCR, it stood at 1, 67,000 units by the end of June’14.
2) Delay in New Launches
Due to unsold inventory, the developers’ appetite for new projects has also gone down simply because the cost is insanely high. In total, the new launches have declined by as much as 32% in the first half of 2014 compared to H1 OF 2013. Going region wise, MMR saw a decline of 38%, while new launches in NCR declined by 43%. The maximum decline was witnessed in Chennai at 47%, while Bangalore saw a modest decline of 16%.
3) Government Regulations
The first step for any builder to start building a project involves taking permissions from the government departments. The scary part is to get as many as 52-55 approvals from numerous government agencies. It was extremely difficult to get those approvals. Earlier it used to take as much as 3-6 months for that, but now things have gone really bad to the extent that sometimes it takes 3-5 years for such approvals! During such period, not only the cost of holding on to the land increases manifolds, even the cost of construction rises. This leads to the final flat/property becoming costlier and not finding enough buyers leading to money getting stuck.
4) Stuck Capital
The real estate sector is currently worth $57 billion and is projected to become a $650 billion industry by 2020. But to reach such levels, the investment climate has to be conducive for business. Given the fact that sales are down by as much as 27% in the H1 of the current year compared to H1 of 2014 and unsold inventory build up has increased in a range of 16-47% across the country, all the major developers and builders are facing acute cash crunch. Add to that, high interest rates on existing bank loans and the difficulty in getting newer loans, the scenario is not very rosy for new investments.
5) Reduced Cash Flow
Due to unsold inventory, decline in sales, and high out go of interest on loan, developers are facing shortage of cash flow to kick start new projects or pour in new investments. The only silver lining to this problem of liquidity is that the Securities and Exchange Board of India (SEBI) has approved the establishment of Real Estate Investment Trusts (REITs). This will help in getting retail investors to invest in the sector and builders getting much-needed cash to meet their capital requirements. This also promises to bring transparency, growth and accountability in the Indian real estate market.
The only consolation is that the commercial segment of the sector wasn’t that severely impacted by all the issues plaguing the industry compared to residential segment. This can be gauged by the fact the vacancy levels in commercial segment have reduced from 21% in H2 2012 to 19% in H1 2014!
Despite these problems faced by the industry, all hope is not lost. The second half of the current year has started showing some stability in terms of sales volume and as per reports the sector is projected to show a growth of 26% in H2 of 2014 compared to H2 of 2013.
Let’s hope that the macro-economic factors take a turn towards the positive growth and the real-estate sector can come out of the slump to grow in double digits to generate massive employment and contribute in the country’s development in a healthy and constructive manner!