Will India’s real estate regain its past glory?

The Indian real estate sector has been showing signs of weakness since the beginning of 2017 when demonetization was implemented. The country’s realty sector, valued at around INR8.3 trillion, as per Niti Aayog’s estimate in February, is one of the most recognized sectors in the world. The realty sector’s growth is well-complemented by higher demand for office spaces, and urban and semi-urban accommodations.

However, the sector, which contributes 6–7% to India’s gross domestic product, is currently in choppy waters due to multifarious economic challenges.

Although the government has doled out an array of packages to revive the sector, current trends show that sales may not rally back to their peak levels. However, the government’s recent announcement of an INR25,000-crore emergency bailout fund for the sector has boosted the morale of developers and aggrieved homebuyers.

Besides, sovereign and pension funds will also invest in the emergency fund to jump-start the sector. However, will these measures revive the once-thriving sector and help it regain its lost glory?

The demonetization move in November 2016 dampened growth in the realty sector and reduced the flow of investments in it. Also, the introduction of the Real Estate Regulation Act (RERA) by the Union Government has put brakes on a number of projects.

According to realty consultant Knight Frank, unsold home inventories in eight major cities in the country (Mumbai, New Delhi, Hyderabad, Chennai, Bengaluru, Ahmedabad, Pune, and Kolkata) stood at 450,263 as of June 2019. While new launches in these cities rose 21% during the period (as against the same period in the previous year), sales increased just 4%. With the economic downturn slowly taking the country in its grip, the number of inventories is unlikely to fall any time soon.

Apart from that, several realty developers are currently involved in resolution proceedings with their lenders under the National Company Law Tribunal (NCLT) amid rising non-performing assets in the banking industry. This has forced many developers to put several projects on hold, leaving homebuyers in the lurch.

The crisis in the sector aggravated with the collapse of Infrastructure Leasing and Financial Services (IL&FS), which defaulted on loan payments, putting non-banking financial firms (NBFCs) and housing finance companies in deep trouble. NBFCs are the major source of funding for realtors in the country.

According to a Fitch Ratings report, India’s realty sector would need to repay debt totaling $10 billion in the first half of 2020, raising the chances of defaults amid a slowing economy. Higher defaults may cripple the banking sector, further raising liquidity crisis.

Apart from fund crisis, there are a couple of other regulation and policy challenges that have crippled the real estate sector in India.

The lack of or irregular funding is a major hurdle for developers, leading to delayed projects. Apart from the complications related to acquiring the funding for the realty project, the developer has to face at least 40 different regulations before starting the construction of the project.

Normally, it takes a few months to a year for getting theses permissions, which will indirectly raise the property cost by 10–20% for consumers and developers. The sector needs a single-window clearance system to streamline and fast-track the approval mechanism.

Moreover, current Floor Space Index (FSI) norms in cities are not at par with growing demand of consumers. According to reports, the permitted FSI in cities in the country is currently at an all-time industry low of 1–1.5. Developers want state governments to revisit these FSI norms.

The implementation of the GST has also put brakes on home sales in the country. Before the GST was implemented, a service tax of 4.5% was applicable for an under-construction property. However, post-GST, the rate has increased to 12%. Along with registration charges and stamp duty, the statutory cost of the property has been increased by 20%, with the inclusion of the GST.

Addressing these issues in the realty sector is imperative as the crisis may spill over to other sectors, deepening the slowdown in the country. Developers seek more measures to ease the credit flow, fast-track clearance of projects, lower taxes, among others, to regain the past glory of the sector.