Editorial

Stalemate in real estate

| Updated on January 23, 2018

Unless property prices drop or economic prospects revive, there will be no end in sight to the logjam in the sector

The Indian real estate sector seems to be stuck in no man’s land. Market watchers have been warning of a bubble in the sector and predicting that prices will crash, but this hasn’t materialised. Residential home prices even in over-supplied markets such as NCR and Mumbai, after marginal falls in 2013, have crept sideways. Eternally optimistic industry insiders have been wrong as well, with demand for their projects showing no signs of a revival. A recent report by Cushman & Wakefield noted a precipitous 50 per cent drop in new residential launches across India in the first quarter of 2015 as compared to last year.

Many interlinked factors have contributed to the stalemate in the sector. For starters, real estate developers, used to steadily rising realisations on new launches in the last decade, have been unwilling to slash prices enough to stoke demand. Today, most residential home buyers borrow at interest rates of 10 per cent plus to fund property purchases. Given abysmal rental yields of 2-3 per cent in India’s major cities, the truth is that it really does not make economic sense to invest in property. Until 2013, appreciating property values prompted buyers to ignore rents. But with price gains no longer a given, buyers are putting off purchases hoping for better prices. Developers on their part are not willing to oblige — they are either exorbitantly leveraged and are hoping to salvage their balance sheets through higher prices or are funded by private equity investors, who set a high bar on minimum returns from every project. Yes, lower interest rates could have made homes more affordable to buyers without a haircut for developers. But despite RBI pruning rates in the past year, lenders have slashed their rates only by 15-20 basis points, making no real dent in borrowing costs. In any case, history shows that property purchases are related to strong economic and income growth rather than interest rates. Finally, the new government’s zealous crackdown on black money transactions, by insisting on PAN numbers and TDS for property deals, has proved a dampener to the significant grey market segment. Overall this stalemate is unlikely to be resolved unless developers relent on prices, or economic prospects look up so strongly as to enthuse buyers to resume their purchases.

Amid all this, the Real Estate Regulatory Bill, recently approved by the Cabinet and awaiting parliamentary approval, promises to drastically reshape the traditional funding and sale practices in the sector. The Bill moots state-level real estate regulators and requires builders to launch projects only after statutory approvals, park buyer advances in escrow accounts and shell out stiff penalty for delays. Indian developers, who have been long used to the buyer shouldering much of the risk on project costs and delays, may not adjust easily to the new rules of the game. In short, even if economic prospects revive sufficiently to draw buyers back into the market, we mustn’t expect the Indian property market to get back to its heyday of 2007-08.

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Published on April 26, 2015
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