We have just passed the 9th anniversary of the global financial crisis and so has the Indian real estate market. It has been a long time, since the real estate sector of India has been suffering from this slump, but has anyone wondered about the future course of Indian Realty Sector.
The real estate market in India has been going through a capital drought and the end doesn’t seem anywhere near. Isn’t 9 years of crisis enough?
Are all the real estate investors going to be paper billionaires only?
Will this crisis ever end?
Will real estate again enjoy being the favored asset class for NRIs, HNIs, and international investors?
And so many questions like this, but with heavy hearts, the answers to all these questions is no, not very soon. This drought in real estate segment of India is here to stay for some more time.
There were good old days for Indian real estate between the Year 2007 to 20010, when there was a flood of capital investment. Approx. $25 billion had been invested into real estate segment of Indian markets in various forms. But this huge investment came with a price and its side-effects. Most of these investments were unenforceable and in some cases plain and simple illegal too. To have a piece of this delicious cake, one had to deal with the lofty expectations of the promoters or developers in Indian real estate market.
At that time I was just a newbie for this market but could easily notice the real estate developers as one of the most optimistic creations of the God (I guess all 36cr Indian Gods).
Real estate developers have always been an optimistic one but for the developers in India, they took it to a whole new level. I guess the blessings of all 36cr gods had been working then.
My first assignment was newly developing suburb, Indirapuram, Ghaziabad. 2nd was Dwarka Expressway (that’s when IndianRealEstateMarket.com was conceived) and then Noida and for some time, Mumbai and Thane too. I got the opportunity to work with some renowned real estate developers of these areas and the experience was a great learning curve for me.
There are some rules for an steady growth, rules for capital optimization, for marketing expenses, for asset acquisition and many others, but here there was like none.
Real estate developers were pushing all the money received from the sales of their early projects (whose foundation has not even been laid or the construction had just started), towards the purchase of new land, heavy marketing expenses, media buying and everything else but construction.
I still have a feeling that, investors had shut their eyes to see this. Capital investment was flooding at a pace and scale that had no one had never been seen before in India. The land seemed like a disappearing commodity then and the sales pitch was, if not bought today it would be worth multiples tomorrow and the golden chariot will be missed. Well, that was the conventional wisdom anyway.
But I understand that it became too much to handle for the Indian real estate community. The greed ruled, the opportunity was exploited and the golden goose got killed as soon as it could be.
There were significant price increases, providing the illusion of handsome returns for investors and buyers alike.
Properties were being sold like stocks. Only files were being transferred for cash (hard cash), and before the ownership of property could be changed in papers, the property file had a new owner. The property prices were increasing like anything. Combine that with the propensity to build ever-larger units at a higher price point, and the most real estate is unaffordable for the average buyer.
The political situation was taking a turn. An illusion of favorable market for real estate in metro cities, that had been created with the landslide win of the Congress, started fading. By the end of the Year 2012, everyone in real estate market started to realize that the market needs a price correction. Suddenly investors came to the realization that, there is a lot of land in India waiting to be developed, and the prices in real estate can come down.
After all, in a country with an average household income of Rs.40,000/- per month, how many people could actually afford to buy apartments worth Rs. 5-10 crore.
In recent years, the sales velocity has gone down and prices have been declining. Return rates have been down, cash flows have declined and construction has slowed down. This all creating a vicious cycle. The slowdown in construction activity further sending the signal of doubt, scaring the next round of buyers and the sales going down again.
Barely 20-30% of that capital investment of $25 billion (approx) has been returned. The return on most of that investment has been either in single digit or mostly negative. And this is the answer to the big question –
‘What is wrong with Indian Real Estate Market?’
Those global investors, work like a backward-looking pack (which I personally appreciate). Before moving ahead, they prefer to stop, have an analytical look at the chart of previous investments and returns and then decide if they want to allocate more money to a specific market or not.
In the case of investment and returns in real estate in India, the record is abysmal. The real estate sector in India looks like an error in a global investment portfolio (I personally feel sad, saying this).
Like a cherry on the cake of troubles for Indian real estate – The banking system of India, the primary provider of capital for real estate ( approx 85% at last count), has been going through a hard time of its own.
The combination of meeting base requirements, RBI Guidelines, series of loan defaulters, and the burden of non-performing assets (NPAs), has effectively made real estate the ignored kid in the family.
Non-banking finance companies (NBFCs), looked like the last hope of monsoon for this drought in real estate and soon they turned out as a topic for another conversation.
Finally came the Real Estate Regulation Act (RERA 2016), (must say, it was necessary), which strictly prohibits the use of customer’s money to do anything other than to build the real estate project they were sold. For buyers, it is good, but for the real estate developers and agents, it has put a monkey wrench on the traditional business model.
Smart real estate companies have already realized this and are reshaping their businesses to focus on planning, execution, and delivery of projects under construction. There are some who still have high hopes that the good log days might come back, well I don’t expect these thoughts to last very long.
All this can be very unsettling for real estate developers, but for the customers, its great news.
Real estate prices are down. Developers are focusing more on customer satisfaction and the quality of upcoming projects, and they can get their dream home, on or near the promised time.
For real estate developers, the good news is, more deliveries and satisfied customers can simply improve what has gone wrong over the time and gain the confidence of investors.