Reality check for Indian residential realty

May 22, 2017 / By

Challenging market conditions and policy reforms by the government have impacted the Indian residential realty sector positively with qualitative scaling up. We observe a portion of the developers’ community employing corporate governance, financial prudence, transparency in operations and a professional business approach,.

This means these developers are proving to be capable as long-term players, while the remaining developers lacking the right intent and vision, as well as reputational and financial strength are exiting the business.

This trend will likely slow real estate activity for a few quarters. Since 2008, when the Indian realty sector was at its peak, new launches have risen by 28 per cent and sales have grown by 32 per cent, but the unsold inventory (ready as well as under construction) has piled up by 327 per cent.

Every year for the next seven years, India needs to construct ten times the number of houses it does today just to bridge the existing urban housing shortfall, and the rising unsold inventory indicates that the price discovery has yet to happen for transactions to take place.

Table: Residential activity has scaled up from 2008 to 2016
Table_22May2017Note: Covering Mumbai, NCR, Bangalore, Chennai, Hyderabad, Pune and Kolkata
Source: JLL REIS

The real estate sector needs to reflect on the fact that it witnessed a better period not long ago, and why 2016 was weaker than an average year’s activity from 2008 to 2016, when the average number of launches was 197,421 units (34 per cent lower in 2016), average sales were 164,007 units (9 per cent lower) and the average unsold inventory was 307,321 (42 per cent higher).

With the Real Estate Regulatory Act (RERA) in place, it is high time for the government to revisit its directives to financial institutions about funding this sector. This sector is linked with 250 other sectors directly and indirectly and contributes about 8 per cent to the country’s GDP. It has been one of the top five sectors to attract FDI and has a very low percentage of non-performing assets.

Despite this, it has high-risk weighting from banks and finance, making funds costly. Banking exposure to this sector needs to be at least six times the present level (current gross credit of about US$42 billion) to meet the construction finance for affordable housing alone.

Over the last eight years, developers have earned about 40 per cent less revenue and their profits have dropped by about 20 per cent. On the other hand, land and building permission costs have held up, building permission costs have risen and the holding period for obtaining these has not come down as much.

Policy reforms, demonetisation and RERA have largely cleaned up the sector .With developers falling in line with compliance requirements we see the consolidation of players taking place. With improved transparency and accountability, it is time for much closer collaboration between the private sector and the government to give much-needed momentum to the residential sector to achieve the Prime Minister’s vision of “housing for all by 2022”.

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