Ailing Real Estate

The prolonged stress in the real estate sector is due to many different factors. A much needed clean up has left in its wake a tale of stalled projects, defaults, low sales and an industry in crisis. Granted a lot of the problems are created by the stakeholders within the industry, but to see the real estate sector drive the economy, each problem needs to be acknowledged to be able to prescribe a solution.

FINANCE: The effect of the challenges to financing the NBFCs coupled with stringent review of malafide actions by people working in financial institutions have led to a scarcity of capital. As a result, funding for developers and in many cases, home buyers have dried up. 

STUCK PROJECTS: Tightening up of loose norms and ensuring fiscal discipline (through RERA and court actions) have led many developers to run out of money for ongoing projects.  There are three to four lakh homes (depending on who is estimating) where the construction has stopped completely. While the fundamental problem is funding for these stuck projects, there are probably a dozen different types of solutions that are needed to get these stuck projects going.

FOCUS ON AFFORDABLE HOUSING: The government has ignored the segments of housing that drove the industry earlier and relentlessly focused on affordable housing. This has led to to demand and supply in this segment. The challenge is that affordable housing by definition is smaller sized homes and as a result there has been a reduction in the square feet being developed, leading to a reduction in the need for labour, cement, steel, tiles, elevators etc.

CHANGING GOAL POSTS: While the government has focussed on affordable housing and offered developers incentives for developing affordable housing, this year, a new twist was added in the affordable housing definition. Apart from the size criteria, affordable housing is now classified as long as the cost is under Rs 45 lakh.  Developers plan projects in phases.  With the change in the definition, even earlier phases of projects where the homes are above Rs 45 lakh but within the size requirements now fall out of the tax benefits. 

COST PRESSURES: Over the past few years, while home prices have remained flat or even drifted downwards, there has been an increase in the construction costs as well as input costs for developers.  This was further compounded by the GST that was transferred from the flat purchasers to the developers.  The concept of GST was to eliminate tax on tax.  The government has brought back that regressive regime in the case of real estate.

SENTIMENT: Each of the above aspects has led to the supply side of the industry to be extremely pessimistic and negative about the future prospects of the industry.  This then leads to a further cycle of negativity.

While there are serious headwinds, it does not mean there is no demand it just means that the demand has shifted to developers who are financially solvent and where construction is still underway in full swing at their projects. These developers with a track record of delivery continue to do well.

HIstorically, finance for the sector came from formal, informal sources and customer financing.  All of these are throttled for some reason or another. The only one that the government can influence in the immediate term is to provide time bound incentives to people to buy their homes.  This action will ignite the purchase cycle, get cash flow going for many developers and kick start the cycle. While the hope is that the Government takes this step, the continued clean up of the fly by night operators and those who treat customers with disdain and who indulge in crony banking and managing the system is also necessary.

The author is managing director at Gera Developments Pvt Ltd