The real estate market in India is currently in the midst of fairly challenging times. In the last few years, there have been a few noticeable macro shifts that have challenged the realty sector.
The demonetization exercise in November 2016 put brakes on the growth of the real estate market as it made the rampant use of cash in real estate transactions (prevalent earlier) more difficult. Further, the Real Estate Regulation Act (RERA) that was passed by the Centre in 2016 and most states in 2017 put a lot of onus on builders which further halted new offerings in the residential space.
In addition, the demand-supply gap has been an issue with most of the key real estate markets such as Mumbai, Bengaluru, and Gurugram facing a serious oversupply of properties. However, the big funding challenge came in 2018 after the IL&FS fiasco.
The implosion of IL&FS raised serious questions about the asset-liability mismatch in the books of NBFCs, which have been the principal financers for the real estate sector. It is in this context that the current real estate scenario in India needs to be understood.
Current state of realty: A case of oversupply
If there is one factor that impedes the realty sector in India, it is the oversupply of residential properties. Consider the chart below:
While Ahmedabad and Hyderabad have a relatively comfortable inventory situation, major markets such as Mumbai, Gurugram, Bengaluru, Noida, and Ghaziabad have an average inventory in excess of five years. Even assuming that sales do improve, this is unlikely to change soon.
The bigger challenge is that real estate as an asset class is not showing the kind of 20-30% annual price appreciation that we saw between the years 2001 and 2008. For example, between 2013 and 2017, the property prices in Mumbai and Bengaluru have increased by just about 7.50% and 5.75%, respectively, which is lower than what you would have earned on your savings bank account. During the 4-year period, Delhi actually witnessed negative price growth of (-0.70%).
Tax shifts and demand shifts
Apart from demonetization and RERA, there are two other factors spooking the real estate sector. The first pertains to the implementation of GST (Goods and Services Tax) Act in July 2017. Prior to GST implementation, there was a service tax of 4.5% that was payable in case of under-construction property. Post GST, that rate has gone up sharply to 12% making it almost unattractive to buyers. While the benefit of the input tax credit (ITC) is available on this 12%, it practically does not amount to anything. Property buyers were already paying registration charges and stamp duty on properties. With the addition of 12% GST, the total statutory cost has gone up by 20% of the cost of property for the buyer.
The bigger problem is a fundamental shift in demand patterns. During the heydays of the property boom, many real estate companies invested heavily in developing middle range and premium properties. When the cycle turned, most of these properties could not find buyers. Shortage of working capital has led to many builders defaulting on their delivery commitments to customers. According to a study by Anarock Consultants, in the year 2017 alone, 74% of the builders had missed their stipulated completion deadlines. Above all, the big demand boost now is likely to come from low-cost housing and most of the realty companies do not have the ability, ecosystem, or the low-cost funding options to cater to this sector.
Some green-shoots in the last two years