Abu Dhabi, UAEMonday 23 September 2019

India's property market at a crossroads amid reforms and a liquidity crunch

Analysts and developers say that looking at the bigger picture, real estate has gone through a period of transition over the past few years

Mumbai, India, where residential property prices dropped 3% year-on-year in the first half of 2019. Getty Images
Mumbai, India, where residential property prices dropped 3% year-on-year in the first half of 2019. Getty Images

India's property sector is going through upheaval amid a slowing economy as the government tries to reform the sector in the midst of a liquidity crunch that has pushed many developers out of business. Given the challenges, it has come as a relief to many real estate firms in Asia’s third-largest economy that policymakers have taken some steps to help the ailing industry.

The country's relatively new real estate regulation and development act, fully implemented in 2017, aims to protect home buyers and increase oversight on developers. The measures include making it mandatory for projects and agents to register under the real estate regulator and requires developers to deposit 70 per cent of the money collected from property buyers in a separate bank account, usually known as an escrow account. There is strict punishment for those who violate the law, with developers facing up to three years in jail.

The looming threat of jail time means that it is more difficult and riskier for companies to depend on off plan payments from customers to build their projects.

Analysts and developers say that looking at the bigger picture, real estate in India has gone through a huge period of transition over the past few years. Reforms including demonetisation – a ban on the two highest value banknotes to crack down on illegal money flows - in 2016, followed by the introduction of a new goods and services tax in 2017, and then the real estate regulation act of 2017 have all had developers coming to grips with change.

While not every business has survived these measures, many larger companies welcome tighter regulations, saying that transparency and consumer confidence in the industry has improved as a result.

“Earlier there were a lot of fly-by-night developers,” says Gaurav Gupta, the director of Omkar Realtors, one of Mumbai's major developers, which has projects boasting multi-million dollar penthouses. “The market has definitely shifted towards branded developers now.”

Meanwhile, the country's central bank, the Reserve Bank of India (RBI), announced that from October 1 it will be mandatory for all banks to link new retail loans, including home loans, to an external interest rate benchmark. There have been widespread concerns that although the RBI has cut interest rates at its past four monetary policy meetings this year, these rate reductions are not necessarily being passed on to consumers.

“This will aid the home buyers to avail faster and cheaper home loans,” says Niranjan Hiranandani , the national president of industry group Naredco.

REAL-ESTATE
REAL-ESTATE

In addition, the government two weeks ago unveiled a plan to inject 700 billion rupees (Dh35.9bn) into public sector banks.

“This rejig of the spending model by the government is a clear intent to stoke demand and ease bank credit which had hit across the industry acutely,” says Mr Hiranandani.

Many developers have managed to work within these new regulations and some say the current economic situation is more of a worry.

The liquidity crisis that has hurt real estate companies began last September in the country's non-bank financial sector. It erupted when one of the sector's biggest companies, IL&FS, unexpectedly defaulted on loans. After that, the flow of cash in the system reduced as capital markets and other financing sources became wary of giving money to these institutions, also known as “shadow banks”. Property developers in India had been heavily dependent on loans from non-banking financial companies to fund construction.

This has led to work on many projects stalling in India.

“The real estate sector is undergoing a period of stress,” says Rohit Gera, the managing director of Gera Developments, based in the city of Pune. “Many developers have run out of money for ongoing projects.”

The property sector forms a significant part of the country’s economy, accounting for up to 6 per cent of gross domestic product and is the second-largest employer in India after agriculture, according to official figures.

Partly because of the liquidity crunch, real estate firms are now struggling for funding for projects and the number of developers in India's major cities has plummeted 36 per cent between October 2018 to March 2019, compared to the previous six months, according to property consultancy JLL.

“Real estate is not in very good shape,” says Samantak Das, the chief economist and executive director of research at JLL India. “Developers are facing a lot of problems in terms of financing activity. Now, the other problem is that the economic sentiment means that buyers are postponing their decisions” and real estate companies “have either gone out of business or they've consolidated with better performing developers”.

Shiv Parekh, the co-founder of hBits, a Mumbai-based commercial real estate platform and a director at Raycon Infrastructure, says although it is largely the residential sector that has been impacted by the current environment, he has noticed that developers are selling off commercial real estate to secure cash for other projects.

Bangalore, India. Getty
Bangalore, India. Getty

“We're being slightly benefited by the situation because we're a platform that provides liquidity to developers so we're one of the avenues that a lot of developers are looking at to liquidate their assets,” says Mr Parekh.

Some industry insiders are hopeful that the government is poised to announce a big stimulus package for the real estate sector.

Ankit Kansal, the founder and managing director of Indian real estate consultancy 360 Realtors, says that prices have stagnated or fallen in major cities in India. But he is optimistic that the challenges will be addressed and that the government will “take prudent steps towards completing the stalled projects with the help of fiscal stimulus”.

“In addition, more liquidity will be provided [and] rules will be modified to enable easy bank funding for developers,” he adds.

José Braganza, the joint managing director at B&F Ventures, a real estate company in Goa, echoes those sentiments. “Broadly speaking, when the economy is sluggish, so is real estate which is the current state in the country. However, we do expect the government to be conscientious in tiding it through.”

Property developer Mr Gera hopes that the market turns around soon, given what he describes as an unsustainable situation.

“In real terms, prices are at a long time low and with the burden of GST (goods and services tax), there is no way developers can continue with the existing margins,” he says. “Therefore, as soon as demand comes back into the market we expect to see prices rebound.”

Updated: September 7, 2019 07:59 PM

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