The real estate sector in the country is in the doldrums as the slump in the residential segment because of poor demand and high inventory shows no sign of improvement. Lakhs of home buyers have been left stranded after a number of real estate companies have failed to deliver their projects on time. Leading companies like Jaypee Infratech is facing bankruptcy at the National Company Law Tribunal (NCLT) and the Supreme Court has asked the government-owned NBCC to take over all projects of Amrapali Builders and complete them as home buyers are stuck with incomplete projects for six to seven years and even much more.

With sales going down and prices flat to declining, cash flows have dried up and construction activities have slowed down dramatically. And now with bank lending rates rising, buyers may stay away from loan-backed home purchases. The situation is even grave for smaller real estate companies as they are starved of funds as banks are reluctant to finance residential housing and property prices have stagnated. Many small developers are going for joint ventures with bigger ones or sold their projects to tide over the crisis. Many developers are now looking at developing affordable housing because of government subsidy. The government has come out with lower GST rates and a credit-linked subsidy scheme to promote affordable housing.

Most real estate companies have over-leveraged assets, diverted funds to acquire more lands which led to crunch in funds for completing existing projects. The sector further went into a tailspin with demonetization, Real Estate (Regulation and Development) Act and Goods and Services Tax (GST). In fact, RERA and GST increased the compliance costs for developers, through these are customer-friendly policies.  With high inventory levels, developers are now focused on offloading inventory rather than doing new launches. Developers have now sought government intervention to tide over the grave situation. They have sought reduction in GST on construction services from 12% and better access to finance.

Slump in real estate

Property prices in Mumbai and Bengaluru have increased annually by just about 8% and 6%, respectively, between June 2013 and March 2018, according to National Housing Bank. In Delhi-NCR, prices have actually fallen and unsold houses have piled up, which will take at least another five years to clear. In the past 10 years, the real estate sector went through couple of downward cycles.

In the past, PE investments in real estate were an important source of funding. After the global financial crisis, private equity (PE) funds had cut investments in the real estate sector. Overall PE funding in the real estate sector have dipped 22% year-on-year to Rs 10,080 crore in June quarter from Rs 12,970 crore in the same quarter in 2017, according to Cushman & Wakefield. With the slump, PE investors are now cautious of fresh investments and are trying to recover their losses. Similarly, the banking system, which was the main source of funding, is vexed with piling non-performing loans. Moreover, RERA no longer allows the use of a customer’s money to do anything other than build the project they were sold. Developers have to put 70% of the funds received from buyers in a separate escrow, which means developers cannot roll the money for another project.  As residential real estate accounts for nearly 80% of all the real estate developed in India, developers are hamstruck. Moreover, rental yields in the Indian residential real estate market are very low as compared with other emerging nations. This indicates that the Indian real estate market is overvalued and unaffordable. In fact, ideally the rental yield should be close to the cost of borrowing.

Merger, Consolidation possibilities

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