Understanding the Indian real estate crisis, and how it can be fixed

There is a current real estate crisis in India. There are INR 70,000 crore of unsold residential in the big cities that is obstructing lucrative new projects. Construction is both expensive and poorly optimised, and especially with commercial projects needs upfront capital. Exits and liquidity are often difficult and require fighting your way out with RERA. Perhaps worst of all, is the breaking down of trust between the players of the sector. 

This was discussed at India GRI 2019, where the leading developers, investors, lenders and operators meet annually for collegial, closed door discussions on current real estate market. At the master session ‘Real Estate Crisis - Where is the silver lining?’ they debated how the market may be set to bounce back and present great opportunities very soon. 

It can be said that the market holds some difficult complexities that are specific to India’s current situation. To begin with, the banks are sitting on thousands of lakhs of liquidity but often won’t lend to projects because of a swath of developers that take high risks, bad working conditions and a credit plunge in transaction velocity.

A further hindrance to this is poor valuation from surveyors that don’t properly understand the market. The developer now holds full responsibility to secure institutional lending, and it has now become a game of patience. There has also been a permanent reset of capital values, and land owners need to recognise this. 

So the buyers are not buying, and the financiers are not financing. The money is now having to come from the stressed fund by the finance ministry, which has become a saving grace for a lot of large projects that were stuck. 

Where is the silver lining? Where is the light at the end of the tunnel? Well, India’s first REIT happened this FY and is performing pretty well, and these things often act as a barometer for the country’s real estate market and foreign investment attraction. However, the dark clouds of the last few months has blacked out even some of the more optimistic developers. It’ll need more than just a REIT to restore hope to the sector.

With the sales velocity progression starting to dip and good projects starting to feel the heat from credit valuation, NBFCs have agreed to begin taking haircuts to salvage some money. Other suggestions to lament the crisis have been to provide 100% interest on housing loan deduction to first time buyers, and increased monitoring on projects to ensure trust between participants. 

All agreed that trust must return to the sector, and that the only way to achieve this was by working together. The very core of the Indian ecosystem needs a fresh start, and time is of the essence. It was concluded that there was indeed ‘light at the end of the tunnel’ so to speak, but there needs to be government reforms to spur demand, liquidity, and confidence. 

 

For more information and discussion on the Indian real estate market, join the most important players in the region at GRI India Real Estate Leaders Forum 2019, taking place on 20 November in London. 

Article by Matt Harris