Challenges faced by the Indian real estate sector

Indian Real estate sectorThe Indian real estate sector has come a long way since the 1990s’ by becoming one of the fastest growing markets in the world. It is not only successfully attracting domestic real estate investment but foreign investments too. The growth of the industry is attributed mainly to India’s growing population, rising income level and rapid urbanization. However, despite the positive outlook for the sector in the coming years, it is battling challenges. These challenges restrain the sector from yielding full benefits of the potential growth. Moreover, it is facing situational extremities such as increasing need for housing but diminishing project launches in semi-urban and rural areas and increase in inventory pile-up but shortfall of demand in urban areas. These trends point towards some major issues through which Indian real estate is passing at present. The figure below represents the trend in sale of inventory and new project launches in major cities of India during the period 2010-2016.

Launches and sales of real estate properties in India (Source: EquityMaster (2016))

Launches and sales of real estate properties in India (Source: EquityMaster (2016))

The aim of this article is to review the major challenges which real estate is facing currently and their possible causes.

Job loss in other sectors affect the Indian real estate sector majorly

People earning in the bracket of Rs. 2 million and Rs. 8 million per annum are the major investors in the Indian real estate sector. They thus make up for a huge portion of the factors responsible in the sector’s growth. Most people in this category are employees in IT and other service sector companies. According to IIFL (2017) India’s IT and BPO sector employs over 4 million people. However,  recently according to many reports, employees working in the middle management of these industries are at a higher risk of job loss due to increased automation and artificial intelligence tools (Money Control, 2017). This affects their ability to purchase a premium or mid-premium house. Thus the issue of job loss has hit the sector directly, and demand for housing will continue to drop (particularly in cities) as a result.

Inventory pile-up in the Indian real estate sector

According to the survey conducted by ASSOCHAM, some of the major Indian cities have faced a sharp decline in property prices as well as lending rates. Delhi-NCR witnessed the sharpest drop with fall in demand by 25-35% (SIC, 2015).  The pile up has been caused due to a number of reasons like fall in demand, litigation issues, failure to deliver projects on time, poor planning, etc. This has resulted into 2,50,000 units of unsold residential houses in Delhi-NCR alone.  Most of the builders consider unsold flats as work in progress but until the property is sold, they have to pay high interest rate. This also delays launch of new projects.

Low rental yield from the Indian real estate sector

Rental yield is the key determining factor of purchase and the value of a property (Jagannathan, 2016). A high yield is important for making an investment in the property. Rental yields in India is among the lowest in the world at 2.2%  (Equitymaster, 2016). This makes buyers looking for property only as investment somewhat skeptical of purchasing. Also gross rental income in the major cities Mumbai, New Delhi, and Bangalore are quite poor despite a consistent rise in property prices (Shanu, 2016; Singh, 2017). This indicates that real estate in India is overpriced in some locations, making it a dull investment option. Thus low rental yield is a major challenge for real estate.

Rental Income as a % of property’s purchase price in the Indian real estate sector (Source: Equitymaster, 2016)

Rental Income as a % of property’s purchase price in the Indian real estate sector (Source: Equitymaster, 2016)

Economic slowdown since recession has affected the real estate sector

In 2006, the Indian real estate sector was passing through a golden period and property prices and demand were at an all time high. However, in 2008 when the recession hit, several changes were faced such as drying up of fund in banks, stock market crashes, currency crisis and large scale job loss (Chaturvedi, Guru, Singh, & Sharma, 2013) . The higher income group put off plans for investment in real estate. As a result, the demand of housing went down and developers struggled to find buyers and tenants for their overpriced properties (Tranquils woods, 2012). They were eventually forced to sell the stock at a loss.

Housing growth rate after and before global crisis of 2008 (Source: Crisil, 2010)

Housing growth rate after and before global crisis of 2008 (Source: Crisil, 2010)

High interest rate and and unclear tax rates

Higher interest rate is a vital challenge to the real estate sector. While compared to countries such as USA and the UK, India’s banks are found to give loans at 7-8% higher rates. Currently the rate of interest hovers around 10% which is 3-4 times higher than the interest rate charged by US banks for purchasing a property (IBEF, 2008). The higher the interest rate the lower the demand for property, causing a ripple effect. Thus interest rate on home loans is also considered a challenge to developers of the real estate sector.

As discussed in the previous article, high tax rates and less transparency in the taxation system of the country are a major challenge. Until recently developers as well as buyers were faced with multiple taxes such as service tax, VAT, and excise duty which varied from state to state. The lack in clarity of tax and high prices dissuaded them from investing in it. However, with the recent implementation of a standardized tax format (GST of 12%), the scenario is set to change soon.

Difficulty in getting bank loans and delay in possession

Home loan seekers commonly face difficulties in procuring a loan from banks and non-banking financial institutions (NBFCs). The top reason is facing rejection of application due to lack of knowledge about documentation and lack of required credit score. Another reason is lack of required sum for down payment on the loan. Furthermore, dilemma in choosing the interest rate, time taken for property evaluation and the lengthy loan disbursement process (Financial Express, 2016). In most cases banks approve loans quickly, they take much longer to disburse the loan. During this period customers are faced with increased costs and waning interest on the property. Despite the launch of friendly mobile applications and instant customer service, this issue remains grave in the financial sector.

Most developers initiate several projects at a point of time and start advertising much before the completion of the project to attract the customers. However stoppage in construction of property due to varied reasons such as lack of funds, litigation, failure to procure necessary licenses, etc. causes a delay in completion of the project. Due to this buyers fail to get their property on time but are faced with the burden of repayment of loan.

Need of support from the Government

Of all the challenges reviewed real estate sector of India, only two issues have lately been addressed on a macro scale;

  1. eradication of a complex tax structure with the implementation of GST and
  2. addressing inventory pile-up by implementing the RERA (Real Estate Regulatory Authority) bill.

Although it will take some time for the effect of these changes to show, it has uplifted the mood in the sector. However, other issues primarily that of job loss in other sectors is yet to be addressed effectively. Implementation of attractive schemes and policies such as Affordable Housing, Housing for All, etc. will be redundant in face of growing issue of lack of jobs nation-wide, particularly in rural areas. Therefore, more attention needs to be paid by the governments in tackling this challenge.

References

  • Chaturvedi, D., Guru, S., Singh, G., & Sharma, M. M. (2013). Economic Recession and Indian Real Estate – Hopes and Implications. THE GLOBAL eLEARNING JOURNAL, 2(3), 1–13.
  • Crisil. (2010). India Real Estate Overview. CRISIL Research.
  • Equitymaster. (2016). Property rental yields in India lowest in the world.
  • Financial Express. (2016). Home loans: Top 5 problems faced by borrowers in India. Retrieved from http://www.financialexpress.com/photo-news/business/403188/home-loans-top-5-problems-faced-by-borrowers-in-india/6/
  • IBEF. (2008). Real Estate Market & Opportunities. ndian Brand Equity foundation.
  • IIFL. (2017). IT meltdown | Job losses in IT likely to hit the earnings of real estate developers.
  • Jagannathan, R. (2016). Why Indian Real Estate Will See A Crash, Or At Least A Long Period Of Stagnation.
  • Shanu. (2016). Rental Yield In Indian Cities – Find The Reasons Why Rental Yield Is Low In India.
  • SIC. (2015). Indian Real Estate Sector. SIC Global .
  • Singh, A. R. (2017). Home rentals: How India fares against other countries on the globe.
  • Tranquils woods. (2012). Effect of Recession on Real Estate Industry | Tranquil Woods.
Anita Tomer

Anita Tomer

Research Analyst at Project Guru
Anita is a post graduate in applied operational research and a graduate in mathematics (hons.)from University of Delhi. As a part of her association with Project Guru, she is working in the direction of developing strong statistical concept. Apart from data analytics, she loves adventures and loves to explore places.
Anita Tomer

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