The volatility of India's real estate industry

The real estate industry is the ‘backbone of the Indian economy’. The industry has seen many booms and busts since independence. Particularly after the economic liberalization, many doors were opened to NRIs and foreign investors.

In recent years, the real estate industry has survived a global recession, demonetization, and policy changes such as the implementation of GST (Goods and Services Tax). Other trends such as the implementation of the RERA Act have helped revive investment in the real estate industry, but the battle is not yet won. Demand and supply trends are volatile and highly susceptible to market trends such as unemployment rate, inflation and interest rates.

The four major phases witnessed by the real estate industry since liberalization
2001-2005

The initial growth phase

2006-2008

A high growth phase

2009- 2010

Declining demand and declining supply

2011- present

Increased supply and declining demand

However, when compared to other forms of investment such as equity, debt, and gold, real estate is a lucrative investment in terms of returns. Furthermore, with the introduction of newer concepts in the housing such as green bonds, home automation technology, and faster construction techniques, the real estate industry is expected to see a turnaround by 2025.

Increasing unsold inventories across India

As of June 2018, there were 5.34 lakh unsold housing units across seven major cities of India: Mumbai, Delhi-NCR, Chennai, Kolkata, Bengaluru, Pune, and Hyderabad.

Major factors that had a significant impact

Demonetization resulted in a spiraling cash crunch situation.

Noncompliance with the Real Estate Regulation Act in many states.

Higher costs to buyers from stamp duty and registration fee in addition to 12% GST.

Most of the developers focused on premium and luxury housing units while the demand shifted to affordable housing units.

Government policies to revive the real the estate industry

Major policy changes that affected this industry since 2001 include land acquisition bill, RERA Act, demonetization, monetary policies, Digital India movement, GST, affordable housing, and Smart Cities Mission.

The biggest boost came from the RERA Act which aimed to protect the home buyers by mandating increased transparency and accountability of the real estate firms.

The affordable housing segment was the best performing segment because of low-priced units, easy availability of finance, low-interest rates, and tax subsidies. The Digital India and Smart Cities initiatives spurred optimism in the real estate industry as the demand for housing in rural areas is expected to rise with the provision of better infrastructure.

Non-banking financial institutes that provide housing loans to people have recently been faced with multiple setbacks like record-high non-performing assets, loan defaults, and poor stock market performance. Although the RERA Act has proved beneficial for homebuyers, builders delayed new project launches. The initial GST of 12% on housing was received with backlash from the market, whereas demonetization pulled the sale of the property down by 40% in major cities by 2017. A market revival would not only require mechanisms for seamless execution of the policies, but also new changes such as modifying the land acquisition bill.

Dynamics of the real estate industry

The real estate market is faced with some critical challenges. Apart from high unemployment a tremendous amount of unsold inventory has piled up. Rental yields are below 2%, which is the lowest among developing countries in Asia.

The increased cost of construction from the rising cost of land acquisition and insuring the property has added to the worries of the developers. However, in order to offset this effect, the government has opened 100% FDI in property development.

This coupled with a 7% GDP growth rate and increasing per capita income has led to an influx of foreign investment in real estate.

  1. Mumbai,
  2. Pune,
  3. Gurugram,
  4. Noida,
  5. Bengaluru,
  6. Kolkata,
  7. Chennai,
  8. Ahmedabad,
  9. Hyderabad

These cities are some of the biggest cities in India and are showing steady growth in the past 2 years. They are the hub of several industries including IT, hospitality, and education in South Asia. The newer localities in these cities are taking a planned approach to infrastructure development. Apart from subsidizing technology homes, metro lines are being laid whereas special economic zones and affordable housing areas are also being set up. It is in these regions that the highest demand for real estate is being recorded in India since 2017.