Reasons behind the slowdown in real estate sector in India

The real estate sector is one of the most dynamic and globally recognized sectors today, owing to a number of factors like population spurt and increased purchasing power of consumers. India is one of the biggest real estate market. It comprises of four subsectors namely housing, retail, hospitality and commercial.  Growth of these sectors is highly dependent on the growth of the corporate environment and the demand for office space and residential projects (IBEF, 2016). However there has been a slowdown in the sector due to various internal and external factors.

India’s real estate market has witnessed a decline in property prices. With slowdown in consumer demand, there has been an increase in inventory backlog and disappointment among the real estate industry since 2008. With constantly increasing real estate prices, most of the properties have become unviable for purchase due to liquidity crunch.

low yield rate as one of the reason for slowdown in real estate sector in India

Rent yield in major economies

Real estate market is considered to be highly overpriced and not affordable to a vast majority of the Indian middle-class households. On the other hand the rental yields are too low (approximately 2-2.5%) and thus housing is not considered to be a good investment option (Jagannathan, 2016). However in long term the real estate sector has given higher returns (Re-emerging real estate sector of India is hungry for investments) than other investment options such as stocks and gold.

Increasing real estate inventories in the major cities due to slowdown

India’s major cities – Delhi NCR, Mumbai, Bengaluru, Chennai, Kolkata, Pune, Hyderabad and Ahmedabad witnessed only 4% new home purchases in 2015. As a result of this, nearly seven lakh units are left unsold. Experts from the industry estimates that it will take at least two or three years to clear this backlog. Though the builders are offering 25% discount and lucrative schemes like free club membership the sales are not increasing (Yerunkar, 2015). The current property prices are very volatile, however in the long term with increasing demand they are expected to be stable.

A slowdown in the global economy forced customers to postpone their buying decisions indefinitely. The real estate industry has an inventory pile up of 46 months in the Mumbai Metropolitan Region (MMR) alone, as of August 2015. Coupled with cash crisis and economic recession setting in, the rising prices and fall in demand led to a stagnation in the industry in 2015. As a  result there was a “price correction” or decrease in prices by 0.95% and 3.23% in the MMR region and Mumbai respectively (Yerunkar, 2015). A similar trend has been observed in all other major cities of India.

Unstable economic condition of the consumers 

With the economic recession and increasing inflation, many companies had a ramp down and lay-offs became common. As a result there was an increase in unemployment. This reduced the purchasing power of the individuals and prevented them from investing. In 2013 alone, an estimated 2 lakh job had been lost in India in various sectors like automobile, manufacturing, construction, and the service sector. Similarly hiring rates fell as much as 15% in sectors like oil & gas and pharmaceuticals (Financial Express, 2013). On the other hand, due to Indians losing their jobs abroad, the foreign exchange remittances reduced considerably after 2008, leading to a decline in real estate activity in India (Koshy, 2016).

Increase in price due to higher costs of production

Research shows that even reputed builders and promoters are facing a pile-up of inventory. Due to this the builders are under pressure to lower prices. However they are unable to do so because of high construction costs arising from liquidity issues and delays in obtaining approvals (Hindu BusinessLine, 2016). Also selling the existing properties at lower prices indicate a drop in property prices in the area which is disappointing for the existing owners. As inventory keeps piling up, the construction of new houses is discouraged which leads to a slowdown in the growth of the sector.

Declining consumer trust due to delay in completion of projects 

Indian real estate sector is notorious for being plagued with many difficulties, one of them being the delay in completion of projects. More than 25% of the total number of projects in India are not being completed on time (Kumar, 2015). The main reasons for this phenomenon is poor project management, rising inflation, rising construction cost, cash crunch faced by builders and most importantly- diversion of funds towards establishing new projects rather than finishing the ongoing ones. This has led to a decline in consumer trust and causing a major slowdown in the sector.

Introduction of technology-oriented homes 

With the recent launch of high-tech homes like Smart Homes the old residential units built in a conservative way have become redundant. This has also added to the inventory backlog which has aggravated the slowdown. Moreover, homes built on superior technology are not being sold by builders for cheaper rate despite the recession and low affordability of consumers, leading to low demand (Hindu BusinessLine, 2016).

Region specific consumer demand

Real estate prices have grown at their slowest pace in North Indian cities since 2013. On the other hand the Southern part has done well. This is due to increase in end-user demand, especially in IT-driven growth clusters. Prices quoted by builders have been either stagnant or with negligible margins.

NCR’s (Delhi, Noida, Gurgaon, Ghaziabad and Faridabad) poor performance is largely attributed to poor project fundamentals and infrastructure issues (Hindu BusinessLine, 2016). The North India  had the lowest price increase since 2013. Real estate prices in Gurgaon declines by 1.4 % between 2013 and 2015. West-Indian cities have been largely stable with a negative bias. South Indian customers have shown keen interest in investing in properties towards the rural side for affordable housing. Therefore, regional differences in real estate demand has also led to overall slowdown in the sector.

Expected future of real estate in India

Despite the current slowdown, the Indian real estate market is expected to reach $180 bn by 2020 . The growth will be mostly due to sufficient growth in retail, commercial real estate and the hospitality market. The housing sector contributes 5-6% to the country’s Gross Domestic Product (GDP). This sector is expected to attract maximum Foreign Direct Investments and non-resident Indian investments in both the short term and the long term. Bengaluru and Mumbai are expected to be the most favoured property investment destination for NRIs’. This is followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.

The Government of India along with respective state governments have taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Increase in the flow of Foreign Direct Investment (FDI) into Indian real estate is encouraging increased transparency. Developers have revamped their accounting and management systems to meet due diligence standards to attract funding. Similarly other government schemes such as affordable housing, housing for all and introduction of REIT is expected to boost the real estate sector.

References

Abhisikta Dey

Abhisikta Dey

Research consultant at Project Guru
Abhisikta is a Bachelor in Economics from Calcutta University and a Masters in Business Administration in field of Finance & Marketing from Birla Institute of Managementand Technology. She has worked as a Business Research and Advisory Manager withGenpact, Evalueserve and Reliance Industries for 10 years. She has been a team player and a mentor to most of her peers and team members. She takes pride in her children and loves her work as a research consultant. In her spare time shetakes keen interest in travelling, socializing and dance.
Abhisikta Dey

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