There have been some great learning for the Indian real estate in the year 2019. Ravi Sinha highlights the pains & gains with a question mark as to whether the developers will learn the lessons or it would be yet another year that ends with optimism galore for the year ahead.
Beyond inventory statistics, and the customary positive outlook for the year ahead, 2019 has yet again underlined the need to read the pulse of the market dispassionately to learn why the tide has been going against. The lessons are equally true for both the builders and the buyers. Unfortunately, the sector does not seem to learn the lessons yet again. The testimony of the developers’ defiance is their guarded optimism for the year ahead, while dismissing the 2019 as yet another challenging year that has gone by.
The large section of the Indian developers are still living in denial and on the face of it exhibiting the optimism for the year ahead. This is not withstanding the pains and gains of the year where the sector weathered more pains than the gains throughout 2019.
The DHFL issue has exposed the sector to a prolonged spell of liquidity crisis as the NBFCs were the major source of funding for the residential real estate. The two issues that would continue to confront the developers in 2020 would be liquidity crunch and trust deficit on part of the buyers.
In terms of the overall gains for the sector, the year has been witness to a spate of judicial intervention, be it with Jaypee, Unitech or Amrapali. Even the apex consumer forum NCDRC has been quite prompt in giving judgments in favour of the buyers. While it may be construed as adding to the pains of the developers, in the final cost & benefit analysis this would narrow the trust deficit of the buyers and goad the sector to better compliances, transparency and hence trust.
The successful listing of Real Estate Investment Trust (REIT) could be cited as another major gain of the year. The REIT has been at a drawing board stage for many years now. With Embassy REIT listing, some other major developers with income producing assets, like Mumbai-based K Raheja Corp and Bengaluru-based Embassy Group have also announced their plans to test the waters with REIT.
Pains nevertheless have been very many and has rather neutralized the possible gains of the sector. As things stand today, despite of stressed fund by the Government of India the liquidity crisis seems to be a major challenge for the sector. The number of increasing insolvency cases (now reaching 450) is another pain point. Though the government has now put a rider that the number of buyers needed to drag the builder into NCLT has to be 100 or more, the challenge seems to hog the headlines in 2020 as well.
Irony is that the trust deficit of the buyers is also increasing even after RERA. This is because RERA lacks the teeth to either regulate the sector or be catalyst to promote it. Even the RERA orders are either not being executed or challenged in higher courts across the States. Last, but not the least, the job market does not look to be impressive enough to help the cause of the sector sitting over huge unsold inventory. After all, unproductive assets in the form of under-construction, stuck or delayed projects are today estimated at 560,000 homes worth INR 4.5 trillion ($65 billion) across the top seven Indian cities.
The question is what are the learnings for the sector that, if lessons learnt, could goad the Indian real estate into direct direction. Well, the lessons are for both the builders as well as the home buyers.
For the builders, the biggest lesson is that land bank is today a land liability. The developers should better go for co-development and look for JV/JD wherever possible. Secondly, the developers have to be ready with the financial closure of the project, even if the sales velocity is slow; expecting to sell the maximum number of units during construction stage would be too ambitious now.
The developers should better look for smaller projects to execute, so that they don’t go beyond their financial bandwidth or the execution capabilities. While there has been increased focus on the affordable housing now, and luxury housing not doing that well, the real market drivers in the top 8 cities would be affordable luxury; a compact luxury that is neither beyond the purchasing power of middle class nor just offering roof over the head. Last, but not the least, the developers need to focus on job catchment locations and not burn their fingers with speculative approach towards the future locations.
For the buyers too, learnings are writ large over the wall. To the extent possible they should better go for ready to move properties, or projects near completion. New launches are today worth avoiding due to liquidity crisis of the sector and the overall execution uncertainties.
Secondly, the buyers have to learn that what sells the cheapest more often than not proves to be the costliest. It is better to pay a reasonable brand premium to the reputed developers. Similarly, the house is now meant for self-use and is not an investment instrument by any stretch of imagination.
The big question is whether the eco system of the Indian real estate is that knowledge driven to learn from its mistakes and take the harsh lessons to get into a better year ahead. Well, it is anybody’s guess since the harsh lessons of the last few years have hardly changed the scary reality of the Indian real estate where all the stakeholders – whether developers, home buyers, banks or non-banking lenders – are today overleveraged.
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