James Joseph, a media professional, had been house-hunting for over a year. He had hoped to buy a two-bedroom flat in Navi Mumbai to accommodate his family of four, who were then cramped in the single-bedroom flat he owned. He sold his old flat, looking to purchase an apartment in one of the upcoming towers in Kharghar, a residential node in the city where 1,000 sq. ft flats were priced at Rs 1.3 crore upwards. He had almost zeroed in on an apartment-but then, following the larger downturn in the Indian economy, his company froze staff wages.
“There is no point in taking a loan with monthly instalments over Rs 50,000 when the future of your job is uncertain,” he says. Joseph is now planning to move into a rented two-bedroom flat instead. Will he buy a flat in Mumbai in the future, considering that his two children are studying at schools in the city? “Why buy a home here and take a financial hit?” he asks. “I would rather invest my money in a scheme that gives me good returns by the time my children are in college.” He’s not alone. Several potential buyers in Mumbai share his sentiment, shying away from home purchases as employment prospects turn gloomy.
The Indian real estate sector-valued at Rs 8.3 lakh crore, as per the NITI Aayog’s February estimate-is in the grip of one of the worst slowdowns in a decade. A report by realty consultant Knight Frank India, published in July, estimated that unsold home inventory in eight key cities-Mumbai, the National Capital Region (NCR), Bengaluru, Chennai, Hyderabad, Ahmedabad, Pune and Kolkata-stood at 450,263 units in the first half of 2019. And although new launches in these cities were up by 21 per cent in the first half of 2019 (compared to the same period in 2018), sales rose just 4 per cent in the same period. The Mumbai Metropolitan Region had the highest unsold inventory, at 136,525 units in the first half of 2019. The NCR came in second with 130,000 unsold units, while Bengaluru was third with 85,387 unsold units. “The golden years of Indian residential real estate are well and truly over, at least in the short to medium-term,” says Anuj Puri, chairman, Anarock Property Consultants. Buyer sentiment-of both end-users and investors-is seriously depressed, he adds. “Housing sales were at 350,000 units in 2014 (the highest between 2013 and 2019), but fell to a mere 210,000 units in 2017, immediately after demonetisation. End-users perched on the fence, awaiting a favourable market, while investors backed out of the market entirely,” he says. Though there were some indicators of a modest revival in 2018, current trends indicate that sales are unlikely to rally back to their peak levels anytime soon. However, compared to the residential real estate market, commercial real estate-which makes up just 12 to 15 per cent of the overall property market-has shown good growth, with new transactions in the office space growing over 11 per cent in the first half of this year. This was on the back of strong demand for office space from corporates.
Sanjay Dutt, MD and CEO of Mumbai-based Tata Realty & Infrastructure, identifies a number of factors contributing to the slowdown. “A major issue is excess development, which led to excessive inventory being built up-and the fact that most of it was not suitable for end users. Other problems relate to delays in price correction as well as an erosion of buyer confidence due to delays in delivery by developers.” The increased cash flow requirement as a result of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Goods and Services Tax (GST) have also exacerbated the liquidity crisis, which has already left the sector reeling from the high cost of capital.
As a result of the slowdown, residential property prices have begun to drop, but not enough to kickstart buying. For instance, prices dropped just 1 percentage point in the Mumbai and Kolkata markets in the first half of 2019. While Pune saw a drop of 2 per cent during the first half of 2019, prices have remained unchanged in Chennai and Ahmedabad. Meanwhile, Kerala has seen a massive drop in demand for real estate. “We need new strategies to survive these days,” says S.N. Raghuchandran Nair, a former vice-president of the Confederation of Real Estate Developers Association of India (CREDAI, an apex body of registered Indian real estate developers), and MD of SI Property Ltd. And the news continues in this vein-in Lucknow, demand has fallen by 50 per cent, according to Khalid Masood, joint managing director of Shalimar Corp., affecting homes costing between Rs 40 lakh and Rs 3 crore. Making matters worse is the fact that though the Reserve Bank of India recently cut its repo rate-the fourth cut in a row since the beginning of this year, this time by an unconventional 35 basis points (0.35 per cent)-many doubt this will have an impact as banks are transferring only a fraction of the repo rate cuts to retail consumers as cheaper loans. Also, potential real estate buyers continue to delay buying decisions. “Customers today postpone decisions to buy as they know the prices aren’t going to go up. Also, they wait for the government to announce some scheme or the other,” says Ram Walase, MD & CEO, VBHC Value Homes, a Bengaluru-based developer of affordable homes.
Although late, the government has stepped in to help. On September 14, finance minister Nirmala Sitharaman announced the creation of a special fund to provide financing to the many stalled affordable and middle-income housing projects in the country. The government will contribute Rs 10,000 crore, with an equivalent contribution expected from firms such as the Life Insurance Corporation of India, banks and sovereign funds. The move, says the finance ministry, will benefit around 350,000 housing units. Last-mile funding will also be made available to affordable and middle-income projects that are at least 60 per cent complete, though this will not apply to projects that are going through resolution processes under the National Company Law Tribunal (NCLT). “This will provide relief to customers and help restore confidence in the sector,” says Dutt. The sector requires funding of over Rs 3 lakh crore, he says, adding that the government’s fund is a first step in that direction. That apart, the norms for raising money through external commercial borrowing for affordable housing will be relaxed and government servants will get house-building advances at lower interest rates. However, Jaxay Shah, national chairman, CREDAI, says that this will have limited impact since the fund excludes projects that are facing insolvency proceedings or have become non-performing assets (NPAs). “Last month, we met the finance minister and requested several interventions to improve liquidity and boost demand. These have not been met,” he says.
The finance minister had also announced a package to improve market sentiment, boost demand and improve credit flow on August 23. The package involved substantial tax interventions (including the rolling back of the surcharge on capital gains for domestic and foreign investors), as well as measures to strengthen the financial system, including a Rs 70,000 crore capital infusion into public sector banks and the linking of retail loan rates with the RBI’s repo rates to improve transmission of rate cuts to the public. But how helpful will these measures be in reviving the real estate sector?
THE WAY FORWARD
There are no quick-fix solutions, but industry leaders have proposed a slew of interventions to revive real estate.
Revive the economy: Experts say that the primary reason for the depressed demand is the overall drop in consumption caused by the tottering economy. The downturn is visible in a host of macroeconomic parameters-India’s GDP growth slumped to a six-year low of 5 per cent in the first quarter of 2019-20, compared to 8 per cent a year ago, and experts say the country is staring at a protracted slowdown. “The question is this: where will you find buyers? Even in the IT sector, there have been some worrying signs due to the global slowdown,” says Gulam Zia, executive director at Knight Frank India. Layoffs and wage freezes have become common in most parts of the economy, such as the automotive sector, where over 300 dealerships have closed and manufacturers have begun to mothball factories to address inventory build-up.
When people are unsure about their job prospects, the incentive to buy major assets like new homes or cars dips sharply. And the situation has worsened in the past five years. While there was a slight uptick in home sales in 2018-especially in low-cost housing, on the back of the Pradhan Mantri Awas Yojana, which targets the construction of 20 million affordable homes by March 31, 2022, with tax sops to boost sales-the momentum soon faltered.
Ease the flow of credit: Another major factor is the trouble with India’s NBFCs, which supply credit to buyers and developers in this industry. Beginning in July last year, IL&FS, a major NBFC, began defaulting on interest payments on its short-term debts and bonds. This was followed by a similar default by Dewan Housing Finance. This led to mutual funds-major suppliers of funding to NBFCs-reducing their exposure to the sector, from Rs 2.66 lakh crore in July 2018 to Rs 2.02 lakh crore in June 2019. Since NBFCs (and other housing finance companies) account for about 60 per cent of the loans to property developers, this resulted in a major credit crunch and higher borrowing costs. Adding to the sector’s woes, the RBI has laid down stricter norms for housing loans. In recent times, the loan-to-value ratio-the maximum loan allowed for a property of a given value-has been restricted to 70 per cent. In other words, property buyers now have to put up 30 per cent of the cost themselves, says Puri.
Further complicating matters is the fact that regulations to prevent fraud have also worsened the credit squeeze. For instance, the National Housing Bank (NHB), an apex government institution, recently directed housing finance companies (HFCs) not to extend loans for interest subvention schemes offered by builders-schemes in which builders pay a percentage of the equated monthly instalments (EMIs) on home loans on behalf of homebuyers for a certain period. “The real estate sector is already suffering from several issues,” points out Manoj Gaur, MD of the Noida-based Gaurs Group. “In such a situation, the closure of subvention schemes is certainly disappointing. Making all developers suffer for the fault of a few is not right. Instead, offenders should be dealt with sternly.” However Rajeev Talwar, CEO of DLF, feels that the NHB’s decision is a welcome move, since it is trying to link the big data with RERA guidelines. “Disbursement by NBFCs and HFCs to real estate firms without homes actually being constructed has resulted in a fall in the asset quality of NBFCs and HFCs. There should be proper verification of the progress of construction before releasing funds to individuals to protect home buyers’ interests, ” he says.
However, Deepak Kapoor, director of Gulshan Homz, another Noida-based developer, says that such interventions could do more harm than good. Referring to a circular issued by the RBI on February 12, 2018-which prescribed rules for recognising one-day defaults by large corporates and called for insolvency proceedings as a remedy-Kapoor sounds an alarm on moves that impose blanket bans on project refinancing. “Suppose a builder with a project valued at Rs 100 crore feels that he will be able to collect Rs 40 crore (as advances) from the sale of properties-and so, takes a loan of Rs 60 crore. If, due to the slowdown in the market, collections are only Rs 30 crore and the builder requires an additional loan of Rs 10 crore, the bank would have to categorise the earlier Rs 60 crore loan as a non-performing asset,” he explains. “Thus, a shortfall of just Rs 10 crore could mar a project worth Rs 100 crore.”
The government’s move to recapitalise banks will help to some extent. “The instant recapitalisation of public sector banks with Rs 70,000 crore ensures the re-opening of the NBFC funding funnel, which will boost the demand for homes and allow a spurt in fresh loans,” says Niranjan Hiranandani, co-founder and managing director of Hiranandani Group, a major Mumbai-based developer. “This rejig of the spending model by the government is clearly intended to stoke demand and ease bank credit, which had been acutely hit across the industry.”
Lower taxes: Many argue that the government should lower taxes-for example, saying that taxing ready-to-move apartments is unreasonable. Though GST has simplified taxation, it has not led to lower real estate costs. Under-construction homes attract 5 per cent GST for mid-range properties and 1 per cent for affordable homes. However, it does not include input credit benefits, which would have reduced the overall purchase cost. Nitin Agrawal, president, CREDAI Bhopal, says that frequent changes in the tax structure, especially relating to GST and service tax, have also taken a significant toll. Beyond GST, stamp duty and registration charges in the 5-7 per cent range apply to under-construction homes. This cumulative cost effectively negates the price advantage they once offered, says Anarock-under-construction homes were once the default choice, thanks to their competitive prices, but buyers are now increasingly wary of such projects.
Make RERA uniform: The real estate sector had traditionally been characterised by its unorganised nature, with inordinate delays in project completion and unscrupulous developers who misused buyers’ money or made changes to project plans at will, leaving buyers in the lurch. The real estate market is also notorious for large cash payments-the ‘black money’ component of property purchases. This has made the sector opaque and attracted a large number of ‘investors’ who view the market as something akin to a gamble-diverting funds into real estate, only to sell properties for higher values at opportune moments. This not only drove real estate prices to levels mostly unaffordable to the middle class, but also resulted in developers ignoring basic tenets of customer satisfaction, leading to frequent legal tussles. RERA was expected to solve many of these problems, ending the role of fly-by-night players who held the real estate market to ransom all these years. Some of RERA’s buyer-friendly objectives included the enforcement of timely project deliveries and the protection of buyers’ money by mandating that developers put 70 per cent of advance payments into an escrow account. But the regulation has not been implemented uniformly across the country. As of May 2019, only 19 states had implemented RERA in letter and spirit, with dedicated online portals to provide details of registered real estate projects.
However, some feel that the implementation of RERA could have been postponed, coming as it did when the sector was going through a slowdown. They also say that RERA’s structural changes bring uncertainty in the short term. “The timing of RERA, perhaps, wasn’t right. What has taken 70 years to change in the country, can’t be done in one month,” says Dutt.
But Zia differs. “RERA is all about delivering what was promised. It is developers’ inability to adhere to compliance that is landing them in trouble,” he says. He also points out that while RERA came into force only two years ago, the market slowdown is about five years old. Implementing a major change like RERA when the market was anyway in the midst of a fundamental correction is the perfect timing, he argues.
Expedite clearances: A long-pending demand from industry players has been a single-window clearance system for projects. Delays in clearances leads to increased costs, which are ultimately passed on to buyers. Experts say that a faster approval process with reduced documentation will, therefore, benefit the industry and, ultimately, buyers. They also say that a single-window clearance system will not only resolve operational issues prevalent in the industry but also improve the productivity of the real estate industry.
Improve ease of business: Many are of the opinion that the government needs to improve the ease and cost of doing business in the real estate sector. “If the cost of capital [in India] is much higher than that of a developed nation, then there is a problem. It affects the profitability of a business where the margins are in the range of 10 to 15 per cent,” says Dutt. He adds that the government should also speed up the approval process for infrastructure, both physical and social, to attract more real estate investments. Others say that the government needs to ease the approval process to attract investments. As Agrawal says, “There are more than 20 permissions required to begin projects, which take between six months and a year to secure. This period can be reduced if the government implements a genuine single-window system.” Manikant, MD of Surya Nestbuild in Patna, echoes this point. And regarding the Madhya Pradesh government’s proposal to reduce land circle rates by 20 per cent to boost the sector, Agrawal says that this will help, but only if more people know about it.
Reduce costs: Agrawal says that a broader economic stimulus plan-say, by reducing costs-will benefit real estate. One immediate intervention he suggests is to reduce taxes on key inputs like cement, which are currently taxed at 28 per cent under GST. Industry leaders have been arguing for a similar reduction on a number of inputs to 18 per cent, which will lead to a reduction in the cost of construction. (On a related note, there is also a demand for better regulation of cement prices. Cement companies allegedly raise prices by Rs 100 per bag during peak construction season. This, developers say, is not a consequence of demand and supply- the price increase by cement companies is arbitrary.) Agrawal also says that fees charged by some state governments have been hiked massively. “Earlier, builders paid Rs 50,000 as submission fees for projects on 10 hectares of land. This fee has been hiked to Rs 25 lakh, as has the fee by municipal bodies”, he says. Businesses have also argued for a reduction in corporate tax from 33 per cent to 25 per cent to allow more financial flexibility to deal with market risks and policy changes. (Just weeks before the state assembly polls, the Maharashtra government has unveiled a Rs 2,200 crore fiscal package for Mumbai’s real estate industry, comprising significant cuts in premiums for additional buildable area or floor space index for projects.)
Remove caps on deductions: In the 2019 budget, the government permitted taxpayers a deduction of Rs 1.5 lakh against interest paid on home loans taken up to March 31, 2020, for affordable homes valued upto Rs 45 lakh. This deduction stacked on top of the existing Rs 2 lakh already permitted under Income Tax provisions. Several experts, including CREDAI’s Shah, say the government should remove the price cap of Rs 45 lakh and allow the deduction to apply to all home purchases. He also says the interest rate on affordable housing should be lowered for both home buyers and developers, while also stressing the need to bring down capital gains tax. Both these interventions would make property purchases more appealing to buyers and investors.
Continue the focus on ‘Housing for All’: The government has already taken several steps to meet its ambitious ‘Housing for All by 2022’ target. These include interest subsidies and reductions in GST rates on such properties, among others. Calling for such interventions to be continued and ramped up, experts have also recommended that the National Housing Policy consider boosting rental housing, as this will also create surplus housing stock. As former RBI governor Rajan says, “I think one resolution would be to make housing much more affordable [in general]-that would mean allowing house prices to fall. At the same time, you also have to make life easier for the real estate developer [by easing] access to finance.”
Implement investor-friendly initiatives: Over the past few years, the returns on investments in residential real estate have dropped from two- or even three-digit values to single-digits. In many locations, returns have even become negative. “The return on investment from housing currently clocks in at a meagre 2-3 per cent even in the most favourable markets across Indian cities,” says Puri. This has kept investors at bay-and investors need to be in the driver’s seat for the market to revive.
Help trapped home buyers: A host of real estate players, including Jaypee Associates, Amrapali, Ansal API, Raheja Developers and HDIL, are currently in resolution proceedings with lenders under the NCLT. This has left many home buyers in the lurch, with homes left incomplete and monthly instalments on bank loans continuing. This has made several buyers, especially in the NCR, approach the courts for reprieve. While court intervention has given some assurance to buyers that their investments will not suffer, and they will see a completion of their dream homes, albeit much delayed, it doesn’t augur well for the sector. Shubham Jain, senior vice-president and group head (corporate ratings) of rating agency ICRA, says the Supreme Court’s decision to direct public sector housing firm NBCC to complete the projects is “definitely a relief to home buyers, but also increases the risk of real estate developers defaulting”. He adds that since even individual home buyers can now initiate insolvency proceedings against builders, issues like these could lead to major problems for builders whose projects have stalled due to weak demand, falling prices or insufficient capital.
Since a sustained crisis in real estate can cripple not just the sector itself, but also associate industries, it is imperative that the Centre act quickly. Though there are no easy solutions to resolve this crisis, there are a host of short and long term measures that could bring the economy back on track.
(With Rahul Noronha, Amarnath K. Menon, Amitabh Srivastava, Jeemon Jacob and Ashish Misra)