The real estate slump may not be over yet

A recovery in the real estate sector, where project stalling rates have spiked, may be as prolonged as the slowdown without a significant price correction

Sneha Alexander
Updated5 Aug 2019, 08:22 PM IST
The apex court has asked the state-owned NBCC to take over the housing projects of two real estate giants— Amrapali and Unitech.
The apex court has asked the state-owned NBCC to take over the housing projects of two real estate giants— Amrapali and Unitech.

Fifty years after bank nationalization, India is today witness to a unique form of nationalization of real estate, thanks to the Supreme Court.

To provide relief to homebuyers, the apex court has asked state-owned National Building Construction Corp. Ltd (NBCC) to take over the housing projects of two financially troubled real estate giants Amrapali and Unitech.

The licences of these two real estate groups have been revoked, with the court holding them responsible for diversion of funds and for not delivering projects on time after receiving money from homebuyers.

The court’s orders may have come as a punishing blow for the developers but it is not clear whether homebuyers can cheer yet, given that NBCC’s ability to deliver such projects on time remain untested.

The broader crisis in the real estate sector also does not appear to be over yet, suggests an analysis of the available data on the sector.

The roots of the crisis can be traced to the real estate bubble in the years leading up to the global financial crash of 2008. The crash led to a global credit freeze and real estate projects across the world were gutted as lenders did their best to avoid this sector.

India was no exception to this trend though credit flow to the sector did not dry up as dramatically as in the West. However, at least the speculative capital in the sector was no longer forthcoming as expectations of investors about the returns from the sector got revised.

Unsurprisingly, project launches in the sector have been declining steadily since the peak of 2007, according to data from the project-tracking database of the Centre for Monitoring Indian Economy, or CMIE).

As fund flows dried up, project stalling rates spiked. The stalling rate for commercial estate projects accelerated since 2012 as the economy slowed and demand for office spaces declined.

Construction of commercial real estate, which is mainly for leasing, is funded primarily through own equity and external debt.

Unlike the residential sector, these projects do not have customer advances as a source to fund and complete the projects, said Shashank Jain, partner, deals, at PricewaterhouseCoopers.

Private equity firms, which were earlier betting on real estate developers to take a lead in development, have also turned cautious, he said.

The shock of demonetization, followed by two new regulatory changes, the goods and services tax (GST) and the Real Estate (Regulation and Development) Act, only served to bring in more uncertainty and ensured that the slump in the sector continued.

As bank credit to the sector slowed and bank deposits soared post demonetization, banks outsourced lending to non-banking financial companies (NBFCs), which in turn stepped in to fund real estate developers. However, the NBFC crisis last year squeezed that channel of finance as well.

Bank lending has picked up since then, especially in residential real estate, but lending to commercial real estate is still showing tepid growth.

Unsurprisingly, the lack of funds continues to be one of the major reasons behind stalled projects even today. The two big reasons cited by investors for stalled projects is the delay in land acquisition and lack of funds.

The lack of funds has also forced developers to enter barter deals with smaller contractors to take over parts of their projects, in a desperate bid to exit those projects.

“It’s a challenging situation,” said Jain. “Every stakeholder should be prepared to take a hit or make compromises.

Banks and financial institutions have to take a haircut in the loans given, developers and owners have to forgo profit/ surplus cash flows, and even homebuyers should be prepared to pay more, if required, for the completion of projects.”

Ultimately, a lot rides on where house prices head. Despite the slump in the sector, most localities haven’t seen much of a correction in house prices.

In Delhi and Gurugram, there have been mild corrections but not in Mumbai or any of its suburbs between fiscal 2014 and fiscal 2019 (up to December 2018), according to data from the National Housing Bank Residex.

A significant correction can pave the ground for a V-shaped recovery in the sector. In the absence of that, the recovery in real estate is likely to be as prolonged as the slowdown.

Catch all the Business News , Corporate news , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

MoreLess
First Published:5 Aug 2019, 08:22 PM IST
Business NewsCompaniesNewsThe real estate slump may not be over yet

Get Instant Loan up to ₹10 Lakh!

  • Employment Type

    Most Active Stocks

    Tata Steel share price

    139.25
    03:59 PM | 13 NOV 2024
    -4.9 (-3.4%)

    Bharat Electronics share price

    281.45
    03:50 PM | 13 NOV 2024
    -8.8 (-3.03%)

    Tata Power share price

    399.05
    03:59 PM | 13 NOV 2024
    -15.2 (-3.67%)

    Tata Motors share price

    786.40
    03:59 PM | 13 NOV 2024
    1.45 (0.18%)
    More Active Stocks

    Market Snapshot

    • Top Gainers
    • Top Losers
    • 52 Week High

    Suzlon Energy share price

    54.08
    03:59 PM | 13 NOV 2024
    -5.31 (-8.94%)

    Rattanindia Enterprises share price

    62.59
    03:58 PM | 13 NOV 2024
    -5.36 (-7.89%)

    Gujarat Narmada Valley Fertilisers & Chemicals share price

    545.95
    03:44 PM | 13 NOV 2024
    -43.85 (-7.43%)

    Motilal Oswal Financial Services share price

    898.15
    03:58 PM | 13 NOV 2024
    -70.5 (-7.28%)
    More from Top Losers

    KNR Constructions share price

    307.80
    03:58 PM | 13 NOV 2024
    23.65 (8.32%)

    Suven Pharmaceuticals share price

    1,259.00
    03:29 PM | 13 NOV 2024
    55.25 (4.59%)

    Piramal Pharma share price

    259.70
    03:52 PM | 13 NOV 2024
    9.15 (3.65%)

    Medplus Health Services share price

    699.50
    03:29 PM | 13 NOV 2024
    23.85 (3.53%)
    More from Top Gainers

    Recommended For You

      More Recommendations

      Gold Prices

      • 24K
      • 22K
      Bangalore
      76,865.000.00
      Chennai
      76,871.000.00
      Delhi
      77,023.000.00
      Kolkata
      76,875.000.00

      Fuel Price

      • Petrol
      • Diesel
      Bangalore
      103.02/L0.00
      Chennai
      100.90/L0.00
      Kolkata
      104.95/L0.00
      New Delhi
      94.77/L0.00

      Popular in Companies

        HomeMarketsloanPremiumMint Shorts