How real is the real estate industry in India ?


 How real is the real estate industry in India?

                                                          -by Abhishek Maity

Real Estate sector has seen immense challenges in the past 5-6 years, currently valued at Rs 65,000 crore being the second largest employer generating strong multiplier effects, this sector is expected to reach US $ 1 trillion in market size by 2030, at present the sector contributes 6-7% to the Indian GDP and this is expected to increase up to 13% of GDP in 2025 as per Indian Brand Equity Foundation recent report.

Firstly, the sector is infested with speculators or informal agents locally called the Hundis who buy in bulk the housing inventory from the developer firms in cash and then sell them forward to the retail buyers who end up paying 10-20 times more than the actual price of these plots as per estimates there are around one million unregulated brokers in the country who create stymie the efficient working of the real sector.

Since 2016-17 the banking sector followed a method of indirect lending to the real estate sector through the NBFC’s


As the shadow banks would raise funds from banking systems and mutual funds which where then given as loans to the developers on the premise that they will repay once the properties are sold by the firms. For example, most of the incremental lending came from NBFC’s in 2018-19 which was around half of the Rs 5lakh crore of the total loans given to the real sector and since the total bank lending to shadow banks were around Rs 7.3 lakh crore in 2018-19. Once the liquidity crises got kindled by the collapse of the IS&LM in 2018 the banking system stopped lending funds as a result the NBFC’s themselves were not able to manage this asset-liability mismatch. Hence, cutting the supply of required funds to real estate developers resulting in a backlog of incomplete apartments, according to JLL database around 2.2lakh housing units worth Rs 1.56 lakh crore launched in 2011 in Delhi-NCR regions are yet to be completed by the developers.

All these together creates a constraint on the supply of real estate units but given that there is excess demand has resulted in astronomical prices for the properties in India so the price to income ratio in the real sector in Mumbai is around 32.96 compared to 9.77 in New York and the price to rent ratio was also higher in Mumbai. Then came the Covid-19 pandemic which disrupted the whole economy imposing restrictions in movements and re-creating activities along with job uncertainties and pay cuts affecting the income of the masses as a result the real estate sales were 49% in quarter one of 2020 as compared to 51% in 2019. The lockdowns and cautious buyer sentiment turned into an unparalleled rise in the unsold inventory from about 15 quarters in H1 end 2020 to around 19 quarters in H1 of 2021. Now with work from home and digitization becoming the norm a survey found that 76% of CEOs indicated that their organizations would need less space moving forward reducing real estate costs by around 20% also India’s office space demand fell by around 16% in 2021. This sector holds the potential to compound the economic growth of India but it needs some new blood in the form of new reform measures, innovative products and an improvised manner of running this sector is the need of the hour. As Shakespeare said

I would give a thousand furlongs of sea for an acre of barren land

 


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