The Indian Property Market Is In Dire Straits

The Indian Property Market Is In Dire Straits

While the Modi Government may want to provide housing and toilets for all by 2022, and launch a 100 Smart Cities shortly, the housing sector today is both in an unregulated mess and in dire financial straits.

Two things generally indicate how the consumer is feeling- houses and cars. Both industries are still iffy  in India, with vehicle sales picking up a little but still wobbly, and sales of apartments and flats very much in the doldrums.

The Government needs to execute a series of far reaching reforms urgently to revive this vital sector of the economy. Construction and housing  provide offtakes to quite a few manufacturing and service sectors including architecture, marketing, advertising, cement, steel, bricks, sanitary-ware, flooring, tiling, lighting, furniture etc., on the growth of which such industry is co-dependent.

Together, this lot contributes as much as 17% of the GDP, and many lakhs of jobs. The housing industry as it stands, contributes as much as agriculture to the GDP, even though the latter may account for a far more sizeable chunk of the total population.

The property market is badly depressed at present, owing to a mismatch between demand and supply, compounded by Government neglect and apathy, high interest rates, over-leveraged builders, and stubbornly high inflation affected construction costs.

The economy on the whole cannot be revived unless the stagnation and worse in this area of works is put right first. All over the world, the health of the residential and commercial construction sector is a key measurement with regard to the state of the economy. The Indian property market, throughout the country, has been depressed for five years now, with a further down turn over the last three.

The NCR has unsold inventory of 303,000 apartments, that will take nearly five years to clear at the present rate of sales, according to real estate research firm Liases Foras. And within this alarming statistic, Delhi itself, with its high-priced builder flats, mushrooming in place of older houses, has as much as 20% in unsold stock.

The key markets of Gurgaon, Noida, and Bhiwadi in the NCR, are staring at some 50% of the total under construction unsold at this time; with speculators, as opposed to end users, accounting for half of the other half. And the investors, unable to hold out indefinitely in the depressed market, are off-loading their purchase at discounts to the builder’s prices, further aggravating the problem.

The story is similar, if somewhat better, in Mumbai and Bangalore. The high-priced MMR region has 168,000 apartments yet to find buyers, and Bangalore, largely an end-user market,  is still groaning under the weight of 113,000 unsold flats according to Liases Foras.

High interest rates too are keeping would be buyers away from contracting home loans. Massive builder debt and interest payments, sharply increased construction cost, a stagnating economy,  all are factors why this sector is in trouble. Unless demand picks up soon, there will be a spate of inordinate delays, defaults, even bankruptcies.

Luckily, the situation does not quite amount to a full-fledged housing bubble, with about half the inventory sold by the builders on average, but the asset class is unlikely to generate the kind of capital gains associated with it over the next several years.

Both the residential and commercial markets however do have enough pent up demand to be ultimately absorbed, as long as further supply is put on hold. But, since the industry cannot grind to a complete halt when it comes to new launches, given that several builders have land banks and licenses in hand, the problem will be aggravated further.

Still, there will be few new launches that can hope to succeed in these market conditions, even if they have thinned out considerably. New launches are also a cheap source of funds for cash strapped builders, who need to complete ongoing projects.

It is however unclear, whether any category, ranging from the affordable and mid-segment, to the luxury projects, are outperforming the rest. All sections of the market are uniformly suffering low demand and over-supply. The resale market is only active for bargain hunters looking for distressed sales.

Various problems of property buyers, facing one-sided contractual arrangements from the builders, have also been pending Government action for a very long time. In addition, the builders who have over-built illegally, or built on land acquired by the Government at a pittance from farmers, are facing farmer agitation, litigation and stoppages.

This, even as many customers have paid large sums as installments to the builder, and expensive EMIs to the lending banks. Environmental restrictions, applied strangely, after the fact, to developments near sanctuaries and the like are also destabilizing market sentiment and worse.

Private and sarkari developments alike are dependent on the Government and municipal authorities to  build and provide ‘livability’ by way of new roads, electricity connections, water, sewage, security, street lights etc.. But many of the developments in outlying areas, particularly in the NCR, are marooned today in a sea of mud, with no clarity as to when their problems may be addressed, let alone solved.  Road connectivity promised in particular is mired in multiple litigation, with the original land owners demanding higher compensation and alternative developed plots in lieu of the agricultural land acquired forcefully at low prices by the Government and passed on to the Builders. 

In the resultant chaos arising from all these reasons, many housing towers are half-built and stalled by cash-strapped builders, and even those nearing completion, years late, still have no roads and other amenities to service them.

Politically, the BJP, if it wins Jharkhand outright, as is expected, and props up a PDP Government in  Kashmir come December, will have done very well indeed.  Particularly on top of its recent wins in Haryana and Maharashtra.

But economically, the hole dug by the previous UPA Government is both deep and wide. To fill such a cavity is going to take enormous doing. Fortunately, many of the macro factors are heartening, particularly the lowering of inflation due to lower oil prices .

The interlinked housing, office, and infrastructural sectors need to grow sharply, and could be the way to get the Indian economy into double digit GDP growth in the shortest possible time.

What it needs however, is huge investment. This investment can come, both from internal and external sources, if interest rates are lowered, taxes are cut, and FDI is encouraged.  The 100 Smart Cities and housing for all only make sense if conditions are created for this sector of the economy to thrive afresh. This includes tweaking existing land acquisition legislation and the framing of  new incentives.

(1,104 words)

October 27, 2014

Gautam Mukherjee