Reality Check in real Estate Is Vital

All businesses go through trade cycles including the boom to bust periods and real estate sector is no exception. Rather, contraction in real estate activity turns out to be more painful given the sector’s linkages with over 250 industries and ancillary businesses.

Property sector is undergoing a major transformation over the last few years, the business environment is changing drastically forcing all the stakeholders to react and adjust accordingly. While they say change is the only constant, the pace of change has been the sharpest ever this time for the Indian real estate sector.

Without any doubt, the last 3-4 years would be counted among the most eventful for the sector as several disruptions have been taking place at the same time making it a perfect storm.

Raft of reforms starting with demonetisation, implementation of Real Estate (Regulation & Development) Act, 2016, the Goods & Services Tax (GST), Benami Properties (Prevention) Act, Insolvency & Bankruptcy Code and above all the rising consumer activism are all ensuring the sector emerges as more transparent and accountable going forward.

The chaos caused by the ongoing liquidity concerns owing to real estate developers debt profile and exposure of Non-Banking Finance Companies to the sector will make sure only the strong entities—both realty developers and their financiers–weather the storm.

Residential real estate sector has been reeling under debt pressure and sluggish sales momentum in the backdrop of delay in delivery of housing projects. According to government estimates, around 4.58 lakh housing units have been facing delayed delivery across 1,600 stuck projects. The delay has resulted in rising consumer activism, number of litigations in consumer forums and even the National Company Law Tribunal (NCLT).

One of the key challenges currently impacting the supply dynamics for the residential realty is the liquidity crunch in non-banking financial company (NBFC) and housing finance company (HFC) segment.

Funding availability and cost of funds for builders has witnessed an adverse impact. This has resulted in financing pressure for developers who were relying heavily on refinancing to support their cash flows as their books turn heavy due to existing land assets and inventory pile up.

Established developers with execution record are still able to access funding. However, mid-size builders operating in not so attractive markets are finding it difficult get their loans refinanced or even raise funds in the first instance. The consolidation process has gathered momentum as we can already see several realty developers giving up their projects and making way for existing lenders or large players.

Consequently, the execution of ongoing projects and launch of new projects have also been negatively impacted.

The government has already announced the establishment of Rs 25,000-crore fund for stalled housing projects and is moving faster on that front to identify projects and disburse the funds.

Interestingly, the country’s largest commercial bank State Bank of India (SBI) last week came up with a product to provide assurance of project delivery or returning the home-buyers’ funds to address uncertainties related to delivery of housing projects. This is the first time ever any financial institution is offering guarantee with regards to any housing project’s delivery.

Measures like these hold the potential to alleviate some of the execution, delivery-related issues hereon and bring back the elusive homebuyers into the market.

The ongoing shake up in the sector is the much-needed detoxification real estate had to undergo and was due for long. This is certainly expected to remove the impurities and create transparent business environment, drive consolidation and most importantly ease concerns of homebuyers.