Is real estate sluggishness going away soon? Not really

While some real estate experts say the market is reviving, others say not anytime soon. But if you are looking to buy a house, this is your chance to buy a ready house at low prices

For some time now, the buzz has been that real estate prices have bottomed out and going forward they will start moving upwards.

However, the buzz—created largely by supply-side stake holders such as real estate developers and brokers—has failed to attract homebuyers.

Even the ongoing festive season discounts and offers have not been able to attract any significant number of buyers. Samantak Das, chief economist and national director - research, Knight Frank India said, “There is a significant fall in optimism due to lack of homebuyers in the market. Transactions are even lower than the number of deals that happened during previous year’s festive season, which were itself lower.”

According to Ficci-naredcoknight Frank India Sentiment Index (Q3 2017) released on 7 November, “the future sentiment score has reached its lowest point (55) in Q3 2017—the lowest over the 13 quarters, indicating a significant decline in optimism pertaining to the sector’s future performance.”

The real estate sentiment index is based on a quarterly survey of key supply-side stakeholders, which include developers, private equity funds, banks and non-bank financial companies (NBFCS).

Over the last few years, not only high property prices, but long project delays and bad quality of delivered projects were few of the other reasons that resulted in a gradual decline in the number of transactions in the sector. Apart from that, demonetisation, implementation of the Real Estate (regulation and development) Act, 2016 (RERA) and Goods and Services Tax (GST) has further hit the market.

Given all these factors, coupled with the lukewarm demand and low sales volume, developers have almost stopped launching new projects.

According to a recent report released by Propequity, a real estate data, research and analytics firm, “The new home launches dipped 83% across top 8 cities in the third quarter of 2017, from 24,900 units to 4,313 units.”

The situation is not expected to improve in the near future. According to research report published last month by Crisil Ltd—a global analytical company that provides ratings, research, and risk and policy advisory services— demand for residential property is unlikely to revive in the next 12-18 months as the fundamental problem of lack of end-use buyers is unlikely to change any sooner.” Let’s read more about the current slowdown in real estate market. THE REASON

According to a Crisil report ‘Residential market unlikely to look up soon’ dated 10 October 2017, between 2011 to 2017 “initially, demand declined on account of slowdown in domestic economic growth and due to high interest rates; later, sectorspecific issues (unaffordability and delayed possession) concerned end users.”

Some also say that lack of confidence in developers is what is keeping homebuyers as well as investors away.

“The type of dent that the sector has received—because of non-compliance of rules, project delays and other by developers—will take long to fade away. Homebuyers are extremely cautious,” said Das. Sales did not drop overnight but declined gradually. According to the Crisil report, “Real estate sector in India has been witnessing prolonged sluggishness over the last 6-7 years.” The trend is common across India and is not specific to a particular city or location.

“Absorption of new homes in the top 10 cities (Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune) has slipped at a compound annual growth rate (CAGR) of 8% in the last 6 years. The sector has witnessed a decline in area booked and area launched over the last few years,” said the Crisil report.

Apart from the above-mentioned issues, mismatch in demand and supply also had an impact on demand from homebuyers.

“Developers have been majorly focusing on mid-category, luxury, and premiumhousing projects. This has cre- ated a wide gap in demand-supply dynamics, resulting in pentup demand for affordable housing units and a huge unsold inventory of unaffordable units across most micro markets,” states the Crisil report.

In the present market, where there are few takers for the current inventory, developers are not in a position to launch new projects.

“Most developers have experienced sluggish sales on their launched projects during the first half of the year. Hence, the focus will be on selling the unsold inventory,” said Rushabh Vora, co-founder and director, Sila Group, an integrated property consulting firm.

Not only demand, RERA compliance for new project launches is another reason that is holding back project launches. “Post introduction of RERA, developers cannot launch projects without all the approvals in place,” said Vora.

Despite trying their best to hold prices, developers are now resorting to price cuts either directly or by discounts and other offers.

According to the Crisil report, “Pressure on residential real estate prices across top 10 cities was clearly visible during H1 2017. While several developers offered upfront per square feet discounts, a few large developers bundled financing schemes and reduced interest schemes to offer ‘all-inclusive house prices’. Homebuyers, in many cases, were also offered indirect benefits such as reduced floor charges or premium location charges. Taking into account these aspects, the effective price correction was 5-10%.”

“While earlier, new projects were launched at lower price, now developers are bringing down prices even in alreadylaunched projects,” said Das.

Dealing with construction permits

All procedures required for a business in the construction industry to construct a building, for instance a warehouse, factoring in the time and cost to complete each procedure as well as the quality of building regulations, the strength of quality control and safety mechanisms, liability and insurance regimes, and professional certification requirements.

While maturing real estate sectors such as the residential, office and retail have been doing well, it is time we look at new sunrise opportunities in sectors such as warehousing. With GST paving the way for cross-border movement of goods across India, the World Bank data on time and cost involved in constructing a warehouse is not encouraging enough.

The e-commerce sector is growing rapidly in India, and very soon there will be opportunities for constructing large modern warehouses equipped with state-of-art automation.

Registering a property

The full sequence of procedures necessary for a business (the buyer) to purchase a property from another business (the seller) and to transfer the property title to the buyer’s name so that the buyer can use the property for expanding its business, use the property as collateral in taking new loans - or, if necessary, sell the property to another business.

Prior to RERA becoming a market force in 2017, information on projects, land title clearance deeds and developer liability existed somewhere on paper (if existed at all) and buyers had no access to it. Nevertheless, verifying land title clearances and other aspects of due diligence were the responsibility of the buyer, who would have to engage a consultant for such verification. The full impact of RERA is still not visible in the ranking for property registrations This will only happen when all states have adopted RERA without tampering with the Central guidelines by next year. Also, initiatives such as single-window clearances and online registration facilities should be strengthened in order to make these procedures less time-consuming and cost-intensive.

Online records of titles, title insurance and title search and certification will be the real game-changers which could take India into the World Bank’s Top 50 almost immediately. Work has commenced on digital registration, digital records and online search and certification, but adequate controls also need to be added at every stage.

Enforcing contracts

The time and cost involved in resolving a commercial dispute through a local first-instance court, the quality of judicial processes index, and evaluating the economy on how well it has adopted good practices that promote quality and efficiency in the judicial system.

The World Bank’s Doing Business report says after establishing debt recovery tribunals in India, non-performing loans have reduced by 28%, thereby resulting in a decrease in overall interest rates. RERA as a body that resolves disputes between developers and buyers is a progressive initiative, which however must be implemented in all markets without dilution. Progress on this will be captured in next year’s report and reflect in India’s ranking on this parameter.

The processes involved in resolving disputes between businesses, land owners, developers and the Government need to be speeded up – a clear action point

for the coming year.

Resolving insolvency

The time, cost and outcome of insolvency proceedings involving domestic entities, as well as the strength of the legal framework applicable to judicial liquidation and reorganization proceedings.

As the chart below indicates, India’s track record with regards to insolvency has been very poor, resulting in investors’ reluctance to involve themselves financially. There is a large concentration of stress in the land-rich textiles and metal manufacturing industries, and it remains to be seen whether the new Insolvency and Bankruptcy Code will help unlock land parcels in Indian cities.

This does not mean that Indian Government has not done anything – these ranks are merely relative performances as seen from a strong correlation between ranks and DTF scores. It does mean that other countries in Asia and Africa are possibly doing far better in terms of reforming their real estate and manufacturing competitiveness when compared to India.

The report has acknowledged India’s efforts in terms of:

1. Single window approval system for building plans

2. Streamlining business incorporation processes

3. Easing tax compliance procedures (via online filing, consolidation through GST, etc.) 4. Bankruptcy and insolvency 5. Easing export-import border compliance procedures

It also confirms that after establishing debt recovery tribunals in India, non-performing loans have reduced by 28%, leading to a reduction in overall interest rates.

The Doing Business indicators are now the basis for undertaking reforms across many economies, including India, providing ready benchmarks or guidance values.

There are still factors which the World Bank could not acknowledge this year, primarily because of timing of the report. These are factors that can be seen as ‘low hanging fruit’, and a lot can be done this year to improve on them. .