dna edit: The real estate sector is in the doldrums

The Indian economy has been on shaky ground for two years now, and the real estate sector is a prime example of how deep the pain runs. This isn’t particularly surprising; linked to multiple industries and greatly dependent upon macro factors, it is particularly vulnerable to economic uncertainty. But a property consulting firm study underlines the magnitude of the problem. Over the past eight quarters, sales volumes — the best indicator of construction activity — of the country’s top real estate firms have dipped 43 per cent. Operating profits over roughly the same period have remained consistent at Rs 2,800-2,900 crore per quarter, but that is largely because of a counterintuitive rise in prices, a part of the problem.

Mumbai and Noida, two of the country’s prime markets, illustrate different aspects of the issue. The former, as blue-blooded as they come in realty terms, is deep in the red now. It has been the worst hit in terms of sales volumes with a 36 per cent decline in the past year. Poor economic indicators play a major role here. The downward trending GDP growth rate and rising inflation have intersected to create a liquidity crunch at both the builder and buyer ends. In a freely functioning real estate market, this would have led to a new equilibrium at lower prices. But in the light of the Indian equity market’s volatility, speculators have invested in the old standbys of gold and real estate more than ever, preventing market correction in the latter. That isn’t the whole story, of course; a poor regulatory environment and a stubborn refusal by builders to provide more affordable housing are significant factors as well. A look at the markets in southern India — aimed at end-buyers rather than speculators and the only ones to have performed respectably as per the study — shows that the latter can pay off.

Noida, one of the new realty boomtowns, is at the other end of the spectrum. The market there has been undermined by the builders who have poured revenues into starting new projects at a breakneck pace instead of completing current ones. Consequently, 40 per cent of projects under construction have been delayed, denting buyer confidence. This is bound to impact the market negatively given time.

Exogenous factors such as macroeconomic performance aside, there are steps both the central and state governments can take to give the sector a boost. Improving the regulatory environment is the most important. The Real Estate (Regulation and Development) Bill 2013 is not without its loopholes — it will only cover residential real estate projects of over 1,000 square metres — but it could go some way towards standardising markets across the country and safeguarding buyers’ interests. But it is currently languishing in the Rajya Sabha; the new government must push it through swiftly. Creating a single window clearance system and streamlining the process for securing various approvals and licenses will, meanwhile, reduce project timeframes and lower costs for builders.

Above all, the government must encourage builders to invest in the massively underserviced affordable housing sector. There are a number of steps it can take here, from special credit provisions for such projects to taking another look at the current practice of housing boards auctioning land to increase their receipts. The profit margins for builders may be lower here, but with guaranteed sales for them and a much-needed increase in housing for the low income groups driving urbanisation across the country, it would be a win-win situation.