Unsold inventory in the real estate sector is piling up, slump is aided by scepticism over RERA and GST

Unsold inventory in the real estate sector is piling up, slump is aided by scepticism over RERA and GST

As per the report, this slump is despite the 20% price correction in the past 18 months. About 17,188 units were sold in the first half of 2017 compared with 23,092 units in the same period last year.

It’s a buyers’ market. Or so say analysts tracking the real estate market. Reams and reams have been written about how anyone planning to buy a house can pick and choose from the large stock of unsold inventory and pay lower than what was the price a few years back. But Delhi resident Simi Mohan isn’t convinced. “I don’t want to book a flat in any upcoming project because I don’t know when I will get it. And the prices of the already built flats are not in the affordable range for me. So how is it a buyers’ market?” asks the 32-year-old paramedic, who works in a government hospital. Mohan has a point. The unsold inventory is piling up, developers are sitting on unfinished projects and the consumer is nowhere in sight. Regulatory norms in the sector have changed in favour of the buyer, but sales are not improving.

A report released last week by property consultant Knight Frank India says housing sales fell 26% in Delhi-NCR in the first half of 2017, and the unsold housing stock stood at a staggering 1.8 lakh units—the highest in the country—which will take developers four-and-a-half years to sell. As per the report, this slump is despite the 20% price correction in the past 18 months. About 17,188 units were sold in the first half of 2017 compared with 23,092 units in the same period last year. “The real estate market for residential units remains subdued owing to several factors, which mainly include incomplete projects adversely affecting the confidence of buyers, over-leveraged balance sheets of frontline realty firms and a weak job market,” says DS Rawat, secretary general, Assocham, an apex trade association.

From 2007 to 2010, construction across various cities was at a peak and many projects were launched. Prices reached an unattainable stage towards 2013. Around the same time, the country was hit by job losses. Many fly-by-night operators fled the scene, cheating consumers of their hard-earned money. “The trust factor is at an all-time low. People are not ready to invest unless it’s a ready-to-move-in flat or a reputed developer,” says Neeraj Bansal, partner and head, ASEAN corridor and building, construction and real estate sector, KPMG India, a consultancy firm that tracks the sector.

Regulation woes

But these reasons are nothing new and it’s not the first time that the real estate market has been hit so badly. “This time around, the slump has been aided by regulatory factors,” says Gulam Zia, executive director, adviser, retail and hospitality, Knight Frank India, adding, “Regulatory norms like RERA [Real Estate (Regulation and Development) Act, 2016], GST (Goods and Services Tax), Benami Property Transactions Act, together with demonetisation, are impacting the sector and this effect is here to stay for a few months.” As per Frank Knight India, the stock of unsold units in the top eight markets of the country stands at 5.96 lakh units. The unsold inventory made it a buyers’ market, leading to a dip in prices last year, and experts point out that it has become even more so this year.

Unrealistic prices, coupled with demonetisation, led to a price fall in the range of 15-25% in 2016. “It was a buyer’s market last year and has become even more so this year. Prices are at their lowest point, banks are eager to lend and developers are bending over backwards to accommodate customers with more discounts and attractive offers,” says Anuj Puri, chairman, Anarock Property Consultants (formerly JLL India-Residential). Most of the inventory in NCR is priced 20-25% lower than in 2012. Even discounts, flexi payment plans and freebies such as club memberships haven’t been able to turn around consumer sentiment and result in upward sales.

Where are the buyers?

Customer behaviour has changed in the past few years, explains Zia, with buyers having lost confidence in a developer’s ability to construct and deliver a project on time. The market may have plenty to offer, but the buyers are wary of the developers’ tall claims. “There is plentiful supply in the market, even in the ready-to-move-in category. If there is any difficulty for buyers at all, it probably lies in the fact that they are spoilt for choice,” Puri says. The lack of conviction in a builder’s ability to deliver isn’t an overnight phenomenon. It has taken shape over a period of time. Developers in the past have launched massive townships and often used customer advances to buy land or launch other projects. This often led to delays in construction by months and even years, resulting in an erosion of confidence among home buyers. The situation has been aggravated this year by the various regulatory norms—demonetisation, RERA and GST—which have all come one after another in quick succession in the past seven-eight months.

“As of now, RERA is a long-drawn battle. The regulator is yet to be appointed and then the builders have to register themselves. We can’t trust the developers yet,” says Vineet Kumar, a senior business analyst with Royal Bank of Scotland, Gurugram. He had booked a flat with a prominent builder in Noida, and is waiting for possession for the past seven years. He, along with 1,500 other flat owners in Noida, now plan to file a case under the UP Apartment Act against the errant builder.

With RERA, which became effective from May 1, the country got its first regulator that seeks to bring fair practices to protect the interests of buyers and also impose penalties on errant builders. “RERA brings discipline and transparency to the sector,” says Vamshi KK Nakirekanti, executive director and head, valuation and advisory services, CBRE, South Asia, a real estate services firm. “But it all depends on speedy implementation,” says Abhay Upadhyay, national convenor, Fight For RERA, a forum consisting of home buyers fighting for the implementation of RERA. “At the moment, dilution in real estate rules by states and non-appointment of regulator are our biggest concerns,” he adds. The forum was started in June 2015 with the objective of smooth passage of RERA, which was at that time stuck in the Parliament.

So far, only Kerala, Rajasthan, Madhya Pradesh and Maharashtra have appointed a regulator and 18 states and union territories have notified RERA. Urban development minister M Venkaiah Naidu has asked all states to approve the regulation, notify the rules, appoint regulators and operate regulatory authorities by July 30. “RERA is in the process of rendering the Indian real estate market more transparent and buyer-friendly than ever before,” Puri of Anarock Property Consultants adds.

RERA will be a helpline for consumers. Under the new norms, developers can’t advertise, sell or book any property without first registering it with the regulator. Missing a deadline will attract penalty to be paid to the buyer, and no developer can ask for more than 10% of the property’s cost as an advance booking payment before actually signing a registered sale agreement. “With RERA coming into effect, delays due to cash crunch would become a thing of the past, as 70% funds need to be maintained in an escrow account for the project,” says Gagan Randev, national director, capital markets and investment services, Colliers International India, a global commercial real estate company.

“I advise anyone wishing to buy property to wait till RERA is implemented fully. The builders are in a financial mess and we are suffering. The ones I have booked a flat with have expressed their inability to finish the project and have asked us to take an alternative flat in one of their other properties,” Kumar says. He had booked a two-bedroom house for Rs35 lakh in 2010 and the developers are offering him another property, a three-bedroom house for Rs70 lakh. “Where will I get the extra money from, and why should I expand my budget?” Kumar asks.

Developer dilemma

If the consumers are yet to cheer up, developers are also crying foul. “Many developers are ready with the paperwork, but where is the regulator? The ill-preparedness of states in implementing RERA is going to cost everyone. It will push for hasty compliance when regulations come into place,” says Rohit Raj Modi, secretary, CREDAI, an apex body of private real estate developers’ associations. “Also, every state is drawn by local nuances and has to keep local land sale deed practices in mind. So they need broader consultation,” he adds.

The big builders have realised that building trust is going to take more than pre-launch freebies. “Developers are getting increasingly aware about the requirements under RERA and most of them are already in advanced stages of revitalising their processes, systems and business practices to suit the regulations,” says Randev of Colliers International India. For developers with footprints in multiple territories, different provisions of RERA would mean treading the path even more carefully. “The primary concern for the real estate community remains the limited infrastructure available to get themselves and their projects registered under the Act, and getting their operations in line with the law,” says Randev. The bigger players know that regulation will help in bringing conviction back to the much-maligned sector.

“Transparency and accountability will become the new norms in the real estate sector. The customer will undoubtedly become the king, but it will be a win-win situation for real estate developers as well,” says Rohtas Goel, chairman and managing director, Omaxe, a real estate company whose major thrust areas have been tier II and III cities. This is a point reiterated by most developers as of now. “The Act will also allow for the speedy redressal of disputes between buyers and developers, and help in enhancing the trust between the two,” says Rajeeb Dash, head, corporate marketing, Tata Housing. The company intends to expand its portfolios across 10 metros and emerging cities.

Ground zero

Several debt-laden developers in big cities are struggling with slow sales, high unsold inventory, delayed construction and stalled projects. Most leading banks and financial institutions have reduced interest rates between 50 and 100 basis points across various home loan segments. A slow revival is being predicted in the next quarter as far as the affordable housing sector is concerned.

The exceptions are evident in the way residential units were launched in the quarter demonetisation was announced and the last quarter. PropTiger Data Labs’ report of Q4 FY17 shows a 19% jump in the number of residential units launched compared to the previous quarter, and a 42% jump compared to Q4 FY16. “The new regulations will have a temporary sobering, slowing down impact on the business for two-three months in each state after RERA is notified. This will happen because of the time taken by developers to get their projects registered,” says Sunil Mishra, group chief strategy officer of real estate portals Housing.com, PropTiger.com and Makaan.com.

The market will show a positive impact, albeit slowly. “The tax revenue collected from real estate deeds remains one of the highest sources of earning for state governments. So this sector can’t be lagging for long,” says Bansal of KPMG. “There will be a lot of consolidation, and only well-capitalised and organised developers will remain,” predicts Puri. Over the next year, it is expected that developers will rush the pace of construction and will focus on the execution of existing projects rather than go ahead with multiple projects to generate more funds.

“In the long run, mortgage rates are expected to rationalise further. RERA will bring in greater investor confidence and increase the ability of the real estate sector to attract formal sources of capital, thereby rationalising borrowing costs. This will help in realistic capital values and increase in attractiveness to end users who are currently holding on to investment decisions,” says Nakirekanti.

Till then, gloom might seem to be the norm in the sector.

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