Mumbai: Tough times ahead for real estate developers

Updated: Feb 05, 2019, 18:59 IST | Vinod Kumar Menon | Mumbai

Government focus on mass affordable housing worries builders facing a liquidity crunch about existing and under-construction projects, may lead to real estate industry slump

Experts say sales in under-construction properties have been declining. Representation pic
Experts say sales in under-construction properties have been declining. Representation pic

The real estate industry, which was struggling to overcome the liquidity crunch, will face even tougher times in coming days, with a vast difference in the demand and supply ratio.

Moreover, with the government focusing on mass affordable housing projects, developers are concerned about existing stock and the fate of under-construction projects stalled for years, which experts say, may lead to a major real estate slide down.

'Severe liquidity crises'
Speaking to mid-day, Pankaj Kapoor, managing director, Liases Foras (a real estate data analytics company), who will soon release his report on sustainability of debt for the real estate market, said, "The lending rate for developers from nationalised banks is around 12 per cent. Non-banking financial companies (NBFC) offer R4 lakh crore at interest rate varying from 12 to 16 per cent, and the builders cannot sustain the lending and cannot repay lenders in present sales conditions. Actually they should have 2.5 times more sales."

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He added, "With the recent expose of IL&FS and DHFL, the lending crises has led to a vicious cycle, and the real estate industry is stuck in severe liquidity crises. Builders will ultimately have to either reduce the prices of their existing stock, or look for broking and consulting houses to bail them out."

Today the market is the best for buyers, as there are many sellers who want to sell their stock. In such a scenario builders are open for bargaining and negotiations. "Also we must understand that the land cost in the past 10 year period has gone up by nine times, making the price of both under-construction and ready stocks unaffordable for common man," explained Kapoor.

Kapoor added, "Sales in under-construction properties have been declining in the past few years. While under-construction properties attract 12 per cent GST, no GST is charged on ready ones. Additionally, delay in execution and delivery has kept buyers away from under-construction properties. Our data shows sales in ready properties haves gone up from 11 per cent to 27 per cent in the past five years. And in MMR the ready stock versus under-construction sales have gone up from 11 per cent in 2014 to 26 per cent in 2018. If the trend continues, the real estate industry will witness a further slowdown in coming months.

Affordable houses required
The need of the hour is affordable houses, and with the market abuzz about Poddar group announcing affordable homes of approximate 250 sq ft carpet in Kandivli, it could turn around the market further.

"The very fact that CIDCO and MHADA housing lotteries get over a lakh applications for a few thousand affordable houses, is evident that people are willing to buy, provided they can afford the price tags," Ajay Chaturvedi, a real estate consultant and expert said.

According to housing expert Ramesh Prabhu, "Out of 13,000 under-construction projects registered with MahaRERA, over 5,000 are already stalled and most due to liquidity crunch. It will be the NBFCs and other lenders who will have to bear the brunt of this, as the developers are either bankrupt, or are facing civil and criminal litigations, and few are behind bars."

'A boost for infrastructure'
With an aim of providing affordable homes, the government, in its interim budget, has given tax exemptions to developers undertaking affordable segments' projects, extending them for one more year for those that get approved by March 31, 2020.

Speaking on it, Dr Niranjan Hiranandani, co-founder and MD, Hiranandani Group, feels the proposals in the interim budget include a boost for infrastructure as a result of increased spending on airports, railways, waterways etc.

He said, "These will positively impact real estate. If things happen the way they are supposed to, we should be achieving twin goals — housing for the home seeker as also 'back to business' for the industry. The minister mentioned that India is poised to become a $5 trillion economy in 5 years and aspires to become a $10 trillion economy in the next 8 years. This will obviously augur well for real estate."

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