A decade of learning from the Indian Real Estate
With India walking the path towards urbanisation, the need for improved infrastructure and better housing is of prime importance. The real estate sector is thus, crucial for the role it plays in contributing to the same. According to a KPMG report published in 2018, the real estate sector contributed to 7% of India’s GDP in the year 2017 and is poised to increase this to thirteen percent by the year 2025, thus contributing $650 million to the nation’s economy.
In the last decade, the Indian real estate sector has seen its share of highs and lows but has managed to tide through, despite the situation at hand. The following highlights from the past decade of real estate learnings can help gain a better perspective of the state of the sector in the country.
2008 saw the fall of the financial services firm – Lehman Brothers, the effects of which were felt across a large number of sectors and industries. The Indian real estate sector, miraculously, was spared from the repercussions as it attracted considerable equity interest and continued on its operations sourced from capital collected in 2005-06. Bank financing dried up post-2008, but this gap was rapidly filled by cash flows deployed by Non-Banking Financial Companies (NBFC). The non-institutional investors aggressively bought under-construction stock in projects. Developers were using this capital as equity to buy more land and using debt, which they believed was relatively cheap, to complete the projects.
As a result, the period of 2007-2011 was the time of taking risks and aggressive buying of land and property. The period after this saw developer riding high on optimism, as they started using debt structures to decide their next investments in the Indian real estate market. Between 1991 to 2014, the real estate sector saw historical annual returns of 20%, as well as investment growing by 600% to reach over USD 2 billion in 2017. As a result, real estate was one of the most lucrative in the country.
Armed with this knowledge, non-institutional investors started lending at a 24% percent rate to developers, with the belief that this was bridge financing, and that the market/sales would significantly pick up.
This period, additionally, saw the emergence of Asset Reconstruction Companies (ARC), which are specialised financial institutions that buy non-performing or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. Instead of wasting time chasing defaulters, banks sell the bad assets to the ARCs at a mutually agreed value. Several steps were taken by the RBI and the government to help the asset reconstruction activities. In one such step, the government successfully raised FDI in the sector to 100%.
2015 – 2019:
According to a study conducted by Liases Foras Research and Rating, the debt and inventory of the developers in India had increased tenfold, but sales figures were yet to match the said monumental increase. With borrowed finances from different sources, developers kept adding housing stock into the market without productivity. As sales remained abysmal all this while, developers started finding it challenging to meet their debt obligation at that point. This led to false promises being made to potential homeowners, and the sector began experiencing some signs of duress.
The years following 2016 saw the introduction of a multitude of motions and processes that had a deep impact on the real estate sector. This included the implementation of demonetisation, GST (Goods and Services Tax), RERA and the affordable housing movement. The sector was severely affected by demonetisation, as previously, a large number of transactions in this sector were carried out through cash. With this, sales went down and unsold inventory started increasing. Recently, at the 33rd GST council meeting, new rates on residential and commercial properties were released to the public. This included the GST rate of one percent (without Input Tax Credit) on affordable housing, five percent (without Input Tax Credit) on non-affordable housing and twelve percent (with Input Tax Credit) on commercial properties. Implementation of GST has helped in establishing a simpler tax structure, which has helped in the transparency of operations. The Real Estate Regulation and Development Act (RERA), was put in place to help buyers avoid the pitfalls of half-baked information and murky guidelines fed by developers. These were the first – a line of decisions made that benefitted the sector at large and were followed by the introduction of Smart Cities, which served as a prime opportunity for developers. Additionally, the Pradhan Mantri Awas Yojana (PMAY) launched in 2018, included a provision for affordable housing, which has been a boon for real estate developers, ever since its official execution.
The way forward in this sector seems to be fairly optimistic, with the Securities and Exchange Board of India (SEBI) having given their approval for the Real Estate Investment Trust (REIT), which will aid in allowing all kinds investments in the Indian real estate market. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to the source material and organise manpower, and are hiring qualified professionals in areas like project management, architecture and engineering. These changes are expected to lead to more transparency, streamlined processes, and the augmentation of trust in the sector.