Why the Indian Real Estate Sector is Down in the Dumps and How it can be Revived

Why is the Indian Real Estate Sector Down in the Dumps?

It is no secret that the Indian Real Estate Sector is down in the dumps and needs to be revived quickly. Following the Demonetization of the high value Indian Currency, the sector, which is basically cash driven slumped to the extent that the number of deals and transactions which were being done came down by 50%.

Moreover, the sector is also reeling under the well intentioned, but, thoughtlessly implemented RERA or the Real Estate Regulation Act that was introduced by the Indian Government to bring in more transparency and accountability into real estate industry in India.

Indeed, it can be said that both these measures were like a Double Whammy to a sector that was already facing headwinds due to overcapacity and funding problems.

Thus, it is the contention in this article that there must be urgent steps taken to revive the Indian Real Estate Sector, if not for anything else, but to carry forward the intentions of the government into creating affordable housing for all by 2022.

Structural Problems Need Radical Solutions

As mentioned earlier, the basic problem with the Indian Real Estate Sector is structural. What this means is that due to its cash driven nature and means of funding, often from dubious sources, as well as lack of transparency and accountability, the sector is unlike what is the case with the developed economies where these problems are either negligible or are managed well.

This is in contrast with the Indian Scenario where transparency and accountability are major problems. For instance, nearly 60% of the projects are either delayed or handed over incomplete fashion making it harder for the homebuyers to move in into fully finished homes.

Apart from this, most builders do not seek the necessary approvals before embarking on the projects, which can be a source of irritation and downright nuisance for the homebuyers who are then left grappling with these problems.

In addition, builders rarely compensate for the delayed projects as well as refuse to take responsibility for unfinished or incomplete as well as defective buildings.

Some Attempts at Reform

Thus, any attempt at reform must first address the structural issues and this is where we mentioned the RERA as a well meaning law. For instance, under the provisions of this act, builders have to take full responsibility for handing over completely finished homes and cannot shirk the consequences.

In addition, the RERA spells out means of redress available to the buyers who can approach the statutory authority or the RERA regulator who is supposed to provide relief and succor to aggrieved homebuyers in case of defective and other issues.

Moreover, the RERA also addresses the chronic problem of financing for homes wherein prospective homebuyers are provided with legitimate and transparent funding in the form of loans from established and reputed lenders.

In short, what the RERA seeks to do is to introduce more transparency and accountability into the Indian Real Estate Sector.

Demand Supply Mismatch and Overcapacity and Shortage at the Same Time

Having said that, there are other problems as well from the supply side as well as demand side of the equation. For instance, many major Metros in India often suffer from a glut of capacity wherein there are homes aplenty, but, not enough buyers mainly due to such homes being used to park funds by the builders.

In other words, despite several measures, the government has been unable to rein the tendency to build homes without assessing the demand and in turn, use the excess funds and the liquidity in the system to be exploited by the builders who use such funds to build mega projects, some of which turn out to be White Elephants that are built for building sake and without any homes actually being occupied.

On the other hand, genuine homebuyers in these metros often find that there is a shortage of capacity within their affordability and means as most homes are either overpriced or too far from the city downtown to be bought.

Thus, the Indian Real Estate Sector is down in the dumps also due to mismanagement and misalignment of the demand and supply equations that tend to skew the availability and consequent shortage in a manner where the problems are too many to be addressed in a meaningful fashion.

While Demonetization and the RERA were supposed to rein the sector and bring some discipline, the key aspect here is that the government should have gone the distance and tackled the problems mentioned above.

For instance, it could have touched upon the potential Hot Potato of Benami ownership that has been identified as a key problem and that too, very sensitive to resolve. Indeed, there were high hopes after the Demonetization and the passage of the RERA that these problems would be addressed as well though what transpired was entirely different.

Needed Reforms

What the discussion so far indicates is that fundamental reforms need to be undertaken to make the Real Estate Sector in India into a developed economy one and bring in world class standards. This can only happen if there is adequate political will as well as boldness in taking unpopular but highly effective measures such as the ones suggested here.

Indeed, if the government could do a Demonetization kind of exercise on the Real Estate Sector as well, it would indeed be a truly transformative and revolutionary measure that would address many of the problems faced by the sector.