To Win The Race Finally, Developers Must Move Slow And Steady In 2019

It was hard to resist the charm India’s real estate exhibited during the start of the millennium. More and more people had begun to move towards the cities, starting 2000. On top of that, these people had begun to earn well enough to start planning a house purchase while they were still young, unlike their parents. The government showed great prescience there and jumped in to assist this population. Consequently, banks started lending to the sector more aggressively, more liberally. Government agencies quickly turned rural areas along big cities into upcoming hubs and initiated the process of exploiting the perceived potential of the property market. Real estate developers cannot really be accused of engaging in cockamamie if they got carried away, and went on a project-launching spree. It all made business sense. The over-eagerness demonstrated by developers during that period was a collective lapse of reason ─ the closing years of the decade have gone on to substantiate the fact that they might have been living in la-la land. But, they were not the only one, and, to be fair, they were not the only one who misjudged the situation. Homebuyers were no different.

If the fattening salaries inspired India’s homebuyers to invest in the country’s most-prized asset class, eager banks and even more eager developers prompted them to invest vigorously. The “unbelievable” deals were quickly signed and sealed, often against a buyer’s better judgement. 

Building on hope

They tell you to hope for the best and be prepared for the worst. This is an advice every stakeholders in India’s real estate sector seemed to have ignored while a disaster built up. Everyone showed a great deal of surprise when that ominous music begun to play in the background in 2013 and the sector started slowly crumbling in 2014. As it true of any good scheme, all is good till there are only hopes involved. Homebuyers hoped for a dream home in affordable rates; builders hoped they would be able to deliver all they promised to buyers; the government hoped India’s second-biggest employment generating sector would grow by leaps and bounds, consequently boosting the overall economy. All hell broke loose, however, when the time to deliver came.

Developers who had aimed too high did not have the required liquidity to complete projects. They misread the situation and got over-ambitious with delivery timelines, too, which has now proved to be a mistake of epic proportions. While some cannot deliver projects because they are money starved others cannot do it because they forgot all about the external forces that could stop them from delivering what was promised. Some developers went on to make both these mistakes at the same time, and are consequently either starting at insolvency or well on their way to folding up. While building on hopes, most forgot to stick to certain ground realities.

Somebody in this line of work was expected to be ready in case a sector regulator arrived (the demand for a real estate regulator has been there for a long time) or a new tax law was launched (the goods and services tax law was also in the works) even if they could not be prescient enough to foresee a note band (which came as a bolt from the blue on November 8, 2016). As the situation progressed,  the demand for homes fell after touching the peak, creating a situation where builder could neither sell their existing stock nor launch new projects. As soon as buyers sensed all is not as well as it seemed in the beginning, a phase of fence-sitting begun. After this primary source of liquidity dried up, financial institutions could support the sector only so far — they are wary of lending to infrastructure projects in general and housing projects in particular, as it stands today.

Getting closer to reality

Data available with PropTiger.com show home sales increased 24 per cent during 2018 after registering a 17 per cent fall in 2016. With better demand, sales are expected to grow further in 2019. For that to happen, developers got busy with completing their running projects and marketing their inventory amid various hardships. When compared to 2017, unit completion rate increased 55 per cent in 2018, and it would now take an estimated 29 months to sell the existing inventory stock lying with real estate developers in nine key markets.

The Real Estate Regulatory Authority did help in restoring buyers’ faith in the sector and so did the GST that subsumed several state and central levies and made home purchase much-less complicated.  Demonetisation ensured only genuine buyers remained in the market. Consequently, there has been no unreasonable rise in property rates.

In the meantime, proceedings are underway against several developers for delaying projects, duping buyers and siphoning off funds. Those with bad records will certainly be weeded out as the sector enters a new phase. To put it succinctly, the year 2018 set the tone for a complete recovery of India’s realty, based on changes on the ground.

Are we ready to take a flight?

Expecting any magical changes in the year 2019 may be assuming if one predicted a full recovery—even if we factor in a spike in demand and a hike in sales. The ongoing liquidity crisis in non-banking finance companies and the crumbling of sector giants, including Jaypee, Amrapali and Unitech, would keep realty giving a hard time in a year when the country will go through the general elections. The outcome of the poll would decide to a large extent how things would pan out for the sector. In the meantime, builders, who are under the gun today for a variety of reasons, just have to maintain the momentum they were able to create in the year gone-by. Going slow and going steady should be their only motive in the new year. While they march towards a better future, here is something that should cheer India's developers up — institutional investors are sticking with you firmly.

Views expressed are personal.