Indian real estate sector has been dragged down by decades of promoter abuse and adverse government policies that have plagued the entire economy
Let's talk housing. Real estate, once the pounding heart of every Indian retail investor's portfolio, now finds itself in a shambles due to years of over-development, promoter-driven avarice and funds diversion and governmental indifference.
Unitech, Jaypee Infra, Amrapali — the list of real estate giants who have gone bankrupt or are nearing this status is a long one. And in their ruin, these companies have taken down millions upon millions of middle-class investors, people who were either looking for their dream home or simply parking their funds in a sector that had provided stellar returns to investors for years, doubling or even tripling their money in under a decade. The once best-in-class investment avenue is now down and out, not even a pale reflection of its former self. North India, particularly Delhi NCR, has been the worst hit. In Delhi NCR, supply outstrips demand many, many times over.
As an example, along with thousands of other investors, this author too coughed up 95 per cent up-front payment for a flat in Amrapali's highly-advertised Silicon City, Noida in October 2010. Possession of the property was promised within 36 months, with a grace period of six months. Over the next few years, unbeknownst to anyone, Amrapali promoter Anil Sharma quietly and allegedly siphoned away funds from the Silicon City project and bought up many other tracts of land for new housing projects. He also splurged on luxury cars, foreign trips and other items of personal indulgence. Sharma then 'sold' flats in these new projects, and used these funds to buy more land for more projects. He also continued indulging himself, hobnobbing with the glitterati and getting star cricketers to become his brand ambassadors.
To cut a long story short, after 8 years of waiting for possession, the flat-buyers finally moved the Hon'ble Supreme Court. After due deliberation, the SC asked NBCC India to look into the project viability of Silicon City and several other Amrapali projects. As the funds needed to complete Silicon City had been siphoned off, the SC directed flat-buyers to make further payments, even those that were to be made only after possession was offered, saying this was the only way to complete the stalled project. Those that did not want to make this payment could forget about their dream home.
The result? Flat-buyers, who had already paid up money for the elusive flats from their savings or through bank loans and had not a brick to show for it 10 years later, had no option but to pay huge sums of money.
Anil Sharma has been behind bars for months now. Unitech promoter Sanjay Chandra also faced similar punitive action. While this may be a small consolation for affected investors, it doesn't take them any closer to getting possession of their promised flats.
The Government has been taking steps to try and rein in the inexorable shutdown of the country's real estate sector. Union Finance Minister Nirmala Sitharaman recently announced a Rs 25,000-crore rescue package for the completion of stalled residential projects. However, the sheer number of such housing projects makes this sum too paltry to have any significant impact. The Insolvency and Bankruptcy Board of India (IBBI) has revealed that a total of 115 insolvency cases have been filed under the 'Real estate' category till September 2019. Of these, 87 cases are under process while 28 have been closed. The 87 residential projects facing bankruptcy are worth $66 billion, around Rs 4 lakh crore.
According to property consultant Jones Lang LaSalle (JLL), nearly 4.54 lakh residential units are running years behind their completion dates due to various reasons. In a recent report, JLL said, "In the current scenario, it is the residential real estate segment that presents the maximum amount of stressed assets. India's housing sector has been reeling under the pressure of delayed/stalled projects. The NBFC debacle and subsequent liquidity crisis added to the problem. The closing of the refinance window led to many projects getting stalled due to lack of funds. This, coupled with home-buyers preferring to look at ready-to-move-in projects, affected a wide cross-section of residential real estate projects."
The overall housing malaise is larger and interwoven into other larger issues impacting the Indian economy. Nearly all sectors of the economy have been hit hard over the last few years. An immediate offshoot of this is that Indians, over the last few years, have become increasingly averse to making a commitment of making home loan repayments month on month for the next 10-15 years.
Other than promoter greed and a slowing economy, there are other reasons for the plummeting real estate fortunes. Among them are the low or negative growth in property values and, therefore, repeated instances of delays and default by builders, leading to a total loss of faith in under-construction projects; the introduction of GST, which has simplified tax payments but led to higher overall taxes on new homes and a growing preference to play it safe by paying a fixed monthly rent.
Finally, there is demonetisation, which attempted to kill the cash component (black money) in real estate transactions. For many decades, real estate was the preferred means for parking excess unaccounted-for wealth. The possibility of involving large cash components was a big factor that drove housing sales across India. Admittedly, demonetisation has not eliminated the involvement of black money in real estate transactions but it has brought it down significantly. India's predominant salaried middle-class does not generate black money but it does now prefer to deal through transparent official investment channels, such as mutual funds.
Then there is the possible spillover of real estate woes into India's already reeling banking system. The default last year by two housing finance companies, Dewan Housing Finance Corp and Altico Capital, sent shivers of panic down bankers' spines. A recent report by Fitch says shadow lenders could be highly exposed when loans worth around Rs 70,000 crore become due for repayment in the first half of 2020, as many more builders may struggle to repay.
There is no quick-fix formula to kick-start a recovery. People will only invest and buy houses again if properties become more affordable, both from the pricing and taxation perspective. But that is easier said than done. The situation is so bad today that is not just flat-buyers and out-of-work construction workers who are committing suicide, in recent times, some builders themselves have also taken the extreme step of ending their lives. These are grim times.
Views expressed are strictly personal