Indian real estate sector has been reeling under a slowdown for the past 2 to 3 years. Experts have sighted many reasons for the same, there are any number of analysis floating around, including predictions for the future. The economic slowdown, government policies and lack of initiative at state levels have been blamed for it. It’s surprising that when there is shortfall of residential as well as commercial property in India and the government is looking to construct 18.2 million houses, why is real estate sector reeling and we have surplus inventory in cities which would take years to liquidate. What are the real reasons for this slow down and who is to be blamed for the same? There are many a reasons, however the bottom line remains that to quite an extent the real estate sector itself is to be blamed for the situation they are in. We discuss the reasons as under: –
The Game of higher returns in the Real Estate Sector in India
Unfortunately, the real estate developers have concentrated in a few cities for high returns and not done their homework well. For higher returns, a number of projects have been undertaken in cities where the market is investor driven rather than end user driven. This led to exponential rise in real estate prices, making it not only out of reach for the end user, but also for the individual investors. When real estate market is driven by the end user the infrastructural development and improvements are much faster and attracts other sector investments, giving the area the required boost. However, in an investor driven setup, though the projects come-up, the area does not get the required infrastructure as the demand is non-existent, due to non-occupancy. This kind of a scenario has a cascading effect on the entire real estate sector in a particular city.
Supply v/s Demand of Property
The real estate developers have not been able to keep the residential and commercial verticals segregated. The concept of hybrid projects i.e. a combination of residential and commercial has led to creation of certain inventory which does not have any demand in a particular area. A future enabled market research is essential before planning any project, just because a land packet is available is not reason enough for a residential or commercial project to come up. Till the time real estate sector takes into account the demand factor before planning any project, things will only worsen. The real estate developers have concentrated their efforts in selected class A cities and overlooked class C cities. This has led to a gap between the supply and demand, the supply is where there is no demand; and where there is demand, supply is not there. Unless the real estate builders rechristen their strategy the sector will keep suffering.
The Investor Sentiment
The real estate market thrives on investor sentiment, which for the past 2 to 3 years has been negative due to the reasons mentioned herein. The investor is confused and doubtful when it comes to ascertaining the actual valuation of property in a particular area. He is unable to ascertain the ‘right’ price, which holds back the investments and the real estate market is devoid of the required capital.
The Black Money Factor
The present regime has been able to stifle the flow of black money into the real estate sector, which used to be the main funding source. Various policy changes, have ensured a strangulation of black money funding and has also broken the politico-mafia linkages rampant in real estate sector. This a welcome step, though there might an initial slow down, in the long run it will ensure a healthy growth for the sector.
The real estate developers really need to think through their boots to introspect to understand the changing scenario and stop beating around the bush, in case they intend to revive the sector. The next few years are going to be crucial, in case corrective measures don’t come into place it will be very difficult for the real estate in India to recover.