Parcels in Distress-Real Estate Crisis
Updated: Apr 6, 2022
Real estate, the quintessential middle or lower class statement and dream has been in deep waters for the past year. Realty markets in India are facing the ire of piling vacant inventories and incomplete or stuck projects. The market has been hit by a serious liquidity crunch and broken credit flow which have ceased funding for both buyers and builders. As a result, the economy is facing the brunt of a slowdown.
The economy is undergoing a period of slower economic growth due to distress in micro sectors like real estate, automotive and shadow banking. The country’s economy which had an ascending growth curve is now reeling under the slowing growth rate which has hurt its ambitions of becoming a $5 trillion economy by 2025.
Mumbai’s real estate sector is undergoing one of the worst times with the city witnessing a huge number of unfinished projects along with an equal number of vacant lying homes. Developers facing cash crunch aren’t able to complete existing projects and, with the shadow banks in crisis, builders and developers are seeing a broken credit flow. Also, the ED’s stringent monitoring of defaults and tighter regulations for companies with piling debt and huge defaults are going under pulling unfinished projects with them hassling investors and home-buyers.
A changing younger millennial generation moving away from the bondage associated with realty is favouring the rental and co-living concepts more for the inherent freedom they provide. This changing preference and want among the new generations is providing traction to the biggest competitor of the ailing sector. Their changing wants and preferences hit the developers and builders as they had cooked up huge debt building those parcels of real estate in anticipation of positive consumer response. With the opposite happening and their investments gone wrong, the developers saw themselves in a deep pile of trouble.
The current outgoing shadow banking crisis in India also had a major hand in creating distress in the sector because of the very fact that the sector was financed by shadow banks. A fallen credit line affected both the buyer and the builder and a liquidity crunch stopped funding for projects whilst reducing the number of home buyers. Many might also blame realty to be the cause for the banking crisis as the sector contributed to a huge portion of NPAs that banks possessed but both these sectors suffered and are suffering equally because of each other.
Cities like New Delhi and Mumbai are seeing a huge increase in the number of vacant inventories. Looking deeper into these vacant inventories you realize that most of them are uber-luxe expensive developments built for the rich and them being the most indolent shows the more conscious spending habit being adopted by the rich. Delhi along with many other cities has also been hit by the same problem.
Many blame GST, demonetisation and stricter rules to be a cause for this. Implementing GST saw the prices of estate rise causing people to think twice before investing and purchasing. And with a shortage of funding, nothing much is being done to support the troubled sector with investors pointing out that they had invested everything and now nothing much is left.
Unsold housing units in Noida, Greater Noida and Gurugram stood at nearly 1.09 lakh at the end of July, of which 54 per cent were priced at Rs 45 lakh and below, according to property brokerage PropTiger.
Clearly we are seeing 3 majors drivers of the economy being affected by this crisis-the buyer, the builder/developer and the investor. These 3 major groups have been left hassled and high and dry as cash and credit have dried up in the entire economy. The government in efforts to provide relief to the sector had set up an Rs10,000 crore fund for incomplete or stuck projects. The GOI under the lifeline is going to provide support to projects which have a positive net worth and are not being referred to in bankruptcy courts.
But little has happened as banks are unwilling to provide the little credit they have to beleaguered companies and the relief fund hasn’t been set up. Realty insiders and executives are urging the government to move fast in order to prevent a large-scale failure. To provide support to distressed home buyers the government set up RERA(real estate regulating authority) where these home buyers could register complaints and get their problems addressed to. The government also reduced the interest rate on home loans so as to spruce up demand.
The government in efforts to revive the economy has been trying to recoup the backbone sectors of banking real estate and automotive through a slew of incentives, new measures and reforms. But what they fail to realize is they can only achieve effectivity of such lifelines by clearing the old backlog of problems. To deal with newer upcoming problems they need to clear older problems which is clearly not happening. The government needs to be engaged and interested while handling a major crisis like these.