There will be no Revival for Residential Real Estate in Festival Season

You may want to believe the positive opinion but don’t raise your hopes. It is difficult to ignore the writing on the wall. The old business plans are dead. At least until the return of irrational exuberance. We are in the midst of an “end-users” market. That is not about to change in the short term.

The only way to instil revival/ positivity will be to (1) increase the number of buyers and (2) improve the spending capacity of the buyers. Unfortunately there are no indicators suggesting that either of these changes will take place in a haste.

Just as we can’t be over-optimistic, we are also not facing a doomsday scenario. A methodical, proactive change in strategy of Developers is required to tide-over the current times. Aggressive schemes being announced by Developers might cause a spike but they won’t set the wheels of revival in motion.

I will first examine each rationale making a case for revival.  Then I would point towards the real reasons which could slowly yet surely cause a recovery.

RERA and GST

Both are systemic and path breaking reforms. Both, in our democratic ecosystem, will take time to settle down/ become fully operational. Both will have significant, long-term positive impact but in the short-term will create challenges. We are still in the short-term phase. A few more quarters are required before transaction and tax volumes rebound to normal levels and thereafter start improving.

So while these two reforms should have a very progressive impact in years to come, in the immediate future, demand is only expected to stagnate/ reduce because of these.

Affordable Housing

It is the need of the hour. Flavour of the season. Blue-eyed boy amongst the Government policies. It also has its inherent challenges. To elaborate:

1.   It’s not everyone’s cup of tea. Low margins, need to control constructions costs, small ticket-size doesn’t attract most established developers to this alternative. It is for this reason we have seen emergence of specialised players such as VBHC, Signature Global etc.

2.   It doesn’t solve the existing problem. It will add fresh supply in the market which is already struggling with slow and limited sales for the existing supply. Even if a Developer changes their focus or undertakes planning, approvals and sales of green-field affordable housing project, it might help him survive but not solve his problems in the ongoing project

3.   Efficacy of such projects to provide housing to their target customers remains in question. Perhaps in Tier II/ III cities, infill sites in large cities or in land parcels connected to metro network there would be genuine, end-user buyers. In most other cases investors will infiltrate squeezing out the genuine consumers.

Rebooted economic environment

Every reboot takes time. Some economists claim the economy is in a tailspin. A positive person might argue that the economy is still in the rebooting mode. If the systemic changes eventually make a constructive impression i.e. Government action bears fruit, the economy is still some time away from shifting gears.

Inflation is under control. But only just. Institutional investments, across sectors, are reaching new peaks. Unfortunately, bad news is omnipresent in all other statistics.

GDP growth is slipping quarter-on-quarter. Job creation is non-existent/ limited. Private sector investment is negligible. Income growth is low. And this trend is expected to continue for a few more quarters even if the Government comes up with policy changes or stimulus package.

Ample supply

This is partly correct. There is a lot of ready stock available. Even more stock is being completed by Developers across the country. Never has the secondary market been so flush with options for a buyer. So this is an undoubted opportunity to acquire that dream home. We are perhaps currently in the best “buyer market” of the past several decades.

That said, ample supply is the biggest symptom of the problem. There are not enough buyers! Festival season or not, the number of buyers are limited and will remain so for a while. Ample supply, extremely attractive discounts have been available for a while now. If the buyer hasn’t unlocked the coffers yet, festival season won’t unlock any floodgates.

Competitive mortgage rates

This is one of the main reason for considering a house purchase. It has benefited both the current and prospective mortgagors. The current rates are close to the lowest they have ever been and will continue to head south for a while. 

But then this downtrend in mortgage rates has been obvious and predicted for a while now. Any demand/ interest in acquiring real estate due to these lowering rates has partially been absorbed already. It hasn’t and wouldn’t release any pent-up demand. Some on-the-fence buyers might get tempted to invest their money but there wouldn’t be a geometric increase in purchases due to this. 

If most of the above points won’t result in a revival, what will kick-start “acche din” for residential real estate in India?

The negative sentiment prevalent due to slowing GDP numbers hasn’t helped. Several investors have now preferred the equity markets/ mutual funds over real estate or gold. This has further dried up the money flow towards real estate. Buyers are holding back their investment of surpluses in real estate till confidence increases on Developers’ ability to deliver. Till then the corporatized developers such as Tata, Godrej, and Mahindra etc would garner bulk of investments in Greenfield projects. Rest of the monies will go towards completed projects.

So what could turn the tide? What fundamental barometers could tilt buyer confidence in the positive territory? To understand that we will have to go back to the basics. In fact the industry should start focusing on the basics and plan accordingly.

Private sector investment

As per RBI data, investment by private sector saw a rise of 5.8% which is supposed to be “abysmal”. Private sector firms are facing debt overhang which is then impacting the Banks who financed them. Credit-off take of MSME is also in the negative zone. The Government has taken proactive steps such as the improved insolvency laws however it will take time to extract poison from the system.

Purely public sector funding will not prop up economic growth. It could trigger growth and confidence in some sectors/segments but will not turn the tide. An across-the-board, steady investment from the private sector is the first step towards kick-starting a virtuous cycle.

Job growth/ creation

Successive Governments have been unable to crack this problem. Even before 2014, “jobless growth” was a much talked about term. While that conundrum remain unsolved, slowing down of GDP has only exasperated the concern.

Job growth, would result in increased take-ups in commercial real estate and that would in turn increase demand for houses. Direct correlation between commercial and residential real estate is well known. Over the past 3 years, take up of office real estate across India has remained stable around 40 mn sft per year. We are nowhere close to the peaks of 55 mn sft which were witnessed in 2007. My hypothesis is that faster we start inching closer (year-on-year) to the last peak, quicker would be the recovery in Indian real estate.

Income/ salary growth

The per-capita income for India was expected to cross Rs 1 lakh in 2016-17, up from Rs 93,293 of the last fiscal year. How much of that estimate is achieved remains to be seen. RBI’s customer confidence survey of June 2017, conducted in the large metros, showed worsened condition of jobs, income growth, employment and economic well-being. In fact the survey showed that confidence in current income levels fell drastically in 2016.

The day this trend is reversed, we would get out of the current vicious cycle. Ordinary buyers need to be assured about their future in their current job. They should be confident about increase in salary levels year-on-year. It’s only then do they take an important decision of buying their first or larger house.

Positive sentiment build up

There was a clear and strong positive sentiment across India in 2014 during the change in administration. Image of India had taken a hit globally due to various corruption scandals however the economic engine was humming relatively steadily.

Over the past two years the positivity, at least in real estate, has fizzled out. Either due to multiple black-swan events in India and internationally or due to the industry shooting itself in the foot due to delay/ lack of delivery. RERA, a significantly positive mood, will bring respite, going forward, but struggle for delivery of existing buyers will dampen spirits of many other buyers.

To summarise, private sector investment would lead to job growth. That would result in income/ salary growth and would eventually result in a genuine positive sentiment amongst buyers.

Implementation of RERA’s provisions could be the first step in that direction. For eg if RERA takes over projects which are stranded mid-way with little hope as the Developer is jailed/ given up, it would be a perfect example of action speaking louder than words.

In conclusion, my fear is that if the above mentioned economic pointers don’t turn positive, we might be looking at several seasons of slow down. Not just the upcoming one but most likely a few more in the future.