Indian real estate sector saw an unprecedented growth in the decade upto 2014. They say, for most of the years from 2004 to 2014 real estate barrons saw almost 100% profit margins. This also attracted lot of top Indian business houses like Godrej, Tata, Adani, Bajaj in to this business. The Indian real estate story was such a shining example that even 2008 - 09 Global financial crisis could not weather away it's luster. Even the common people who had invested in to real estate in that decade doubled their investment every 3 to 4 years max.
But things started looking grim post 2014-15. Returns started dwindling especially for residential real estate market. Nationwide a huge inventory of unsold apartments had started piling up day by day. Demonetization, RERA (Real Estate Regulation (and Development) Act, 2016)1 and GST acted as additional dampeners to the already reeling industry. Big corporate real estate developers had the holding power and thus even though there was no price rise in last 5 years but there wasn't any significant price reduction either except few freebies like interest / maintenance / stamp duty waiver. Lot of people including me had a view that real estate prices won't come down sharply; builders will hold onto stock, reduce new launchings and in few years income levels of buyers will go up and then the real estate market will bounce back again.2
And then this global pandemic called Novel Coronavirus or nCoV - 2019 unleashed its brutal attack on whole humanity changing the entire picture in matter of just 3 to 4 months. Now I see a dire need of paradigm shift in the way real estate business is handled. I would like to enlist few shifts that are inevitable:
1] Price drop:
1.a) Retrenching economy: Generally it is believed that when a worldwide economic crisis hits a developing country like India, it lowers the GDP growth rate lets say from 7% to say 5% unlike developed nations like USA or UK where it actually retrenches i.e. shows a negative rate of say -2% from earlier 3%. The current pandemic is predicted to bring in such negative GDP retrenchment of developed nations to India3 and being a developing nation , this is surely not sustainable for India. We are already seeing it happening with lost jobs of millions and millions of daily wage earners, reduced salaries of most of the working class and halted increments of white collar employees.
Some studies predict that this grim picture is not going to change any time soon. Particularly few studies4 predict that the post pandemic economic recovery will follow a 'Nike Swoosh' (✔️) i.e. it would be a prolong arduous journey of 10 years to come to the pre pandemic economic levels. If unfortunately this comes true then people would not have appetite to invest in real estate sector. Because though real estate sector is the last sector to go down in to the recession (after the realities are understood and accepted by people), it is also the last sector to boom in the recovery phase (attributed again to realities understood and accepted late by people).
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Economic Cycle: Pic Credit: https://images.app.goo.gl/51JUsui2u5XKpvu19
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1.b) GOI wants price corrections5: Various real estate groupings (MCHI, CREDAI, NAREDCO etc) have demanded substantial sops for the revival of the sector from the government but so far their requests have been met with a deaf ear. In fact quite a few times it was made clear in no uncertain terms by the Commerce Minister - Mr. Piyush Goyal that 'Government of India expects real estate sector to finish off the unsold inventory by offering heavy price reductions if needed. Otherwise this sector is heading towards disastrous downfall'.
Now if Government expects you to do certain things then be sure that you have got no to very little leeway.
1.c) Land Price Drop: Land prices play a significant role in driving real estate prices. Land prices can easily eat up 2/3rd of the real estate project cost in case of much in demand locations. Thus unless and until exorbitant price expectations of landlords don't moderate out, price reduction for the projects on recently bought land is a distant dream. But this can and should surely happen in case of developers who have already been sitting of huge land banks (this again assuming those land parcels were mostly bought quite a few years back at dirt cheap prices). In this case also a mental hurdle of a developer 'to scale up the land price to the present level has to be broken'.
1.d) Amenities drop: A shift is needed in the mindset of customer here. Any Tom, Dick and Harry expects to buy a home in a project which has a swanky clubhouse, luxurious swimming pool and host of other sport arenas. This expectation is so strong that even a developer with a single building project is compelled to offer these amenities. Not just cost of building these but also the premium charged by the developer because of these amenities increases prices of the house either directly or indirectly. These amenities also add a recurring maintenance cost to the owner (housing society) and except giving hedonistic pleasure to the owner are hardly been used by most of the residents.
Instead of these amenities, an open land with lots of trees planted on it can significantly reduce the cost of a real estate project.The same is true for few of the inhouse amenities like Three tier security, Video Door Phones etc.
1.e) Area Drop: First reaction of any producer or service provider to bring down the price is to reduce the quantity of the product or offerings in the service (hopefully without hampering the quality). So has started happening with sizes of the houses in new projects. Gone are the days of fairly big houses and architects and planners are moving back to the days of match box houses and this is not a good sign. Just for the sake of understanding please see below table:
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Room
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Old Luxury
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Present Reductions
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Moderation Needed
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Room Sizes in Feet
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Living & Dining
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15 X 21
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11 X 15
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12 X 18
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Bedroom
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11 X 16
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10 X 12
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11 X 14
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Kitchen
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9 X 13
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7 X 9
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8 X 11
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1.f) Duty Drop: Though at present the GST rate on residential real estate has been moderated to 5%, (for commercial real estate it still is at 18% barring few exceptions) the same on some of the vital raw materials like Cement is still as high as 28% with no input tax credit available to the developer. Even the stamp duty + registration which is a state matter is as high as 7 to 8% in states like Maharashtra. States increase the stamp duty at any point if they see any financial shortfalls in the state treasury (where as decrease is seldom guaranteed). Thus overall, unit cost goes up by 11 to 12% for residential real estate. This combined tax burden has to be moderated by central and state governments if they wish to unleash the actual potential of the real estate sector.
2. WFH effect: Pre-covid it was expected that commercial real estate will see hey days with overall serge in its demand. But now with most of the companies thinking of WFH (Work From Home) for prolonged period and for maximum number of its staff; commercial real estate sector will fall short of its lustrous expectations. WFH employees staying put in their native villages or small cities instead of Metros will have adverse impact on the rental incomes (which was already giving awful ROI of 2 - 3%) of the investors. Thus in addition to economic downturn discussed earlier, WFH will act as an additional dampener to the real estate demand.
3. Mentality change: There was a time 10 - 15 years back when under construction houses were sold cheaper than the ready possession houses. But real estate boom brought in seller's market and allowed developers to quote almost same rate for under construction projects as that of ready possession projects in their vicinity. But with economic down turn, it has become a buyer's market and it is better for real estate developers to come to terms with this and bring back the old logical way of charging less for under construction projects.
Also, timely possessions and quality product are two very important things real estate developers should focus on to bring back the faith of its alienated customers.
4. FDI: Real estate sector is vastly disorganised, owner driven business with no apparent system, consistency and competency. Also in addition to farming, it is the only sector in our economy where no FDI (Foreign Direct Investment) in any form is allowed. We have seen with opening of Indian economy in 1991 that bringing in the competition from outside makes the indigenous businesses more competitive and not complacent. It's high time we do the same with real estate sector and let the serious, righteous real estate developers flourish with innovation, increasing overall efficiency and bringing down the overall cost to the end user.
Finally, let's pray that this Covid pandemic soon becomes thing of the past and every Indian citizen gets his dream of owning a house fulfilled.
Links and references: 1. RERA (Real Estate Regulation (and Development) Act, 2016)
2. Facts Vs Speculations about drop in Real Estate Market
3. Post Pandemic Growth Forecast
4. Swoosh Shaped Economic Recovery
5. Mr. Piyush Goyal Speak
