Between the years 2005 and 2008, the investment capital into India was abundant by most counts. Out of which, around $25 billion was invested into Indian real estate market in various forms. Most of these complicated investments involved those which were unenforceable or simply illegal. Besides, one had to deal with the high expectations of the developers.
Investors were bringing in money into India at a greater pace. Moreover, land became a disappearing commodity back then. This means, if a person did not buy, the process woulf multiply the next day. However, this conventional wisdom ended badly.
At present, it seems India still has ample of land that can be developed. Besides, the prices in real estate can come down to a great extent. For a few years from 2010-12, there was a period of redemption. In major metros, the Indian real estate market seemed flourishing due to loose monetary policy, a booming stock market period, and the ruling Congress party.
The real estate sector has so much to handle, but they killed it all too quick. It experienced significant increase in the prices, and gave and illusion of good returns for the investors. Apart from all this, developers choose to build larger units at higher prices. Owing to all the aspects, a major section of the Indian real estate unaffordable for the average buyer.
In a country where the average household income is Rs 40,000, buying apartments worth Rs5-10 crore is almost impossible for the buyers.
As property sales are experiencing a downfall, cash flows have declined and the construction has also slowed down drastically. A slowdown in the construction activity is another aspect, as it sends wrong signals to the next set of buyers.
Out of $25 billion, barely 20-30 per cent has been returned. On the other hand, the returns earned by most of the invested capital is in single digits, and has even been negative for majority of the cases. This is where the main problem lies.
The Indian banking system is facing serious problems of its own. It is the primary provider of capital for real estate, where the last count was 85 per cent. The need to meet Basel III requirements and the burden of non-performing assets (NPAs) on the balance sheets, has made the Indian real estate sector just a word in the banking system. Hence, the non-banking finance companies (NBFCs) remain the only offset to this capital drought.
A policy implemented by the government, Real Estate Regulation Act (RERA) also does not allow the developers to use buyers’ money to do anything other than build the project. This has put a break on the traditional business model of the real estate sector.
A number of companies have already adapted this change and reshaped their business to focus on planning, execution and delivery of their projects. As the developers will now keep their focus on customer satisfaction and the quality of upcoming projects, this becomes a great news for the property buyers in India.