Real estate slowdown: Survey suggests haircut; developers dub it unfeasible

Identifying the slowdown in the real estate sector as a key factor in the overall growth deceleration, the Economic Survey 2019-20 suggested that realtors need to take a “haircut” to steer clear of the legacy issues. The measure will also help cleanse the books of its lenders if developers let housing prices fall.

According to the report, the once-booming housing sector is currently reeling from a mounting stockpile, while prices have remained elevated. “Delayed project deliveries and stalled projects leading to a build-up of unsold inventory over the years” has played havoc since 2011. “The decline in household investment in ‘dwellings, other buildings and structures’ over 2011-12 to 2017-18 is a reflection of slower growth in purchase of houses by households.”

It noted: “Even though growth in prices has fallen sharply since April-June 2015-16 and remained muted since then, the level of unsold inventory has stayed several times higher than yearly sales.” At the end of December 2018, about 943,000 units worth Rs 7.77 trillion with 41 months of inventory were stuck in various stages across the top eight cities, the survey said.

To bring the sector out of the rut, the report said the “existing unsold housing inventory can be cleared and the balance sheets of both bank or non-bank lenders cleaned if the real estate developers are willing to take a ‘haircut’.

Realty developers and industry experts, however, were not impressed. At a time when a number of developers, many of whom went bankrupt, are struggling to maintain profitability, taking price cuts is not feasible, they said.

According to Niranjan Hiranandani, MD of Hiranandani Developers  and president of ASSOCHAM, there is no scope for price cuts across the board. “In some projects and some pockets, there could be price cuts. But developers cannot cut prices beyond a point,” he said.

“The increase of sales in any sector and not just real estate can be attributed to a variety of factors, ranging from consumer sentiment to the economic outlook. While there is always a variety of incentives offered by many developers to buyers, generally, a reduction in the price is not a sustainable plan,” said Ashish Purvankara, MD of Puravankara.

According to him, boosting sales would require several related factors to work together. “Lending reforms, attractive and easy home loan packages, and more importantly, a buoyant consumer sentiment, which is a by-product of fiscal confidence,” he said.

Lack of available land in urban centres, the rising cost of construction, and higher fees and taxes are key hindrances that do not allow headroom to realtors to take a price cut, said a top executive from a leading developer.  “The announcement of a few subsidies and easy availability of finance can aid the sector in the days to come,” he said.

Housing for all

Highlighting the success of the government, the survey noted the number of houses completed under the Pradhan Mantri Awaas Yojana-Gramin (PMAY-G) increased by over 300 per cent — from 1.195 million units in 2014-15 to 
4.733 million in 2018-19. Under the PMAY-Urban, against assessed demand of 11.2 million homes, 10.3 million houses were sanctioned, 6.1 million grounded for construction, and 3.2 million have been delivered till January 1, 2020.

"For the Indian real estate sector’s woes to end, the government needs to announce measures that will boost consumer confidence and result in sale of inventory. There is an urgent need to address the challenge of liquidity faced by the sector, especially after the NBFC crisis," said Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani.

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