Real Estate sector is one the most important sectors for any economy, but for the past few years real estate market has been plunged into recession due to multiple factors like Demonetisation, GST, RERA, Liquidity Crunch, NBFC Crisis & many more. To understand the scenario in a simpler way, let’s see the impact on two major factors: a) Increasing Cost of Funds & b) Negative impact on Sales.
Multiple factors had increased the cost of funds for Real Estate sector, starting with Demonetisation which resulted in numerous private investors moving out their capital from Real Estate sector which affected the fresh inflow into the business. To add to the woes, GST was introduced at an effective rate of 12% with input credit (now 5% without input credit) which prompted the Retail investors to stop buying multiple properties. Hence, only End-Users are active in market in recent times with a wait-and-watch approach to grab their dream homes at a reduced price, preferring only ready to move-in or nearing possession inventory. Most importantly, End-Users’ demand would never be able to suffice the supply already generated in the market. Developers are not keen to reduce the price and are still holding on the inventory which would result in higher interest cost.
Excessive supply in Real Estate was due to the aggressive funding in the last 5 years, majorly from HFCs & NBFCs and had led to a huge expansion in the real estate sector. But, a drastic dip in sales in the last 2 years have resulted in a crisis where a significant number of developers might sooner or later would head towards the default in servicing their loans which would eventually result in higher NPAs. If the situation continues to be the same especially regarding liquidity crunch, developers might face the worst phase in the coming months, in terms of funding & cash-flow.
A vicious circle of liquidity crunch might soon follow if no conscious efforts are being made to revive the sector in terms of liquidity & investment opportunity. This liquidity crunch would force many developers to exit the sector sooner or later which in the long run would affect the supply side.
Current approach of any developer should be to focus on smaller or medium size project in the heart of the city or its surroundings rather than extreme out-skirts of the city. Focus should be on catering to the requirement of End-Users as it is now a customer-driven market rather than supply driven market & hence, the developers should address their requirements (Budget, Typology, facilities, etc.). Most importantly, developers shouldn’t depend on the sales inflow & should have adequate funds with them to complete the project and thereby avoid higher interest costs. Gone are those days when developers would earn exponential profit and can afford to borrow funds at higher rates. Currently, the sector is in a consolidation phase and surviving this tough time is very crucial.
Developers who have a clear & structured business philosophy will surely sustain and grow as the real estate sector will eventually overcome this turbulent period and achieve growth. In India, Real Estate sector has lots of opportunity apart from traditional housing / commercial / township projects which is yet to be explored.
About the Author:
As the CEO of Gadgil Developers, Vikram Jain carries an extensive experience over eleven years and is a seasoned veteran in the real estate industry. With his wealth of experience and exemplary vision, he has helped build the group’s reputation as one of the best real estate brands in Pune. He has been at the forefront in identifying and strategizing new business not only in Indian Markets but has also scoured various avenues across USA, UK & GCC markets through path-breaking strategies, successful business models and innovation.
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