India’s real estate market is slowing, thanks to obstructions in acquiring land, cumbersome government regulations, high prices and costlier home loans.
A number of big residential projects have been stalled in recent times because of either funds shortage, agitation over land acquisition or problems in getting clearances from the government.
According to a study by PropEquity, a real estate data and analyses provider, more than 30 percent of projects in the thriving metropolises of Mumbai and Bengaluru and about 65 percent in and around New Delhi will fail to meet deadlines.
The quantum of stalled projects rose to Rs 4.17 trillion ($81 billion) in September 2011 from Rs 2.94 trillion in September 2010, says ICRA Limited, an investment information and credit rating agency.
Industry insiders say it is becoming increasingly challenging to attract investors.
Some foreign investors have already gone away and more would follow suit soon.
“Foreign investors expect quick and high returns, not less than 20-25 percent,” says an analyst who declines to be named. “But that is not happening because property developers are not able to complete their projects in time. Bookings for new houses have dropped in recent months.”
The capital-starved industry is struggling hard with rising land, labor and construction costs.
Anuj Nangpal, director, investment advisory, at DTZ India, a property consultancy firm, says the real estate industry is depressed due to high interest rates as well. The trend will not change any time soon, he warns.
“Increasing commodity prices, inflation and interest rates have pushed the real estate sector into a liquidity crunch,” Ajit Krishnan, partner and real estate and infrastructure leader of Ernst and Young, told e-paper Livemint.com. “Foreign direct investment (FDI) was a way to bridge the gap. Most projects funded by FDI are in the larger cities.”
FDI in real estate has shown a marked decline in 2011.
Housing and real estate attracted 8.9, 10.3 and 11 percent of total FDI in 2008, 2009 and 2010 respectively. But in 2011, it dropped to 6 percent, according to a study by Ernst and Young and the Federation of Indian Chambers of Commerce and Industry.
The study, A new realty: Dissolving borders through cross-border integrations, says as India’s central bank, the Reserve Bank of India, continues efforts to curb inflation, it would not only increase the equated monthly installment but also raise the cost of construction, ultimately impacting the selling price of apartments.
However, it adds that urbanization will drive the demand for real estate, and housing in particular. By 2015, more than 410 million people would be living in cities, which is more than the population of the United States.
“There would be heightened demand in the middle-income segment residential space,” it says.
Real estate and housing contributes 5-6 percent of the country’s GDP and is the second-largest employment-generating sector after agriculture. Not only does it generate a high level of direct employment, but also fuels growth in other allied industries such as cement, steel, paint, brick and building materials.
The sector flourished and matured after the government allowed 100 percent FDI in 2005, opening gates to foreign investment. It reportedly led to some Chinese companies coming between 2005 and 2007 to enquire about government guidelines and procedures.
Though they seemed to lose interest, the industry saw a lot of capital coming in, mainly from Mauritius, from 2005 to 2008 until the global financial crisis in 2008.
Vinayak Chatterjee, chairman of Feedback Infrastructure Services Private Limited, a professional and technical services company engaged in the infrastructure sector, cites government regulations and bureaucratic hurdles as the reasons why the sector is not able to perform to its potential.
“Approval is a big headache,” Chatterjee says. “For a single clearance, one needs to get approval from seven to eight ministries. If one approval is held back, it has a chain effect, the entire process gets stalled.”
However, Chatterjee is happy that the federal budget this month allowed external commercial borrowing (ECB) in low-cost affordable housing.
“This will open many gates, especially for those engaged in the affordable housing segment. They can now borrow at a lower interest,” he says.
Though ECB is a much-needed shot in the arm for the ailing sector, it needs a lot more to ensure that capital flows and business grow.
“The sector should be given an industry status,” Sunteck Realty Chairman and Managing Director Kamal Khetan told the local media. “It will enable developers to have access to debt lending at competitive rates from banks and financial institutions.”
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