Slowdown In The Real Estate Sector

Slowdown In The Real Estate Sector

Updated on 19 November, 2019

GS3 Economy
slowdown-in-the-real-estate-sector

While the Indian real estate market is witnessing a slump, a report said that wealthy Indians are looking to buy property abroad. The overall sentiment for the realty sector at 47 points for the first quarter of the financial year 2019 and outlook for upcoming months at 52 - a sharp drop in confidence compared to preceding quarters. Various Reasons for the slowdown in the real estate sector.

Reason for the Crisis in the Real estate sector

Global slowdown

  • The roots of the crisis can be traced to the real estate bubble in the years leading up to the global financial crash of 2008. 
  • The crash led to a global credit freeze and real estate projects across the world were gutted as lenders did their best to avoid this sector.
  • India was no exception to this trend though credit flow to the sector did not dry up as dramatically as in the West.

Problems in the financial sector

  • As bank credit to the sector slowed and bank deposits soared post demonetization,
  • Banks outsourced lending to non-banking financial companies (NBFCs), which in turn stepped in to fund real estate developers
  • However, the NBFC crisis last year squeezed that channel of finance as well.

Bureaucratic red-tapism

  • Problems in Land acquisition.
  • Environmental hurdles.
  • Lack of proper framework.
  • Nepotism and bribery have added to the problems of the developers.

Greener pasture in the foreign Real estate market

  • Effective discount due to Brexit and dipping currency in international markets like London.
  • Higher ROI:  As the domestic economy hits a slow down, and higher yield in foreign shores such as London offering higher returns and relatively shorter holding period.
  • Emigration:Indians are increasingly choosing to settle abroad for study and work purposes.

Reduced consumption 

  • Falling saving rate: According to the Economic Survey of FY19, gross savings have fallen about 60 basis points as a share of GDP in two years to 30.5 per cent in 2017-18.
  • Falling consumption rate
  • New gig economy has not incentivised buying real estate  but has favoured renting economy.
  • Availability of alternate investment options like mutual fund, equity and bank deposits.

Factors favouring the growth of real estate

  • Emergence of nuclear families.
  • Rapid urbanisation
  • Rising household income.
  • Legislative measures: has enhanced the confidence of both domestic and international investors.
  • Real Estate (Regulation and Development) Act, 2016.
  •  Benami Properties Transactions (Prohibition) Amendment Act, 2016
  •  Insolvency and Bankruptcy Code, 2016
  •  Goods and Services Tax Act, 2016 

Way- forward

  • Low-Interest Rate Loans:  For example, in countries like Japan and Switzerland, the interest on home loan is as low as 2.5 % to 3%.  An initiative from the central government to reduce the home loan interest rate will provide the much-needed relief to the residential real estate sector.
  • Reclassification of risk: Initiatives to re-categorise the sector from 'high risk' probably 'medium risk' by the financial institutions.
  • Incentives to the bankThe developers who have reasonably good debt-servicing track record can be easily identified and the interests of the lending institution can be protected by tweaking the provisions of the RERA.

    The real estate sector is expected to encounter and pass the strict litmus tests posed by these legislations and initiatives and gain considerably from them in the long term. The pet initiatives of the Central Government such as Smart City Mission, Housing For All By 2022 (PMAY), and Make In India will further encourage the sector.

 


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