Resicom – Holiday Investment – 04-21 – LB

Indian property crisis in detail

India remains in the midst of a worse real estate slump than the 2008-2009 crisis, according to experts, with little sign of improvement in the near future.

The property market is the worst hit sector in the country’s overall economic downturn. Constant inflation, high interest rates and delays in construction are keeping buyers away, while housing is often simply priced too high for those who need it.

Lack of confidence

‘The big difference between the two slowdown cycles of then and now is that today, it’s a buyers’ sentiment issue,’ said Ashwinder Raj Singh, chief executive of residential services at the Indian branch of Jones Lang LaSalle. ‘Developers have more access to different sources of capital now but customers just don’t want to buy.’

The crash of 2008 was based on poor liquidity, yet by 2009 the Indian property market was already beginning to recover. The current situation has already lasted two years and is largely down to buyers losing confidence in developers’ ability to meet deadlines. At the start of the crisis developers would announce many major projects and then use advance payment from buyers and investors to buy further land or to begin yet more projects, with the result being that construction on the original projects would be delayed by months, years or indefinitely. When buyers and investors grew wise to this, developers were left struggling with huge debts, a number of stalled projects, slow sales and a huge build-up of unsold inventory.

Focus: NCR

In the National Capital Region (NCR) centred on Delhi, the build-up of inventory during the first three months of 2015 would take over six years to clear at current prices, according to real estate rating and research company Liases Foras. Developers in the region have been particularly dependent on investors, who have withdrawn in droves as projects failed to come to completion and prices remained stagnant.

‘NCR has certain systemic issues because the market is built on speculative ground and the basic financial and execution discipline required by a developer is absent,’ said Jasmeet Chhabria of ARGIL Advisors LLP. ‘The only trigger that will get NCR back on its feet is execution and delivery.’

Housing demand

With a population of 1.25 billion and a shortage of urban housing recorded at 18.8 million units in 2012, demand for homes more than matches supply. The problem is that most potential homebuyers simply cannot afford the prices being asked for new properties, according to consultants. In NCR the problem is compounded as, according to Liases Foras, 52% of the housing supply is in areas where there is no adequate infrastructure for people to actually live.

In Mumbai, there is a shortage of two million homes, despite a huge inventory build-up. Prices need to come down by at least 10% to stimulate sales, according to Knight Frank India’s national director Samantak Das.

A way forward

As banks grow increasingly reluctant to extend credit to developers, a drop in prices seems the only option. In June the government launched its Housing for All scheme to provide a minimum of 20 million homes for low-income families. A real estate bill to protect consumer rights is also underway, and it is hoped that these moves will finally show a way out of the current crisis.

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