Ramesh Gupta lived in a slum in Mumbai. The plot was sold to a builder and he and hundreds of others were worried that they would be evicted. Then his despondency turned to jubilation when he learned that he would soon get a proper house under the SRA scheme. He and others were shifted to another rented location – the builder will pay the rent. Well, the builder did pay the rent for a year or two. The project is still “under construction” and the builder stopped paying the rent for over 6 months now. Ramesh earns around Rs.16,000 a month and of this, he now has to pay Rs.8000 as rent. His life has become a living hell, survival is on a day-to-day basis. His children’s future is in jeopardy and the family lives a life of complete insecurity.
Then there are the upper middle class. Their project in Matunga went in for redevelopment and the builder promised them a delivery by 2018. The project is still under construction; actually work has come almost to a standstill and the builder has stopped paying their Rs.75,000 to Rs.1 lakh rent per month.
No one seems to be buying property today as such horror stories have become commonplace. And under construction projects are shunned like plague. Only projects which have an OC and ready to move in are doing relatively better. Over 12.76 lakh houses are lying unsold in India's top 30 cities, a rise of 8% (YoY). Real estate consultancy Liases Foras put out a report stating that inventory overhang is as high as 80 months in Kochi, 59 months in Jaipur, 55 months in Lucknow and 72 months in Chennai – this means it will take between five and seven years for developers in these cities to get rid of the present housing stock. Where 8-11 months is the norm, on a pan-India basis, it will take 42 months to clear this inventory.
The IL&FS crisis and then the dominos effect on NBFCs is to a large extent responsible for this state. But this crisis has emerged now so the body blow was first demonetization, then RERA and then GST. All three came in when demand as such was pretty low.
If one looks at things logically, we can also blame it on the boom period of 2011 and 2012 where everyone was a realtor and everyone was looking at investing in realty – a project even on moon was selling! At that time, the demand was huge but the supply built up went overboard. Between 2007 and 2012, builders kept on purchasing more land, often backed by private equity at exorbitant prices. This in turn led to land prices getting inflated beyond their value, making the ultimate product very costly while people’s income did not rise in tandem. So today there are scores of projects where builders simply cannot go down beyond a certain price even if demand is low. Thus prices remain stagnant and inventory piles up.
Even in Tier I and II cities, the pricing was way beyond reach. In parts like Goa and Kochi, the per sq.ft price was more than that in Pune and Kochi. Even in smaller cities, average price per unit even today is nothing less than Rs.50-60 lakh in good locations.
In the midst of all this, while demand tapered, cost of construction rose almost three times, rendering many projects unviable.
There is no quick fix to this morass into which the realty sector is in. Companies need to first clear the existing inventory before announcing new ones – when there is no demand for existing, why create more?
It will take another 3-4 years for this inventory to be cleared but to sell, builders need to come up with projects where prices realistic and size is just right. The demand for full floors, 4-5 BHKs are all but gone. If the project is good, priced well, there will be demand.
Thus in realty market today, the only real winner is the rental. And that in itself is an indication of how deep this crisis is.
The sector has major expectations from the Budget on Friday and hopes it will be given special consideration and sops. Realty is a huge employment generator and maybe, this could well be the biggest gainer. But Budget or sops, the underlying question is – will people buy? Mere rate cuts and sops will not attract; there is currently a major deficit of trust; people simply do not trust the builder and his projects. And unless that is restored, demand will remain weak.