Regulatory impasse, liquidity crisis and tepid sales makethe going tough
When a year comes to an end, at least some would recall it fondly, smiling over what it brought them. But 2019, with less than two weeks to go, could not end soon enough for most stakeholders in the housing market.
The green shoots of recovery that seemed visible by the end of 2018 — after the onslaught of demonetisation, GST and other economic ‘shocks’ — died somewhat quickly. No amount of rate cuts could bring cheer to the market or jump-start demand and activity. To rub salt into the wound, the liquidity crisis hit cash-strapped developers very hard, pushing many from the proverbial frying pan into the fire of defaults.
In 2018, home buyers had a good deal to cheer, thanks to the empowerments they got through regulations. But 2019 dampened the enthusiasm as the ground reality of implementation weighed heavily. Sample this: in UP, there are dues worth Rs. 1,200 crore from real estate developers and other organisations, based on RERA (Real Estate Regulation and Development Act, 2016) judgments. However, it has not been easy for home buyers to lay their hands on the money, as developers have been under financial stress. Data show that the Uttar Pradesh Real Estate Regulatory Authority (UP RERA) had issued 616 notices to recover dues. Of this, only 107 were addressed as of September while 109 returned without recovery.
There is also the fact that buyers would rather have their homes handed over to them by the builders, than payments with interest. In case the developer is unable to complete the project and an insolvency petition is filed, the court tries to address the issue of delivery. But, so far, the regulations have only helped home-buyers go from a state of haplessness to some hope; their wish to become a home-owners may take time to come true.
Also, in many States, RERA activities continue to be lacklustre. Some, such as Andhra Pradesh, Kerala, Goa and Himachal Pradesh, are yet to establish a Real Estate Appellate Tribunal.
Flight to quality
With uncertainty looming large, one trend among buyers was the flight to quality. This was not unlike what was seen in the stock market, where investors loaded up on blue chips rather than go for mid- and small-cap stocks. Home-buyers found more comfort among established names with strong balance-sheets and perceived ability to complete projects. Data from ANAROCK Property Consultants show that new launches by branded developers accounted for 53 per cent of the total in the first half of 2019, against 40 per cent in the same period in 2016.
Home-buyers also showed a preference for completed homes against under-construction ones. One reason was the higher cost of under-construction home due to the GST rate. Two, most of the housing demand has been from people who want to move in right away, rather than from ‘investors’ who buy properties to earn returns during the construction period.
Three, in many cities, there was ample stock of completed homes to cherry-pick from. These finished projects were priced competitively against new launches, since developers were keen to clear out their inventory (to avoid tax issues). So, a home-buyer had more incentive to take the less risky path.
Space as a service
That property prices have been stagnant is widely known. Data from real estate consulting firm Liases Foras showed that the weighted average price in the top eight cities has been stagnant at around Rs. 6,800 per sq ft for the past two years.
Prices may not rise in a hurry. Data from the RBI based on its quarterly Residential Asset Price Monitoring Survey showed that housing affordability worsened over the past four years as the house price-to-income ratio increased from 56.1 in March 2015 to 61.5 in March 2019. Lower affordability, especially with tepid economic growth and a dull job market, does not bode well for property price increases.
With price appreciation no longer a motivation to buy, there is a need for home-owners to earn returns from rent. However, with rental returns in the residential market dismally low — about 2-5 per cent in many micro markets — there has been a shift in interest to services for generating more income. For example, student housing and co-living drawing attention.
Even in the commercial space, there was a higher offtake in co-working spaces. For instance, data from Colliers International indicated that flexible workspace accounted for 18 per cent of the total gross leasing during January-September 2019, up from 14 per cent in the same period in 2018.
The author is an independent financial consultant