chances of real estate revival under modi government

Slowdown deepens with NBFC crisis
How to tackle NBFC crisis

With NDA II, under the leadership of Prime Minister Narendra Modi in place, clamour for reforms in real estate sector are getting louder. On the other hand economic slowdown is deepening with NBFC crisis and lowered real estate demand.

In the last tenure, Modi government had implemented several policy measures to regularise and improve housing and real estate industry. The key steps taken by the government were – RERA, Insolvency and Bankruptcy Code, Benami Transaction Prohibition Act, advent of REIT, ease of FDI and National Land Records Modernisation Programme.

Having been absorbed into the system, most of the steps taken under NDA I regime are being rolled out on the ground. As the government managed to deliver, expectations of all stakeholders have only increased this time.

From being reactive to proactive to deal with NBFC crisis

The approach this time will have to be multipronged. The first priority shall be to address the acute housing shortage for urban and rural dwellers. Protecting interest of homebuyers from fraudulent practises shall be second concern (has been achieved through RERA to a large extent). The last one shall be to empower the industry and its players to increase housing stock significantly. Economic slowdown is deepening with NBFC crisis. Policymakers need to tackle NBFC crisis and slowdown.

As per estimates of working group for 12th Five Year Plan (2012-17), shortage of urban housing is about 18.80 million units (1.88 crore units). And housing scenario is worse off in rural India. Estimated shortage in rural parts is pegged at 43.67 million (4.36 crore units) in the same plan.

Under PMAY Urban programme 8 lakh houses stand completed while another 27 lakh are under various stages of construction. NDA I sanctioned a total of 80.4 lakh houses in urban areas.

While government is busy plugging the gap, our data shows that 10 lakh units are lying unsold in metro cities (Mumbai Metropolitan Region, National Capital Region, Bengaluru, Pune, Kolkata, Hyderabad, Chennai and Ahmedabad) and additional 5 lakh in other cities. Liases Foras covers housing market demand supply across 60 cities in the country every quarter and conducted analysis for this post.

What is plaguing the market

The biggest challenge is generating traction in the docile real estate sector. Though units are available, families are hesitant to enter the market due to multiple factors; overheated price level being the most obvious one. Our data shows that national average psf rate (on carpet area in apartment units) stands close to Rs 7,000. Our analysis shows ready inventory in the past five years has grown by 2.5 times.

With slowdown engulfing the market, demand for housing is weakening. Bringing down GST on under construction properties from 12% to 5% has been unable to boost demand yet. The ongoing liquidity crisis is only compounding woes of all stakeholders at a time sentiments are getting somber. Home loan seekers who were rejected by banks looked up to NBFCs and HFCs all this while.

Painkillers not working, surgery required

It is clear without monetary policy support, growth in the sector will remain muted in the short-term. However monetary policy experts and policy makers seem to have varied opinions on the revival path for NBFCs. A section feels NBFC players need to face consequences of their reckless doings while the other is supporting the view to create special lending window to bring shadow lending business back on its feet.

From the time ILFS defaulted on its payment obligations, lenders and mutual funds that provided key resources to NBFCs have shut shop on them. Since then RBI has also been taking precautionary measures for better monitoring of NBFCs as well as that of HFCs.

Key steps taken to regulate NBFCs/HFCs include

  • Stressing upon maintaining liquidity coverage ratio
  • Limiting asset quality mismatch under 20% of outflow in coming times
  • Creation of a new position Risk Office to mitigate risk factors
  • Mandatory investment in government bonds
  • Implemented monthly asset review instead of quarterly asset review cycle

Admitting growth slowdown, RBI on June 6 while issuing policy statement lowered its GDP growth target for FY 2019-20 and brought down repo rate to 5.75. But it did not announce special sops to address liquidity crisis as yet.

But pointing towards a silver lining in the gloomy scenario, it is clear that going forward lending institutions would focus on quality of books rather than expanding size of portfolio.

Patience running out

“Coupled with structural reforms, lower GST slab, advent of REIT and INVIT, buyers sentiment would improve going forward. Under NDA II, we all expect market to rationalise in the favour of homebuyers in the end. But how long would it take is the question haunting the stakeholders at present,” said an expert. Economic slowdown can be controlled by extending some support to NBFCs. “But how to ensure private institutions will not be reckless again will have to be charted down by RBI in black and white,” he summed up.

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