India’s real estate market remains in the grip of a three-year-old downturn as potential homebuyers shun purchases, leaving developers struggling with unsold inventory and stalled projects.
Debt-laden developers in the country’s key property markets—Mumbai, Bengaluru, Chennai, National Capital Region (NCR centred on Delhi) Pune & Hyderabad have been struggling with slow sales, high unsold inventory, delayed construction and stalled projects.
In the past two years, the developer’s sales have dwindled as potential homebuyers stayed away and waited for the economy to overcome its worst downturn in a decade.
The real estate market has been among the sectors worst hit by the economic downturn which, coupled with high interest rates in the face of persistent inflation and delays in securing mandatory government approvals, has kept wary homebuyers away for the last couple of years.
There are no signs, yet, of things getting better.
For instance, last year, the Mumbai metropolitan region recorded its worst home sales and project launches since the global financial crisis of 2008.
The country’s largest property market, NCR, saw a pile-up of inventory in the last year that would take close to 78 months to clear at the current pace of sales.
Following the collapse of Lehman Brothers Holdings Inc. in September 2008 and the ensuing global financial crisis that froze credit markets, India’s property market went into a tailspin. Yet, by late 2009, the sector started getting back on its feet. This time around, the slump has endured a lot longer. More importantly, if an acute liquidity crunch was the big worry in the aftermath of the 2008 crisis, now it’s buyer sentiment—many potential homeowners simply don’t want to get into the market.
The big difference between the two slowdown cycles of then and now is that today, it is a buyers’ sentiment issue. Developers have more access to different sources of capital now but customers just don’t want to buy.
Even deep discounts, easy payment plans and freebies haven’t been able to turn around consumer sentiment. Debt levels peaked at many realty firms, forcing them to sell non-core assets, exit businesses and strike joint venture deals with other developers to bring down capital expenditure on projects.
Repayment of debt hasn’t been easy as cash flows from project sales have remained under strain and developers have been forced to borrow more, in some case, to repay earlier loans. The top 10 real estate firms by market capitalization had a total net debt of Rs.45,723 crore as on 31 March last.
To be sure, there’s no dearth of demand for housing in a country of 1.25 billion people. The shortage of urban houses stood at 18.8 million units in 2012, and it is expected to grow at a compounded annual growth rate of 6.6% for 10 years till 2022, when it will reach 34.1 million.
Rising inventory levels in a country where housing shortage is such a critical issue indicates that the supply that is available is unaffordable to many.
Customer behaviour has also changed in the last few years,with buyers having lost confidence in a developer’s ability to construct and deliver a project on time.
The loss of faith isn’t an overnight phenomenon. It has taken place over a period of time. Developers in the past have launched massive townships and projects by the dozen, and often times used customer advances to buy land or launch other projects, delaying construction by months and even years.
A developer’s biggest challenge is to regain that lost faith and win the confidence of homebuyers.
