The unchecked property market of India is now facing limitations due to the dwindling of bank lending, which is the major source for the buyers and builders to borrow. Such a situation has occurred with the rising of non-performing loans at the leading financial institutions and banks.
The sluggish economy and the ongoing liquidity crisis will restrict the property prices from increasing. A Reuter’s Poll predicts the decline in Delhi property prices.
As calculated by Reuters on the basis of RBI’s All-India House Price Index, the previous 2 years have witnessed a slow gain in house prices. Gains on the price of homes have increased at double-digit rates and have almost tripled over the last 10 years.
The survey conducted by Reuters during February 13 and March 1 this year, covers about 20 experts from the property market forecasting only 1.3% increase in the prices that is even lesser than 2% in the poll of November 2018, and inflation of consumer price.
Several incentives have been introduced by the BJP government for uplifting the property market but none of them is expected to influence the sector in the immediate future as believed by a greater section of the property analysts who polled.
According to the Chairman of a renowned Real Estate consultant, the housing prices won’t change much due to the slower sales, current liquidity crunch and uncertainty surrounding the upcoming general elections. The forecast mentions a gain of 2.5% in housing prices the following year. The bad debts in financial institutions and banks have been cited as the major risks for the country’s Real Estate sector in 2019.
The government has declared slashing of GST rates on the under-construction residential projects towards the end of the previous month. This move aims at pushing the economy through accelerating the consumption of home buyers. Still, some property markets tend to struggle and the proposed rate cut is not hoped to do any good with elections approaching.
Past incidences are evident of funds being extracted by the political parties for financing their campaigns, which they had earlier parked into the Real Estate industry. With the serious liquidity issues being faced by the market at present, what is the certainty of such events not getting repeated? Thus, the current time span prior to the general elections can be quite tough for the property market as a whole.
The property markets across India are mostly overpriced greatly motivated by the sentiments of Indians regarding realty investments. If observed, the property markets of Delhi and Mumbai entirely defy reasoning. On the other hand, the average prices of homes in Chennai and Bengaluru are fair.
Delhi with 40 million residents and above, including NCR, is about to experience a decline in home prices in 2019 by 2% that will become stagnant in 2020 as per the aforementioned forecast.
As predicted by the majority of the Real Estate experts, the country’s financial hub, Mumbai might not experience any increase in the property prices in 2019 while the prices are likely to rise by 2.3 % to 3.3% in Chennai and Bengaluru during this and the coming year.
Few respondents of the survey gave some hope estimating a price hike of 5% or above due to an anticipated boost in housing demand. The reasons cited by them for the rise in demand are the budget incentives, GST rate cut and declining interest rates.
The government reforms along with the impact of RERA, in the long run, are expected to strengthen the recovery of the residential Real Estate. Affordable housing segment will reign the possibilities of housing demand to increase with buyers benefiting from low priced homes coupled with the slashed GST rates.
The dearth of funds from the NBFCs (Non-banking Financial Companies), has also affected both the builders and buyers. The RBI has been requested to fill the system with more liquidity a Real Estate by NAREDCO, which has kept its demands in front of the governor of the Reserve Bank of India.
As pointed out by developers, many projects in the past have been funded through the sale of flats during their pre-launches that helped in securing loans from banks for the projects concerned. But pre-launches have ceased post GST while the number of sold flats is a criterion of the developers to receive a loan from the banks. Therefore, NBFCs were the only resort to borrowing money though at costly rates but that is also getting scarce.
As affirmed by the Real Estate industry, the expenses of borrowing have increased by 2% to 3%. The lending rate lacks uniformity due to the absence of Real Estate’s industry status. The fund costs on an average each year may vary between 18% and 24%.
Around 60% of the loans taken by builders attribute to the NBFCs along with HFCs (Housing Finance Companies) but these organizations have become cautious in lending the developers since the liquidity crisis and many of them have totally stopped providing loans to builders. Investments from Private Equity are flowing in but mainly in the commercial realty segment. The developers are finding it really hard to raise funds in residential projects.
The completion of projects and payment of servicing debt have entangled the developers. Research shows that the debt to be paid by the developers amounts to nearly 1.29 lakh crore rupees but what they are able to earn is just half the amount. Developers are pleading for extending the time limit to clear off their debts. The following 2 quarters of 2019 will remain affected if there is no improvement in liquidity as chances are very less with the general elections around the corner.
The small developers in the industry are striving for the completion of the unfinished projects in order to avoid losses. The sale of land parcels and office assets that yield rent is the solution adopted by the big developers to repay the money. Some of them are even collaborating with Private Equity players.
The cost of construction is another factor detrimental to the escalation of the Indian property market. Project costs have increased substantially in the previous few quarters with the prices of construction inputs such as tiles, cement, steel, rising.
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