Is a recovery in real estate long way off?

Real estate still facing a slowdown

The real estate sector is still reeling under the impact of the triple whammy of demonetization, the roll-out of goods and services tax, or GST, and the introduction of new real estate regulations.

As per the Centre for Monitoring Indian Economy (CMIE),  new real estate projects launched in the June quarter were the lowest since 2005. New project launches dropped by 29% from the previous quarter and by 60% from the year-ago period. Of the new projects launched in the June quarter, Farrukhnagar Industrial Park Project worth ₹ 600 crore is the largest among the projects for which data is available.

cmie data
New project launches; Source: Mint & CMIE

Another crucial indicator is the stalling rate in real estate projects, which remains high, despite a marginal decline in the June-ended quarter. The average stalling rate in the first half of 2018 stands at an all-time high of 13%, with over ₹ 2.5 trillion stuck in stalled realty projects.

Why is this important

Real estate launches have slowed down as developers face multiple headwinds:

  • Developers across the country chose to put on-hold new project launches in order to gauge the impact of RERA on their ongoing and tentative projects and the regulatory and compliance measures needed to be taken in order to be compliant.
  • Property prices have stagnated or fallen in many cities, especially the suburban markets in Delhi-NCR region and Mumbai which have been hit the hardest.
  • Despite the correction in prices, home sales have failed to take off so far in FY19.

Besides, there is very little pick-up in borrowing from banks for real estate, bank lending data shows. In fact, credit growth to commercial real estate has consistently fallen since 2014 and remains at subdued levels.

What’s the way forward

With subdued home sales and fall in project launches, the outlook for real estate companies remains bleak. Whats further fueling the fire is the increasing likelihood of policy rate hikes in the months to come, which will raise borrowing costs and likely dampen real estate investments.

Given the above mentioned factors, a sustained recovery in the sector seems a long way off. However, with RERA, what we are witnessing is a gradual shift from unorganized to organized players who have the capabilities to complete projects on time. Hence, though the outlook for the sector remains bleak, a few quality players are bound to perform well owing to their strong brand value.

Oberoi Realty ( CMP: 483 , Mcap: 17,562 crores)

Godrej Properties ( CMP: 711, Mcap: 16,293 crores)

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