Real Estate Stagnation in India

Huge demand slump coupled with Coronavirus lockdown has badly affected the Real Estate sector. It has witnessed a 29% decline in sales in the Jan-Mar quarter of 2020 across seven major cities.
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Crux of the Matter

COVID-19 has affected every sector directly or indirectly and the stagnant economy is doing no better when the state is struggling with a health crisis and people are under constant threat from coronavirus.

Along with the transportation and hospitality sectors, the Real Estate sector has also faced a huge slump in demand, resulting in a drop in prices. Customers are deferring buying new properties during the pandemic which has added numbers in the worth of unsold inventory totaling to Rs.370,000 crores. The number of units in unsold inventory increased from 4,42,228 units in Q4 2019 to 4,55,351 units in Q1 2020. The period to liquidate money from frozen assets increased from 3.2 years to 3.3 years.

However, the residential real estate market appears to be at an advantageous position today as compared to the global financial crisis, led by a series of structural reforms by the government in the past five-to-six years.

Ramesh Nair, CEO & Country Head, JLL India

It is anticipated that the price reduction of properties due to relaxation in loan rates will result in the upliftment of the Real Estate sector post COVID-19 crisis. But the Real Estate sector’s recovery will largely depend on the spread, intensity, and duration of Coronavirus. Government intervention with stimulus measures and Monetary Policy adjustment by RBI may save the real estate sector from draining into a financial crisis and bankruptcy. Since mostly all the sectors are affected, it will take some time to restore the equilibrium in the real estate sector and its sales.

  • Antilia, the residence of Indian Billionaire Mukesh Ambani is the world’s 2nd most expensive residential property only behind Buckingham Palace.
  • SquarePlums is a Bangalore based startup that focuses on affordable houses by converting shipping containers into residential spaces.
  • With birth rate declining and 20% of its population being older than 70, Japan is also facing a real estate stagnation problem. The number of houses in Japan has exceeded its population, meaning most of the houses in Japan are “Ghost Homes” or as they say in Japanese ‘Akiya’.

ICICI Puts a Lid on Project Finance Dept Amid Slacked Infra Growth

Soon after the Govt. announced the plan to revive the Real Estate sector with a fund of Rs 25k crores, ICICI, the largest lender to the infra sector till 2013, has decided to reorganize by putting the lid on its Project Finance Dept. The slack market and it’s shifting focus on retail banking pushed ICICI for this move.

Crux of the Matter
  • ICICI, encompassed by the sluggish growth, decided to transfer employees in the Project Finance Dept. to other departments, reorganizing the firm’s focus on retail banking and unsecured loans.
  • The slowdown can be interpreted from the downturn of Rs. 52,135 crore of outstanding credit by scheduled commercial banks to the infrastructure sector.
  • Asset-Liability mismatch – acquiring short term funds for long-term projects, NPA’s or bad loans, and time delay in getting statutory permits are the issues haunting this sector.
  • ICICI had reported a 28% drop in its net profit for the quarter ended September, while its gross NPA’s stood at 6.37%.

Asset-Liability Mismatch – Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution’s debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks’ short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur. Likewise, Bear Stearns, a New York-based Investment firm, failed in 2007–08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities. Read More

FM Announces Cash Injection in Real Estate to Rev Up Economy

In a move to shift gears of the slowing economy, FM Nirmala Sitharaman announced a corpus of Rs 25000 crores, of which 15000 crores will be funded by LIC and SBI, for the Real Estate segment. This to rev up the halted projects, which also include projects that have been declared NPA and that are under the scanner of bankruptcy proceedings. FM also aims to revitalize employment along with the cement, iron and steel industries through this move.

Crux of the Matter
  • In the Real Estate segment, as a part of the government’s effort to revive the economy, as many as 1600 projects, containing 458,000 household units, will get aid under this announcement.
  • With the help of the category II Alternative Investment Fund, the pooled amount would assist the project homes with a value of less than Rs. 2 crores in the Mumbai, Rs. 1.5 crores in Delhi-NCR, Kolkata, Pune, Bengaluru, and Chennai and less than Rs. 1 crore across other parts of India.
  • The Real Estate Segment that is struggling since demonetization and IL&FS crackdown is expected to show positive reaction. This will als hrlp in reviving domestic demand.
  • The home-buyers who have halted their EMI’s on account of paused projects will now be asked to continue soon after the RBI nod.

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the 2007–2009 recession in the United States. Read More