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Real estate Industry in India – An overview

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The Indian Real estate industry is one of the largest sectors in the country. The contribution of the real estate sector to India’s gross domestic product (GDP) has been estimated around 6.5 to 7 per cent and the segment is expected to generate millions of jobs. But the sector is seeing a dip in its popularity due to stagnation or drop in prices.

The importance of real estate sector

The real estate sector is the second largest employer after agriculture and experts have stated that the sector is poised to grow around 20 percent over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. For the past decades, the high growth of the sector is matched by the growth of the corporate environment, since there is a demand for office space as well as urban and semi-urban accommodations. The construction industry in India ranks third among the 14 primary sectors in terms of direct, indirect and induced effects in the economy. It is expected that real sector will incur more non-resident Indian (NRI) investments. The results could be in both short term and the long term. Bengaluru seems to be the most favoured property investment destination for NRIs, which is followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.

What is the reason for stagnation ?

There are many reasons for stagnation; one of the primary reasons is lack of planned polices which was coupled with a booming stock market. This resulted in the creation of an illusion of robust home sales for developers in major Indian metros. The flow of large investments, significant price increases, offered an imaginary picture that there could be good returns for investors and buyers alike. Adding more fuel, larger housing units with higher prices were built. But practically, such high priced units were unaffordable for the average buyers. For example, how many people can afford to buy apartments worth Rs2-3 crore in a country where the average household income is around Rs 40,000? With sales going down, prices of the flat began to decline, resulting in the stoppage of cash flow and construction activities have slowed down.

Future prediction in real estate sector

The Indian real estate market is expected to touch USD 180 billion by 2020. Housing sector alone is expected to contribute around 11 per cent to India’s GDP by 2020. In the period FY2008-2020, the market size of this sector is expected to increase around 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, which will be offering the much need infrastructure platform for India. In 2017, new retail space of 6.4 million has finished and supply of around 20 mn sq ft is expected in 2019.

Effects GST and Demonetization

Besides, the stagnation of the construction industry, two main economic reforms demonetization and GST, had a huge impact on the real estate industry. Demonetization was implemented partly due to curb the flow of black money around the country, but it also had an effect on those loan borrowers in the smaller towns and villages. How ? 25- 30% of transactions in this industry are done using unaccounted money. GST on the other hand had an effect on the sector, though not negative impact was felt, it failed to provide appropriate incentives to the real estate sectors.

Government Initiatives and policies

The Government of India along with the state governments have taken several initiatives to encourage the development in the sector. It has initiated the ‘Smart City Project’, where there is a plan to build 100 smart cities, which is a prime opportunity for the real estate sectors. Here are a list other initiatives,

  • Creation of National Urban Housing Fund was approved with an outlay of Rs 60,000 crore (US$ 9.27 billion).
  • 1,427,486 houses have been sanctioned in 2017-18, under the Pradhan Mantri Awas Yojana (PMAY) Urban.
  • Construction of additional 3,21,567 affordable houses was sanctioned under the scheme

Road Ahead

Aiming to solve the problems, the government of India relaxed the norms to allow foreign direct investment in the construction development sector. The government of India also allowed foreign direct investment (FDI) up to 100 %in this sector, which unprecedented decision in the history of real estate industry. The securities exchange board of India (SEBI) has also notified the final regulations that will govern Real Estate Investment Trusts (REITs). This trust will help small investors and developers for easy access of funds and create new investment avenue for institutions and investors. Real Estate Investment Trusts (REITs) will as a war chest fund to real estate just like mutual funds are to equities.

This fund trust will provide hassle free and a convenient way to invest in the real estate market providing diversification benefits with very low liquidity. It means, prices of the shares can be sold at low impact cost. Apart from this, a number of factors are working in the favor of real estate, including the need for 11 crore houses by 2022, 100 Smart Cities projects, focus on affordable housing and Housing for All by 2022, among others. Supporting the move, the government has declared investment to the tune of Rs 97,000 crore on the roads and the focus on rail and airport connectivity has also been increased. This helps to create additional townships and increase real estate activity in the country.

Incentives and other monetary benefits should be offered to individual and private bodies which take up Research and development activities for new building materials and technologies, so that industry can deliver green, low cost, affordable and environment friendly housing and commercial structures. When it comes to decision making, government should decentralize the decision-making process and empower local bodies in urban bodies. The approval process should be streamlined by introducing single-window clearance mechanism backed by technology.

Finally, interest rates should be cut, which can reduce the cost of borrowing for developers. Besides, it can help clear the unsold inventory and support future demand.

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