More than a year ago, future of the real estate market in India was believed to be promising following the implementation of Real Estate (Regulation and Development) Act, 2016 (RERA). The best part of this Act is that it envisages safety to the buyers and its implementation immediately led to fall in property prices in many cities. This way, the Act turned real estate market into buyers’ market. The falling prices lured the local (J&K) investors to lay hand on the ‘opportunity’ and they mostly started investing in under-construction properties.
Today we have agood chunk of investors from J&K region who have parked their hard earnedmoney, and the loan taken bank loans to invest in real estate market,especially in housing projects. The investment has been done mostly outside theJ&K region. Most of these local investors, mostly Kashmiris, have normallytwin objectives to meet. First, they want to secure an alternative safe livingplace at a time when living a normal life has become a challenge in the region.We have already witnessed such kind of situation in 2010 and 2016 when life andproperty witnessed destruction in the valley. Second, they simultaneously wantto secure high returns on investment as some time back investment in realestate was believed to be a golden investment.
Notably, theoverall real estate market is going through a bearish phase as it was impactedby two major ‘black swan’ events. In May 2016, the Real Estate (Regulation andDevelopment) Act or RERA was enacted. And six months later, the governmentdemonetized high-value currencies.
Interestingly,the growing appetite of people here to have housing property, more preciselyresidential flats, outside J&K has equally attracted local property dealersand they too started expanding their real estate ventures outside the geographyof J&K, mostly in Delhi, Punjab, Uttar Pradesh and Haryana. Thiscombination of local property dealers/builders and the local investors hasbecome a convenient means of flight of capital from J&K to other parts ofthe country.
Initially, thislooked prosperous for both. But over a period of time, the investment has lostsheen and many investors found their money locked in the troubled waters of thereal estate sector in the country. Those who have invested in under-constructionproperties are the worst sufferers.
Now, theinvestment has turned a matter of worry for them as the propertybuilders/dealers have failed to give possession of the property to them in thegiven time period. The builder has either failed to complete the constructionor has got entangled into some legal dispute over the propertyunder-construction. In both cases, it’s the investor who is suffering as hismoney is at stake.
Through thiscolumn, I have been warning in the past also that investment in theunder-construction property may face stressful time. Getting possession of theproperty would be a major worry and investors will be left at the mercy of thebuilders/property dealers. I have been receiving various nature of queriesparticularly from those who had paid local property dealers in Delhi, Noida,Haryana or in Punjab for purchasing flats, particularly residential flats,under construction. They are yet to get possession of the flats as the buildershave been delaying completion of the flats for want of funds.
This is actuallya unique situation all over the country. Buyers have paid almost 70 to 90% ofthe cost of the property under construction, but are struggling to getpossession. The builders have left the construction midway as they have nofunds in hand to complete the construction.
There areincidences where some home buyers who had paid substantial amount forunder-construction flats have formed a group among themselves and startedcompletion of the under construction flats as the builders have run short offunds to complete such projects.
Basically thereal estate market is in a slump. Currently, the returns oninvestments in housing real estate have dropped from two or even three-digitvalues to low single-digit or, in many locations, even negative returns overthe last few years. The massive burden of heavily delayed and terminally stuckhousing projects has hit the confidence of investors/ home buyers. Currently,under-construction properties are depreciating assets and prices are yet tosink to their ‘lowest best’. Further, price correction is almost inevitable.
In the given marketcondition, Reserve Bank of India (RBI) has laid down stricter norms andguidelines for banks dispensing housing loans. In recent times, the loan-to-value(LTV) ratio – the amount of loan that can be given for a property of a certainmarket value – is now restricted to 70%, whereas it previously ranged between80% and even 90% of the property value.
Precisely, buyers availinghome loans now have to pay 30% of the property cost upfront. When too manyaspiring buyers either don’t have that kind of money on hand or prefer to hoardit because of uncertain economic headwinds.
GSThas replaced the multiple levels of taxation previously applicable on a home purchase,but the increased simplicity has not resulted in better cost-efficiency.Under-construction homes attract 5% GST for premium (mid-range) properties.However, this does not include ITC benefits, which would have reduced theoverall cost of the unit. Over and above, 5-7% stamp duty and registrationcharges apply to both under-construction and ready-to-move homes but thecumulative extra cost on under-construction homes effectively negates most ofthe price advantage they used to offer.
Ofcourse, owning a home continues to be desirable for most of us. Here it’s thesense of financial security rather than for return on investment or obtaining astatus symbol which drives this desire.
To conclude, let’s bestraight way own the fact that real estate sector is in a vicious cycle of theoverall slowdown. Buyers continue to remain averse to investing inunder-construction homes. Projects get delayed because of lack of funding, andslow or no construction progress has further dampens buyer sentiment.
In other words, people are stillshying away from buying a house, especially the one which isunder-construction. Even they are not ready to invest in unsold inventory ofthe builders. New launches of housing units has also witnessed a 24% fall inthird quarter of the current financial year. Given the uncertainty hoveringover the economy, better is to defer house purchase decisions.
(The views are of theauthor & not the institution he works for)