In an article posted in 2016 I described the Indian Property markets as a ‘sinking ship’ I think I can now upgrade that assessment to ‘dead horse’. In 2016 most of those commenting from within the industry (ie with vested interests), said that the markets were not really that bad and they were just about to turn the corner, it was merely a short term drop in sentiment and it would soon right itself, then the world would be good again.
This was of course counter to all the evidence showing that the markets had been in a continual downward spiral for a number of years due to structural deficiencies that had yet to be addressed.
It was often quoted that the Real Estate Regulatory Bill and the curbing of the black economy would be two of the defining saviours for the market.
I made the point at that time that I considered these items to be two of the greatest short term risks. The market was being artificially propped up by a sea of black money, and given the already parlous state of the industry it was verging on insanity to believe that Developers could suddenly find the capital reserves needed to meet the requirements of the new Regulation Bill.
So, an already plummeting market was hit with demonetisation and a regulatory framework that was manifestly unworkable. What could go wrong?
Here are a few sobering statistics from the Bangalore market which I believe trend wise to be representative of the national markets (if anything Bangalore is at the ‘good’ end of the spectrum);
In mid-2016 Bangalore had an all-time low Sales Velocity of 1.1%, which was a 7.7% decline over the abysmal end 2015 figures. Bangalore had unsold inventory of 105,569 properties with a value of INR 88,258 crore that would take 3 years to clear. And these terrible sales figures happened at a time when the sft price of new property fell by 4%, and the volume of new stock released into the market plummeted by 49.7% against the previous half year.
Surely it couldn’t get any worse ? Well I’ve just reviewed the latest research numbers and it has, significantly…
Sales velocity is down a further 18% and is now under the 1% threshold and on the back of a 50% fall in new stock launches in the first half of 2016, the second half saw a further decline of 60% - so in total 65% less new stock into the market than the prior year. This is of course bad news for Developers and their large workforces and supply chains (as well as landowners locked in JV’s), but at least it allows some of the old stock to get shifted so existing projects can be finished.
The average Apartment price is down 7.5% and the sft rate is also less than it was last year. The unsold inventory is up to 109,159 units (a rise of 3.4% on the half year) – so the unsold inventory has risen even though we’ve seen an 65% drop in new stock coming into the market. There is now around 40 months stock sitting unsold.
As always the question remains how do you fix this ? the industry is simply too large and too important for Government(s) to continue to let it fail.
The Real Estate sector had a huge wish list for the Finance Minister in the 2016-17 federal budget and a few things recommended by them have seen the light of the day.
Affordable housing was a key point and the sector saw a number of policies aimed at providing help both to the demand side as well as supply side. Coupled with this, there was some focus on infrastructure, digitisation of transactions, and rural housing.
There have also been several changes aimed at allowing FDI into the market to fund projects. All good but as with most things in India that rely on Government, it’s too little and far too late.
The problem for the Government and the economy in general is that over 20% of the Indian banks total exposure is directly in the real estate sector, and with falling prices and shrinking equity the market is looking very susceptible to a subprime style meltdown.
The amazing thing is that if you google “Indian Real Estate Market 2017” you will still see many article headlines saying what a great year it will be. Forbes, The Economic Times and others continue to publish articles that are backed by industry hope/hype and references to the dubious official Indian GDP rate Barrons Article . In the last few years there’s also been plenty of speculation about Chinese money (from companies like Dalian Wanda, China Fortune Land, Fosun etc) being invested on a large scale, but it’s still talk and unlikely to amount to much given the political considerations coupled with the already difficult regulatory environment for foreign investment.
Everyone hopes things will improve, but hope alone is unlikely to be enough. Same old problems of artificially and unsustainably priced land, the wrong style of development at the wrong price points, a lack of liquidity, equity and available finance in the construction side of the industry, and let’s not forget tortuous approval processes and inefficient construction – all in one of the most expensive and difficult markets in the world for development funding.
For all my Indian friends in the Agency sector remember that it’s all about your market share, and a down market is often a great place to make deals. Make sure you get paid at the time of contract by your developer clients and don’t let your debtors list build up. Get cash upfront for any expenses such as marketing.