#EcoSlowdown: why is the real estate sector in such gloom?

QUICK PILL

The claim

• Govt data suggests that India is the world\'s fastest growing economy with 7-7.5% growth

• Despite this, the real estate sector is stagnating

The observations

• A report by property consultant Knight Frank India says 7 lakh units remain unsold across 8 cities

• In the NCR housing sales fell by 50% to 14,250 units

More in the story

• What explains this gloom in the real estate sector?

• What\'s the way out?

The number of new homes people buy often reflects the state of the economy.

Since the government data suggests that India is the world's fastest growing economy with a projected growth rate of 7-7.5%, it should reflect in the real estate sector.

More people should be buying homes and there should be more launches by real estate developers in the country.

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But then why is the Indian real estate sector showing signs of economic gloom?

A report by property consultant, Knight Frank India had calculated that over 7 lakh housing units remain unsold in 8 major cities of India in the first half of the calender year 2015.

The 8 major real estate markets include Delhi-NCR, Mumbai, Bangalore, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad.

According to the report, the unsold inventory would take over 3 years to be sold.

In the National Capital Region (NCR) which includes Delhi, Gurgaon, Noida, Greater Noida and Faridabad, housing sales fell by 50% to 14,250 units.

The NCR alone had an inventory of 1.9 lakh unsold units.

Slower sales impacted the confidence of real estate developers who launched just 95,400 units in the first half of 2015 compared to 1.6 lakh units in the same period in 2014. This is a fall of 40%.

The National Capital Region alone has an inventory of 1.9 lakh unsold units

The numbers for the second half of 2015 are not out but Knight Frank's chief economist and director, research Samantak Das says that it was not great either. Knight Frank will release its full year report in the third week of January 2016.

"We can say that 2015 was the rock bottom year for the real estate residential market. It all started in 2014 when sales started to fall and the final numbers will make 2015 worst than 2014. Clearly, there is not enough confidence among buyers to buy residential properties. We expect that 2015 sales would be 5-6% less than 2014," said Das.

Also read - Indian GDP growth numbers are inconsistent with other indicators

The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the Indian economy.

The housing sector alone contributes 5-6% to the country's Gross Domestic Product (GDP).

Why are there no home buyers in the world's fastest growing economy?

Sunil Bansal a marketing executive in a real estate company says, "We have been getting a lot of queries from people about houses, almost as much as last year. But these queries never convert into sales. Somehow they do not have enough purchasing power to buy a new property".

Bansal explains the concept of DINK or 'double income no kid' families that fuelled the real estate boom in the past. "There are not enough people with high disposable income and zero liability in the market. Most of the people who purchased a home 5 years ago have exhausted their capacity to invest. And the new generation does not earn enough to be able to purchase high-end houses."

According to a recent report, 2015 was the rock bottom year for the real estate residential market

Das of Knight Frank adds another aspect to the negative growth in the residential market.

"People have lost faith in real estate developers. Most projects are facing delays of about 2 years or more. Consumers are very cautious about investing their money. They are investing in only those projects that are ready to move in or are 90% complete".

Impact on other sectors

Negative growth in real estate sector impacts other industries as well.

Net sales of the cement industry grew by a a marginal 1.6% in the June to September quarter this year. This was the second consecutive quarter when the industry posted a marginal growth in sales.

According to the Centre for Monitoring Indian Economy (CMIE) data, "of the 32 companies that declared their results for the June 2015 quarter, 20 reported a decline in sales".

People who bought a home 5 years ago have exhausted their capacity to invest

In its report dated 10 September, CMIE said "The weakness in the industry's sales growth was due to a muted demand for cement from construction and infrastructure sectors. The same trend can also be seen in data for cement production released by the Central Statistical Organization. According to this data, cement output decreased by 0.4 % to 68.9 million tonnes during the June 2015 quarter".

Will 2016 be any better?

Experts say that growth of the sector will depend on 3 factors:

• Reduction in prices

• Decline in interest rates

• Real growth in the economy

Anshuman Magazine, chairman and managing director of real estate management and consulting firm CB Richard Ellis South Asia says "Definitely, the price of the properties and interest rates will have to come down. But there is no short cut to economic recovery. A booming economy gives confidence to people to make new purchases".

Clearly the slowdown in the real estate sector suggests that world's fastest growing economy is not generating confidence among its people to go for home purchases.

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