Why a recovery from real estate slowdown is still a long way off

A large part of the sluggishness in the real estate sector in 2017-18 can be attributed to the Real Estate (Regulation and Development) Act (RERA). Photo: Pradeep Gaur/Mint

Mumbai: The real estate sector is still reeling under the impact of the triple whammy of demonetization, the roll-out of goods and services tax, or GST, and the introduction of new real estate regulations, the latest data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) suggests. New real estate projects launched in the June quarter were the lowest since 2005, the data shows. New project launches dropped by 29% from the previous quarter and by 60% from the year-ago period.

In terms of project costs, the value of new projects launched in financial year 2017-18 was 23% lower than that of 2016-17 and 5% below 2015-16.

A large part of the sluggishness in the real estate sector in 2017-18 can be attributed to the Real Estate (Regulation and Development) Act (RERA).

“Developers across the country chose to put on-hold new project launches in order to gauge the impact of RERA on their ongoing and tentative projects and the regulatory and compliance measures needed to be taken in order to be compliant. Thus, first half of FY18 remained tepid for the real estate industry,” wrote Madan Sabnavis, chief economist at CARE Ratings, in a report dated 12 June.

There are a number of reasons why the outlook for the sector does not appear very bright. There is very little pick-up in borrowing from banks for real estate, bank lending data shows. In fact, credit growth to commercial real estate has consistently fallen since 2014 and remains at subdued levels.

Not surprisingly, property prices have stagnated or fallen in many cities, especially where investment demand was a big driver of the real estate market. Suburban markets in Delhi-NCR region and Mumbai have been hit the hardest, data from the National Housing Bank (NHB) Residex shows.

Despite a correction in prices, a report dated 25 July by property consultant Knight Frank India suggests that home sales have failed to take off so far in 2018.

Given the increasing likelihood of policy rate hikes in the months to come, interest rates are likely to harden, which will raise borrowing costs and likely dampen real estate investments.

A sustained recovery in the sector seems a long way off. This also means bleak job prospects for the masses, given that the construction sector has been the biggest driver of non-farm job growth in recent years.

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