The slowdown that followed India’s 2016 demonetisation policy is still reverberating through the domestic economy. A series of high-profile scandals in the construction sector have seen development firm executives jailed on charges of cheating customers, but these reflect a wider crisis.
In Mumbai, India’s financial capital, property prices have fallen for the first time in 10 years. Housing has long been a core investment for Indian family savings, but the crisis has led to a widespread loss of trust in the construction market.
Unitech, a residential and commercial real estate developer, has built mini townships, commercial complexes and shopping malls across India. Formerly the country’s second-largest developer, its net income in 2013 was INR 2.1bn ($32.2m), but this has since plummeted, with losses peaking at INR 9bn ($1.4m) in 2016.
The crucial problem is a real estate model that relies on high-risk borrowing and debt, which is only sustainable as long as a constant revenue stream from new buyers can be assured. Unitech took investment from thousands of people but failed to deliver the promised apartments after an economic slowdown saw property sales reduced.
Unitech took investment from thousands of people but failed to deliver the promised apartments after an economic slowdown saw property sales reduced
Consequently, two of its executives were jailed and the Supreme Court is now reviewing compensation schemes. India’s banks are also struggling to manage the sheer volume of loans made to development companies that have not been repaid.
The government has introduced improved regulations for the home-buying industry, hoping to safeguard customers. RERA, India’s Real Estate Act, came into force in 2017 to ensure that all new projects must be registered.
It stipulates that developers must use a minimum of 70 percent of sale proceeds for constructing promised homes, as opposed to the higher risk strategy of channelling the funds into accumulating further undeveloped land.
Developers have also been prohibited from selling apartments before all necessary building approvals have been secured.
Voice of the market
Regulation has been a long time coming for the Indian real estate market, but the 92-section RERA act should help assuage scepticism once its full force is felt.
Certainly, the government could not sit idly by and allow this potentially lucrative sector to wither as a result of legislative difficulties. The domestic real estate market is predicted to be worth $180bn by 2020 and is already the second-largest employer in the country after agriculture.
If more robust regulations can provide a boon to the sector, it won’t only benefit developers and homebuyers, but the wider Indian economy too.