Real estate woes

As if demonetisation was not enough to break the back of the real estate sector, RERA and GST followed. Experts say it will take a minimum of two years for the sector to recover.

Published : Nov 08, 2017 12:30 IST

According to  independent estimates, Delhi sees over six lakh people coming every year in search of jobs, and demonetisation meant this workforce was suddenly left without work. Here, families that have migrated from rural areas, especially in Chhattisgarh, Odisha and Bihar, outside the New Delhi railway station on November 1.

According to independent estimates, Delhi sees over six lakh people coming every year in search of jobs, and demonetisation meant this workforce was suddenly left without work. Here, families that have migrated from rural areas, especially in Chhattisgarh, Odisha and Bihar, outside the New Delhi railway station on November 1.

THE REAL ESTATE sector was hit hard by the sudden withdrawal of high-currency notes in November last year. As building activity came to a halt, thousands lost their jobs.

According to a study done by Project Guru, a market research and business analytics firm, the months immediately after demonetisation saw a 53 per cent drop in the sale of housing units in metropolitan cities. The quantum of job loss was huge: over 35 per cent of the available workforce, which travels to metros for jobs and gets absorbed in the building activity, was hit hard, the report said. According to independent estimates, Delhi sees over six lakh people coming every year in search of jobs, and demonetisation meant this workforce was suddenly left without work.

“Job losses were huge. The mid-level and small players were the ones who were hit the most. The big players still had the margin to absorb the shock, but the small players were wiped out,” said Priya Chetty, managing partner of Project Guru. Priya Chetty, who studied the real estate sector closely in the wake of demonetisation, said the sector was especially hit hard because it was heavily cash dependent and it was common knowledge that a lot of black money was used in the sale and purchase of flats. “Companies shut down as people stopped investing money. This left in the lurch many of those who had already invested their money in these companies. A chain reaction of sorts started, and the industry is still reeling in its aftermath,” she said.

Even as the aftershocks of demonetisation were still being felt, the Real Estate (Regulation and Development) Act (RERA), 2016, and Goods and Services Tax (GST) arrived, which further strained the struggling construction companies. Although RERA was a welcome move, as it sought to give buyers protection against wilfully defaulting companies, the companies came under further strain as they became liable for criminal prosecution if they failed to deliver units on time.

“GST and RERA together had a spiralling impact on the sector. Implementation of GST meant that the cost of construction went up. Besides high prices for materials, now the companies were taxed at 12 per cent for under-construction projects. This put a severe strain on already stressed resources, and builders struggled to meet deadlines because lack of resources had become a real concern. RERA meant a builder could even be put behind bars if he failed to meet deadlines,” Priya Chetty said. The heavy penalties with interest for delays complicated matters further, and the sector is still struggling to find a way out. Implementation of RERA is a work in progress, so its full impact cannot be gauged completely at the moment. “As far as GST is concerned, the problem is not the quantum of tax but lack of clarity and lack of the right systems in place,” Priya Chetty said.

Officials in real estate companies such as Raheja Developers Ltd, Omaxe and DLF admitted that the past one year had been problematic for the sector because of demonetisation, RERA and GST, as all three were interlinked. “It has been a triple whammy for the construction industry as a whole. Existing projects are on hold; no new projects are being announced; there are no investors,” a senior official in DLF said. The silver lining in all this, however, could be that houses could become affordable because of the huge unsold inventory. According to a report brought out by ASSOCHAM (Associated Chambers of Commerce and Industry of India), in the National Capital Region there are 2,50,000 unsold units, with Noida alone accounting for 1,20,000. “Over 35-40 per cent of transactions happened in black money in this sector and this transaction totally came to a halt,” the Project Guru report estimated. The government quoted this statistic to make the argument that prices would come down and housing would become affordable for all. “But where has that happened? Has the government started any projects? Has the government announced incentives for the sector to achieve this goal?” asked a senior DLF executive, adding that when demonetisation was announced the Prime Minister said the real estate sector comprised thieves and thugs. “But the government does not seem to realise that this sector contributes hugely to employment generation, and big industries like cement, steel, bricks, other ancillary stuff, all are dependent on the real estate sector for their survival. If you treat us with disdain and call us thieves, then how can you expect the sector to cooperate, whether it is housing for all or affordable housing schemes?” he said.

A few positives Industry experts, however, pointed out one positive outcome of the entire mess: the interest rates on home loans have come down slightly. But it is not enough yet. “Things are as dismal as they can get, and we have to wait two to three years for any positive outcome,” an executive from Omaxe said. Another healthy trend that is now being witnessed is the increase in demand for ready-to-move homes. The speculative buyer who only put money in the sector for investment purposes has now gone missing, and end users are showing an interest in the sector. But it is still a rough ride for the real estate sector, which is simply waiting for good times to come again.

Those in real estate companies found it amusing that the World Bank had improved India’s “ease of doing business” rating because there was simply no business happening.

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