The real estate sector is at an inflection point and staring at long-due price correction in order to improve sales, the report stated
The default at Infrastructure Leasing & Financial Services (IL&FS) and ongoing speculations about Dewan Housing Finance Corporation (DHFL) have made real estate industry stakeholders anxious. The looming crisis is so huge that developers may have to rake up sales by 2.5 times to service their existing debt that has trebled in the last decade to Rs 4 lakh crore, said a new report.
But can we find cheap capital to refill the gap? The existing scenario signifies that the industry is at an inflection point and is staring at long-due price correction in order to improve sales. But is there a scope to bring down prices? To service this debt, developers may have to double their sales for which they may be compelled to cut prices, it stated.
As per the report, while debt has grown in a monumental manner and so has inventory, sales have not gone up in the same proportion. “Having borrowed money from different sources, developers kept adding housing stock without any productivity. Since sales remained abysmal all this while, developers are finding it difficult to meet their debt obligation at this point,” said a report by Liases Foras.
In the past 10 years, while the value of housing sold stock increased by 1.56 times, the value of unsold stock increased 4.72 times. In terms of units, sales volume rose 1.28 times while inventory increased 3.33 times between 2009 and 2018, the report noted.
In the same period, lending to the real estate sector rose to Rs 4 lakh crore from Rs 1.2 lakh crore.
As per the report, the residential market generated Rs 2.4 crore as yearly revenue in 2018. Top eight cities (MMR, NCR, Bengaluru, Pune, Hyderabad, Ahmedabad, Chennai and Kolkata) cornered more than 80 percent of the entire business.
Of the total of Rs 2.4 crore, the top eight cities generated Rs 2.15 crore as revenue, it said.
The report examined performance of close to 11,000 developers and noted that out of a total kitty of Rs 2.4 crore of business, top-90 developers in the country accounted for about third of business and generated Rs 78,879 crore.
One of Budget 2019 proposals is to do with unsold inventory tax. Earlier, the unsold inventory was taxed as per notional rent income after one year of completion. In a slow moving market, the government has now decided to tax unsold inventory as per notional rental income only after two years of completion.
"Currently, unsold inventory stands at over 79,000 units. With this reprieve, developers will be encouraged to finally complete under construction inventory. It should be noted that currently there is demand for ready stock in the market as there is no GST on it. With more units getting completed, the unsold inventory will also double by next year. And to increase off take, developers may try and reduce prices. This will eventually boost sales and open another window to garner revenues," Pankaj Kapoor, Managing Director, Liases Foras, said.Some builders may reduce prices as pipeline of projects will also increase simultaneously. "There would be no cessation of inventory through the year. New launches are expected to grow by 20 to 30 percent across segments, especially in case of affordable housing," he added.