A stalled real estate sector was nobody’s and everybody’s fault

Ashiana Housing: Ashiana Housing to launch residential project in August 2022. The company in its BSE filing said it has obtained RERA registration of Phase 1 of 'Ashiana Malhar' project at Pune (Maharashtra). The management has opened this project for expression of interest of customers. The project is set to be launched for booking (conversion from expression of interest to booking) from August 27 this year. It is a residential project and has total saleable area of 2.68 lakhs square feet.

Real estate, especially housing, is a nascent industry in India. From scrupulous first-time buyers, purchasing with borrowed money, housing became a base from speculators by 2005. The end user was edged out and investors made huge amounts of money trading on slips that vouched that they had paid just 10 percent.

But the chain can only be sustained when at every stage investors finds buyers. As the numbers of speculative investors grew, developers needed more and more cheap land to build on. The best bets were highways coming out of cities. The cash collected from buyers started finding their way into purchasing more and more land banks for developers.

No off site infrastructure: Since speculators and investors were buying the houses, they did not care whether infrastructure and development reached these enclaves in peripheral areas. In fact, they did not care if the housing was completed as the physical asset was never their end game. But there was a set of end users buying as well, which punted on getting property at lower prices and willing to put up with the inconvenience of poor infrastructure during the early years. The problem really started when the end consumer, who was last in the value chain, entered the market at higher rates for completed units and found the infrastructure missing. The higher rates with poor infrastructure made the purchase non-viable and by about 2009-10, end users stopped buying houses.

This reluctance was also triggered by the US sub-prime crisis which led to the folding up of the Lehman Brothers and a huge banking scam. The repercussion was a crisis of sentiment in India even though local banks were safe from the crisis. As employees started getting pink slips for the first time in Indian history in a connected multi-national driven world, housing loan defaults also started. Until then cautious consumers with new access to housing finance had been meticulous in making payments. Now, professionals-turned-investors with multiple housing loans taken by leveraging high salaries, found themselves stuck with inadequate money to make regular payments and not enough end users to buy the assets at prices that had soared after many levels of speculators had received their cuts.

During the bull run of housing from 2005-08, even city authorities tried to maximise land banks and gave out land to private entities to develop. In Noida, in the NCR, east of Delhi, the entire land along the Noida Expressway was given away to unknown entities on a model that allowed them to pay 10 per cent, get a 3-year moratorium, and then start paying instalments after that on an annual basis. Theoretically, the principle was sound. After paying the first 10 percent, developers could afford to build at lower rates as the cost of land was amortised over seven years. But with no entry barriers, just about anybody could apply and get land. With no notion of how this business worked, houses were sold at Rs 1800-2200 per sq ft, way below the cost of construction. Nobody bothered about how the shortfall would be covered.

A similar affordable housing revolution was taking place in peripheral locations like Mira Road, Bhayander and Badlapur in the Greater Mumbai region.

Middle class buyers: This time round, however, there was a difference. Hordes of middle class buyers in the NCR made a beeline to Noida to buy houses for as low as Rs 30 lakh. Banks too fuelled this frenzy with loans to relatively unknown developers on the basis of land on which they had paid only 10 percent of the cost. Consumer money was expected to keep flowing in to keep the market afloat.

But between 2010 and 2013, the actual buyers had almost entirely exited the market. Defaults rose on home loans. Adding fuel to fire were farmers who wanted a better price for their land as the entire ecosystem had benefited. The agitation resulted in a victory where the price to be paid for land acquisition rose significantly. With the cost arbitrage removed, with end users reluctant to buy and the cracks in expertise showing, it was clear that houses could not be completed to promised specifications.

Pre-launches: At the other end of the spectrum were groups like Jaypee and Unitech, which had managed to get vast chunks of land allotted at favourable rates, often calling in political favours, and started selling with very little focus on timely delivery. Product after product was sold to giddy investors who were on a high from previous profits made out of trading 10-20 percent paid up purchases. Pre-launches by select brokers had become the norm and most did not want to own that piece of real estate at the end of the cycle.

Erosion of values: Things came to a head when the 15 percent rise in property values annually stopped and started even dropping. Erosion of values was unheard of in housing and the sheen started to wear away.

Developers felt the pinch and cranes stopped moving on construction sites. As defaults began, banks developed cold feet, the RBI pushed up risk weightage on real estate to over 150 percent and bankers who had once queued up to lend to any and every developer now stopped. Many developers shifted from banks to NBFCs for money. Their checks were less stringent and a lot of fudging could happen in some books like that of the IL&FS and Dewan Housing Finance.

As the clamour grew and the newly elected Modi government promised to set the issues straight, regulations like the Real Estate Regulation & Development Act (RERA), Benami Transactions Act, Demonetisation and Goods and Services Act, threw the unstructured industry into serious financial disarray. The IL&FS imbroglio shook the NBFC market to its foundations and cash dried up for the entire industry. Projects stalled for sheer lack of working capital.

The industry ground to a standstill, defaulting and crooked developers were jailed, buyers clamoured about stalled projects and silent cranes became the hallmark of the once flourishing industry.

As of 2019, Anarock Research estimated that “1,322 projects comprising ~5.76 lakh units (launched in 2013 or before) were stuck in various stages of (non) completion in top 7 cities.”

(This is part two of a three-part series on the problems in real estate. Read part one here. Read the third part of this analysis to find out the solutions to this complex problem.)

E Jayashree Kurup is a writer-researcher in real estate and Director Real Estate & Cities, Wordmeister Editorial Services.

Views are personal and do not represent the stand of this publication.