Can Indian Realty Industry Break Down & Crash One Day?

by 1Property
August 14, 2015
Category:   Real Estate News

According to a brief research by Ambit Capital, it is believed that Indian realty sector will crash soon. Factors like higher property prices, depreciation in the bank lending activities and government’s constant efforts to eradicate black money inflows are some of the anticipated reasons for the crash. The industry is experiencing moments of reduction in transactions and new launch volumes as well. Apart from these aspects, the Indian rental market has shown a drooped graph as compared to its Asian counterparts. Yes, there is a probability of a noteworthy crash to some extent, if not completely. The drop is going to be a slow-motion one and can have a number of side-effects too. There are reasons behind the prediction and here are some of the prominent ones:

  1. The Supply-Demand Cycle

This very factor has laid a very deep impact on the entire functional protocol of the industry. A major droop has been noticed in demand for building material and challenges for lenders with big mortgage. Moreover, a generalized slowdown in the GDP has also been noticed in metropolitan cities with prices falling by 7-18% YoY. For instance, several registration offices in Mumbai recorded a very low number of new property booking and same scenario is being noticed in south Indian states like Tamil Nadu.  At Pan-India level, new launch volumes have gone down.

Here is a snapshot of recorded data:

  • A point gap of 8% is noticed between the gross rental yield and bank base rates. This clearly indicates the unattractive face of the Indian realty sector
  • Draconian Black Money Bill is live from July 1st and this has actually eradicated elite community’s interest in the Indian Real Estate

  1. Slowdown in Construction Sector

According to a data released by the Ministry of Finance, a sharp decline in the cement production has been noticed and that too on a pan-India basis. The decline in the cement formulation activities has resulted into a low supply of the construction material to the client side. This incident has slowed down the process of project commissioning and the realty market can see a lot of unattended and incomplete projects in the pipeline. Either these projects are at halt or they are being addressed but at a very slower pace. Such incomplete stock is actually a negative reservoir.

  1. The Overflowing Residential Stock

According to the data recorded by popular realty firms and research companies, prominent Indian cities are facing a severe residential stock overflow. Parts of Delhi/NCR and Mumbai have incomplete stationed projects or ready-to-move townships that have not been attended or noticed by the buyers. The builders were continuously constructing new residential projects and didn’t wait for the earlier ones to get booked or cleared up. The pipeline never got used-up and stocks started to overflow. The study says that it will take at least 11-14 quarters to clear up the choked line. The stock is filled up is alright but if it overflows then there is a problem. Indian real estate industry will be impacted in the near future if this continues to happen.

  1. The Land Acquisition Bill

Small cities, such as Jaipur, Rajkot and Lucknow are also facing worst situations and their realty arena is not facing good audiences. The realty sellers in these cities are saying that they are not getting enough bids for the property that they have put up on sale. Further, the research by Ambit Capital says that with the advent of Land Acquisition Bill, a powerful source of wealth has gone sluggish and has been stopped in its track. The price of land has stagnated in the rural India over a period of 12 months.

The real estate brokers are demanding further correction is needed for inventory liquidation. On the other hand, discounts have been put up in the secondary transactions market and the lenders are distressed as they have not received any payments from the developers or builders. The crash is visible and the cracks caused can be clearly seen. However, a proper protocol and a little attention given by realtors can save the industry from getting damaged.

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