Over the last ten years, the real estate sector has seen a downcycle which further got a blow in the form of the Covid pandemic. The sector underperformed to the extent that it disappointed all the stakeholders, with low or even negative IRR. There is a need to realize the huge potential which the real estate sector offers. But the recent regulatory reforms have proved to be a blessing for the These reforms have led to the consolidation of the sector and now aided by the improving economy, this new professional ecosystem bodes well for the real estate growth.
If we have a deep look at the developments in the sector over the last decade, we will find that the policymakers, developers, and financial institutions- all have contributed to the underperformance or to say poor performance of the sector. On the policy and regulation front, the failure to introduce a single window clearance system has led to time and cost overrun of projects. Further, the flawed land allotment policies of the development bodies- offering land to developers without proper master planning and basic services together with painfully slow development of infrastructure proved to bane for different stakeholders including customers. The slow pace of redressal of customers’ grievances through RERA and NCLT further precipitated the matters. The failure to create new economic centres, led to infrastructure pressures on existing cities, adversely impacting the quality of life .
The developer community was also largely responsible for the poor performance of the real estate sector. The overleveraging by a large number of developers – taking to injudicious expansion without building adequate capacity and execution capability, led to time and cost overruns of their projects. This in turn resulted in large-scale delivery defaults, creating a bloodbath. The owner-driven organizations with a sheer lack of process-driven operations, bungled on cash flow management. The wrong selection of land/area for development(lacking proper infrastructure and basic services) and unwise marketing policies of developers offering sops like foreign holidays, cars, etc instead of cash discounts and assured returns proved to be detrimental to them. The corrupt practices adopted by the developers did the rest of the damage.
The financial institutions are to be equally blamed for causing damage to the sector. They deployed their funds to developers without studying the demand-supply scenario of the funded projects. Another folly they commited was to invest in SPV structures of developers, without evaluating the overall financial health of the organisation. The launch of the subvention schemes was the biggest blunder committed by the financial institutions. In that scheme, developers were made to pay interest on the money borrowed by the customer. Investing in unprofessional owner- driven family companies also cost dearly.
When all this blood bath was happening in the unregulated real estate sector, the strict compliance under regulatory reforms like RERA set the process of consolidation into motion, forcing a large number of small/mid-sized unprofessional developers out of the business. Many such developers, out of distress, went in for joint developments with big players to get out of the crisis situation. But there are many others who are struggling to get out of the long tedious and complex NCLT process, leaving hapless customers in the lurch.
But this consolidation process despite creating a monopolistic situation is good for the health of the sector, making it more professional and streamlined, especially after taking corrective measures like adopting more sensible land allocation policies and making regulatory bodies more suited to the stakeholders. With all this, real estate will emerge as the most sought-after asset class in the next decade. Especially as despite the global recession, the Indian economy is doing extremely well, supported by a great boost to infrastructure through the ‘Gati Shakti’ initiative and a big push to manufacturing hubs through ‘Make in India’ programme. The maturing of RERA, on one hand, has boosted customer and investor confidence with stronger governance and on the other hand, it has helped create an ecosystem of strong players with a sound corporate structure. All this will make real estate the best asset class in the years to come.