Residential Real estate has gone through a roller coaster ride in the last two decades. From the initial bull run that started in 2003, to the fall in 2008 due to global financial crisis, the subsequent revival till 2013 and then the bear run from end of 2013 onwards till present times has really tested the residential real estate market.
However, The commercial real estate market has had a better story to tell. The emergence of India as a big office market for large multinational corporations who outsourced their work to cost effective India and the booming software export business of Indian companies gave a big boost to the commercial real estate market.
One big difference between the two sub segments of the market is the availability of authentic and reliable data for decision making. The latter being dominated by corporates and largely being a leasing market, the demand and availability of decision-making data was better. The commercial segment has been more robust with large corporates getting detailed data from the developers and the intermediaries on the asset they were evaluating and getting into water tight contracts with the lessors. The availability of pre-leased purchase market for grade A assets which was dominated by HNIs and institutional players was also helpful.
The residential real estate market on the other hand was opaque with data not available on genuine pricing, sales numbers, misinformation by brokers, mis-selling by intermediaries, lack of a regulator and an efficient redressal process and existence of black money in the sales process thereby actual data not being captured by regulators.
The root cause of the divergent routes that both the sub markets took was the lack of transparency which meant lack of authentic data availability. All the subplots of the nightmare in the residential market were leading only in one direction and that is lack of data under various heads. The years of lack of transparency has led to a trust deficit in the buyer’s mind and is compounding the challenge in the recovery of the market.
If one looks at the various stakeholders, what role they played and how they were affected it would be as follows;
The buyer in residential real estate has been tremendously affected in the recent few years. In the initial phase when everything was going well a lot of buyers made decent returns on their asset purchases. Many of them kept on buying even though the market was overheating and the greater fool theory was in practice. As long as they were getting their returns and there was somebody there to buy the asset off them they were happy to support the bull run. There wasn’t any questioning on the practices of the industry till the time the tide turned, and many buyers were left holding either investments that were terrible in quality or terribly delayed or not ever going to be delivered. The lack of a regulator to implement processes and practices into an unregulated market was sorely missed. Even when the RERA act got implemented on popular demand from the consumers, it took some time for it to be implemented and many of the provisions of the original act were diluted by state governments to suit the local needs and pressures.
Many of the buyers were purely into the market for the quick returns that they made on the assets. They never evaluated the product from a livability point of view. Once the market slowed down they were stuck holding their investments which were leveraged and fast losing their value. Many had to cut their losses and get out of their investments.
Many of the Developers thrived due the lack of regulations in the market and the ability to keep rotating customer advances into newer purchases of land and assets. The lack of availability of data being made available to regulators and customers helped many of the unscrupulous ones to take the consumers for a ride. When the sales started reducing due to the trust deficit that got created they relied on greening of the loans from banks to NBFCs. Comparatively, the developers who maintained a transparent way of working and adhered to their commitments were rewarded by consumers through enhanced trust and credibility in their projects thereby increasing their sales numbers.
Institutional Players – Banks, PE Funds
The real estate market attracted the institutional player who came through the FDI route into the residential real estate market. Many of them have not been able to make decent returns due to the challenges faced by them in understanding and navigating the opaque land acquisition process. A lot of leakage was there due to unavailability of data for decision making from the regulatory bodies as well as within the industry. Many of them have now switched to focusing only on the commercial real estate market and buying pre leased assets from the developers.
Government and Regulatory bodies
There is a huge gap in data capturing and data availability on the regulatory side. The market was left unregulated for far too long which led to the emergence of practices which were detrimental in the long run. The prevalence of black money has further compounded the problem. Even when the data on registrations is captured, it has not been digitized for a long time and there is no central repository for the data which can be made available for decision making. Major reforms are required on this front to capture the data that is being generated and being made available to the market.
RERA after implementation has brought about some progress to bring about some structure to the market however, it is still woefully short in addressing the issues and providing a resolution that the industry finds itself in.
Government and Regulatory initiatives:
As per a recent RBI Savings report, on an average, property accounts for about 70% of an individual’s wealth. Hence valuation and liquidity are most important to establish and monitor.
With the industry going through an existential crisis and further compounded by the COVID 19 crisis, this is the best time to catch the proverbial bull by its horns. The reforms which were kickstarted in the sector through the RERA act 2016 and implemented across states in 2017 have to be taken further to bring about further streamlining of the practices of the sector. Further acts that have been the requirement of the time is the ‘Benami act’ which will help bring down the incidence of black money in the market. The Government must bring in more efforts in the matter of land reforms to bring about ease in the opaque nature of the land purchase market. Land pooling was a brilliant initiative in this direction and must be implemented actively.
Data captured at the time of registrations should be captured and compiled in a repository and made available to the public domain, which will help all stakeholders in decision making.
Developers and Industry Bodies:
As most developers are part of some industry body or association, the initiative of bringing about transparency should be taken up by them to help themselves in the long run. Availability of sold units, launched units, pricing and unsold inventory should be compiled through a digital platform and made available to the public domain. Self-regulation and transparent disclosures will bring back the trust into the market and help the scrupulous developers survive and thrive. It will also weed out the fly by night operators from the market.
Intermediaries play a very important role in the sales process and also have a bearing on the buyers experience and trust in the market. RERA has brought about some structure through registration of intermediaries, however, this has to be further strengthened by increasing the entry barriers into the segment. We have seen western countries implement a licensing system whereby only the competent people who can pass exams and get the license to practice should function as intermediaries. This will help bring about transparency and better processes and practices.
There is a big opportunity in making data available in an opaque market. There has been some work towards this by a few companies who make data available on sales, purchases, unsold inventory and pricing. However, there is a lot of discrepancy and divergence between many platforms. On the whole, lack of data and transparency have led to the state that the residential market is currently in and all round efforts across the board by Government and regulatory agencies, developers and Industry bodies, Intermediaries and data providing platforms have to be done in this matter to bring about a revival in the residential real estate market.