Many factors have combined to bring about what I call The Perfect Storm in the Real Estate sector

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Koshy Varghese, the Founder and Managing Director of Value Designbuild (VBD) Pvt. Ltd, Bangalore speaks to Leandra Monteiro discussing the current situation of Indian real estate and the way forward in coming years. What has led to the current slump in Real Estate in India? The current slump in Real Estate is almost in its 5th year. It started very slowly when resistance began to build for residences that fell in the higher end bracket. Subsequently, as the economy began to show signs of slowing down Real Estate was impacted. The Listed companies began to over expand to show results and that led to greater inventory coming out into the market in the Major Cities. Absorption levels had not increased so there was an overhang in inventory. While the overhang in inventory is nothing compared to the shortfall in overall housing in India – which, depending on whose statistics one believes is anything between 18-24 Million units, growing at a pace of 1 million units per year other factors prevented sales. We had demonetization, RERA and GST coming in almost one after the other and the impact made the existing situation worse. In Bangalore, for example, many IT / ITES companies hired staff from rural areas. When they came to Bangalore and wanted to buy their own apartments, they used to sell their land holdings in their villages and use that as the down payment. Since these transactions were mainly in cash demonetization killed it. That affected sales. The IT sector began to show signs of distress and salaries dropped along with job losses on account of AI. Another factor is the change in the mindset of the buyers. Buyers are now looking at going towards buying into projects that are closer to completion. Further, there is a certain level of aversion by young buyers to owning houses using housing loans and prefer to stay in rented accommodation. Over all many factors have combined to bring about what I call The Perfect Storm in the Real Estate sector. What are the Loopholes in RERA? RERA has been in force in Karnataka for over two years now. However, I do not believe it has had any meaningful effect on the housing sector. Housing being a concurrent subject each state has opted to tweak matters to suit their own wishes. Despite two years having passed RERA Karnataka has not yet released the approved sale agreement to be executed between the builders and the buyers. One can imagine what chaos this has led to. To make matters worse the Head of RERA (the government appointed officers) have been changed many times making continuity an issue. RERA has a very lethargic process of settlement of disputes. However, any award given by RERA can be challenged in the courts of law. I do not believe that any award has been successfully closed to date. Further, the stringent norms of RERA are not being implemented. For example, an erring developer can have his registration cancelled. Future registrations can also be held up. This is not being implemented. Further, the rules of warranties is not equitable. Developers do not manufacture any product and all producers do not give 5-year warranties that are required as per RERA regulations. To implement such regulations on all items in the residences, provided by the developer is virtually impossible. RERA has made the registration process very difficult due to their own inefficiencies. For too long the time taken to process a registration is too long. This doesn’t help Developers. Finally, we have the situation where we do not know which of the following takes precedence – NCLT, Consumer Forums or RERA. Customers are filing under each body and it leaves everyone in a confused state. What is the fate of affordable housing in India in the coming year? The current template of Affordable Housing is a misnomer. What is being palmed off as Affordable Housing is a shrunk, stripped apartment sold at almost the same price as a regular apartment, or an apartment in the back of beyond. Affordable housing should really be PWD Housing done by the private sector where land is very cheap, located properly and of a decent size with categories catering to the High-Income group, Middle Income Group and Lower Income Group (as classified by the PWD). A report that came out last week states that half of the unsold stock in top cities come under the category of Affordable Housing. In nine cities almost 4 lakh units remain unsold. This is not good news. Over and above this an RBI report claimed that NPA’s have been rising in the lower loan brackets which service affordable housing. If the economy shrinks further, we will have a situation where job losses will affect this segment the most. Overall, I do not see the affordable housing sector growing till the economy improves and the model of the affordable housing changes. Current Demand in the High-End Luxury Residential projects. The High-end Luxury Residential projects have taken a huge hammering over the last few years. It is still facing slack demand and very few takers. This was mainly because prices were also at very high levels and people did not want to commit to apartments or accommodation worth more than 75 Lakhs. However, I can see that there is more traction now in high end properties and indications are that the next year will see an improvement in demand for high end properties. It may take at least a year to stabilize but I believe it will. Since many players have opted out of this segment the offerings are less and so we expect the existing stock to sell soon. Company’s upcoming projects: We at VDB are starting a Residential Apartment called VDB Nusa Dua Chromatic at Whitefield. It has only ten apartments and faces a beautiful lake. We are also partnering with a layout developer to build a residential layout and provide infrastructure and sell sites. We are also looking at tying up with Co-Living partners to rent out stock that we have in the higher end apartments/ villament and Villas that we have. VDB Willow Farm is in the process of getting completed. VDB Azure, a high-rise development will be ready in about a year. We have plans to start a commercial project in Whitefield and residential building in the city. Vision of the Future and Growth Strategy: We believe that our sector has hit the bottom. While it will take about a year and a half for normality to be regained, we feel that the housing sector will undergo lots of change: • Mergers and acquisitions will happen and almost 60% of the developers will leave this sector or be acquired. • Sale of apartments will be more in the finishing stage as under construction sales may stop. • This will mean that one has to be cash rich to survive the future. • Interest rates must drop for both developers and customers. • Hopefully the sector will get Industry status. All in all, there will be growth but the change in the dynamics will be apparent.