Having just passed the 9th anniversary of the global financial crisis, one wonders about the future course of the real estate sector. Is the end of the biblical drought of capital for real estate in India anywhere near? Will it be followed by 9 years of plenty? Is a new boom cycle on the cards that will make many more paper billionaires? Will real estate again become a favoured asset class for international investors? Sadly, the answers to all these questions is no.

By most counts, there was a flood of investment capital into India between the years 2005 and 2008. Close to $25 billion was invested into real estate in the Indian markets in various forms. On top of these complicated investment structures, most of which were unenforceable and in some cases plain and simple illegal, one had to deal with the lofty expectations of the Indian promoter or developer.

Real estate developers, no matter where they are, are engineered to be the most optimistic creatures on the planet. But Indian realtors took it to a whole new level. Here’s how:

Investor: How much have you built over the last 5 years?

Developer: 500,000 sq. ft.

Investor: How much will you build over the next 5 years?

Developer: 5 million sq. ft

Unfortunately, this did not stop investors from bringing money into India at a pace and scale that had never been seen before. Land was a disappearing commodity then and if you did not buy, it would be worth multiples tomorrow and you would have missed the bus. That was the conventional wisdom anyway.

And just like the tulip mania, it ended badly. It turns out India still has a lot of land that can be developed and prices in real estate can come down, and come down hard. Ask the investors who bought at the peak in Hyderabad at Rs25 crore an acre. But there was redemption, at least for a few years from 2010-12. Loose monetary policy, a landslide Congress party win in the elections and a booming stock market for some time created the illusion of robust home sales for developers in major Indian metros.

That was too much to handle for the real estate community and they quickly killed that goose with greed. There were significant price increases, providing the illusion of handsome returns for investors and buyers alike. Combine that with the propensity to build ever-larger units at a higher price point, and most real estate is unaffordable for the average buyer.

After all, how many people can afford to buy apartments worth Rs5-10 crore in a country where the average household income is Rs40,000?

With sales velocity going down and prices flat to declining, cash flows have declined and construction has slowed down dramatically. The slowdown in construction activity further sends the wrong signal, scaring the next round of buyers.

Barely 20-30% of about $25 billion has been returned. And I’m talking about the capital. Most of that invested capital has earned returns in single digits or in a majority of cases, been negative. And therein lies the problem.

The global investment herd is a backward looking pack. They primarily look at historical returns to decide whether to allocate more money to a specific market. In this sense, our record is abysmal. Couple that with the fact that we are nothing more than a rounding error in a global investment portfolio, and the probability of a large pool of equity capital allocation for India is low.

To top that, the Indian banking system, which had been the primary provider of capital for real estate (85% at last count), is facing serious problems of its own. The combination of meeting Basel III requirements and the burden of non-performing assets (NPAs) on their balance sheets, has effectively made real estate a four-letter word in the hallways of the Indian banking system. Promoters cannot tap the flows of crony capitalism anymore. The only offset to this capital drought has been non-banking finance companies (NBFCs), and they are a topic for another conversation.

This, coupled with RERA (Real Estate Regulation Act), which no longer allows the use of a customer’s money to do anything other than build the project they were sold, has put a monkey wrench on the traditional business model for the real estate community. Smart companies have already realized this and are reshaping their businesses to focus on planning, execution and delivery of projects. The not so smart ones… well they may not be around for very long.

All of this is great news for the Indian consumer, as the survivors in the business will be highly focused on customer satisfaction and the quality of upcoming projects should vastly improve over what has been the historical norm.

Sameer Nayar is founder and CEO, BuildSupply

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