While recent government changes will ultimately assist long-term growth in the Indian real estate market, there are signs that the market may well be running out of steam in the short term. A number of investors have come forward to query why many projects which should have been finished from 2013 are still waiting to be signed off. This comes at a time when the market is coming to terms with recent monetisation changes which were targeted at the use of criminal funds and alleged money-laundering operations. So, why is the Indian real estate market under so much pressure?
Expanded land banks
When you bear in mind that property prices in New Delhi increased by 24% between 2008 and 2014 but have since fallen by 3.5%, this perhaps reflects the concerns about a boom and bust era. While a reduction of 3.5% in property prices is not necessarily a massive concern at this moment in time it is certainly something to be monitored. Perhaps the greatest concern is how many developers used deposit funds in years gone by when the market was booming.
It turns out that many developers used deposit funds to grow their land bank rather than investing directly into the relevant development. This is all good and well in the boom times with buyers stepping forward on a regular basis and competition for properties. However, once the market started to weaken ever so slightly the cracks began to appear.
Cash flow problems
As you might have guessed, a number of developers across India are now experiencing cash flow problems with some being forced to sell off their land assets at a loss. The fact is that more and more developers are struggling to raise sufficient capital to finish ongoing projects which will obviously have a knock-on effect to future plans. When you bear in mind that a number of properties should have been finished in 2013 this does not bode well for some developers.
It would appear that many developers assumed that the Indian property market boom would continue forever and a day. While they should have been reinvesting deposit funds into the actual developments they were already looking at the next property development. This could potentially see some leading Indian property development companies fall by the wayside or perhaps be forced to merge with competitors.
Glut of housing
Recent statistics suggest that the current housing stock would take four years to sell at current rates as opposed to just over a year back in 2009. If anything this perfectly reflects the glut of property right across India and the fact that this will act as a drag on prices for some time to come. In many ways the Indian government has been encouraging non-resident Indians to invest in the Indian market but many are starting to get concerned.
It will be interesting to see how Indian property prices react in the short to medium term after the 3.5% reduction since 2014. Investors and developers are still coming to terms with recent regulatory changes, as well as the monetisation issue, and hopefully this recent dip is only a short-term issue. However, it is concerning that at current rates of sale it would take four years to sell the current stock of Indian housing.