The current state of real estate sector of india , is there a way out

According to the ancient indian fable , all wars were fought for 'Zar, Zoru and Zameen"
Zar- honour , Zoru - female and zameen is land .

Since time immemorial the possession of house is a status symbol as well as a big milestone in one life . Its a dream of a common man to own and live in his own house  and moreover this asset class which has not failed over time and thus the common man has extreme confidence in it . It is also part of the basic necessity of human existence ,the three pillar of basic requirement viz "Roti Kapda and Makaan" . The real estate sector is currently under a lot of stress and thus under the scanner as well .
The real estate landscape of india has done a major change in last 15 years . Whether the architectural aspect or amenities or be it the sheer size and numbers .We are seeing certain developments which are at par with any developed nation ,be it golf courses or fancy clubs and fixtures. The young india when exposed to the global lifestyle expected and thus recreated the same ambience in his life . Earlier one used to dream of own house at the time of retirement but lately the New India started buying houses in their thirties .To cater to this ballooning upwardly mobile population's demand for housing a lot of people jumped to cash-on on this opportunity .

A brand new breed of people jumped on this band wagon and became part of this huge supply chain . Most of the entrant did not had much qualification or experience of this sector. It was almost like the great mad 'Gold Rush' .There was a general feeling in urban india that either you are someway related to real sector or you are missing on something ,whether in form of booking a property in an upcoming project or part of this chain. A lot of people left their existing businesses and started venture in real estate as the return were pretty good .

A new development use to sprung up overnite and the mad rush used to start. All the projects were sold just by showing fancy brochure and presentations and there used to be a price war.  Developers used to launch new projects without all the papers and calculations in place , brokers used to push the buyers for the down payment cheque under the promise that will sell it in next 3 months  and investors (of all hue and cry ,whether Banks ,PE or private) used to open there coffers . It was just unbelievable how the whole multi million projects were sold and all transactions completed without a single brick being laid . Every intermediary in this value chain used to make a cut in the whole cycle , be it land owners or brokers or bankers or investors but the biggest beneficiary in this whole chain used to be the bureaucrats and politicians . They used to milk the maximum from the system because they could influence the supply and the various approvals for completing the projects and they had no responsibility.

Now we are seeing that most of the metro landscape dotted with a lot of unfinished structure with idle tower cranes , stalled projects , buyers crying hoarse on media etc etc . This phenomenon is not just centric to the metros but the B class towns are also facing similar situations .

It was like a game of musical chair going on and when in reality the two concerned party were the buyers, who had actually paid for the house with his hard earned money so that he can live in his dream house, and  the other was the builder who had the onus of delivering the same . All the middle layers who had taken there share from this chain did not had much onus in the final delivery of the product and moreover they had already pocketed their share. So now when the music stopped in this game than suddenly the buyers are the one who feels the most cheated and helpless. Most of them had put in not only all their saving till date but also mortgaged their future earning in form of EMI's in the hope of a dream house for his family . The ratio of buyers to the builders is also highly skewed in the favour of buyers thus the media is also playing to the gallery and also fanning the fire . Builder is the one who has been painted as the only culprit in this game , I do not totally agree to this view point .

Some of issues which have plagued this cycle is that most of the stakeholder in this game were of the view point that this was not a bubble and this party is going to last forever . In this mad gold rush nobody wanted to be seen missing the bus . most people were over leveraged ,be it the buyers or builders and with interest rate rocketing due to this huge demand all the arithmetic went for a toss .The lack of experience of delivery further delayed the project and there by the costs and to top it all the tweaking by the bureaucrats and politicians of rules were challenged in the courts and further delayed the projects . In the meantime the builder had also diverted the funds to buy more land banks for future projects thus making the sold projects cash strapped and further delaying the projects . When the builder got cash strapped to bail himself out he borrowed money from private lenders at a very high rate in the hope that this is a temporary phenomenon and all will be fine soon . He also used other methods like double mortgaging of same property for double property loans and other similar mechanism to raise money .The worst part is that the number of people affected this time is quite high compared to the earlier slowdowns .All these and some more factors all resulted in bringing this juggernaut to a halt . The real estate sector is a cyclical industry and with a 7/8 year cycle and whoever gets caught on the wrong side feels the brunt . We are almost in the last phase and this where there is maximum pain .The majority of the stakeholders in this industry this time had not seen a downturn thus are not equipped to handle this phase and this time the sheer numbers affected is quite high .

Suddenly real estate sector is one of the most cursed sector . In the hay days builders were the darling of this society ,be it the media or investors . I have personally seen investors bee lining in front of their offices with cash and cheque books , most media men boasting of their links with them and seeking hefty discounts from them in their upcoming projects . A lot of bureaucrats and politicians were investors or backing up the developers . Developer were also flashing a very lavish lifestyle and thus becoming the new icons of the society ,Probably they got 'too much, too fast' . They felt that this honeymoon is a permanent one Most of them were busy acquiring new land for project and selling the project on existing one on drawing board itself . The delivery of the sold project was least on the priority .To add to their vows demonetisation and fear of benami property came when this sector was already limping and that acted as the final nail in the coffin.

I feel that the whole system has to take onus of this situation in hand . The government came up with RERA late but better late than never .Banks are now going to NCLT and courts for liquidation of the builders assets . This has added to the already panic situation among the buyers who till date had no idea as to when he will get the possession and now going by the media analysis his hard earned money given to developers is also unsecured , thus low on priority, now his fight is whether he will even get any thing or not . There is panic situation in the market and most of the new buyers do not wants to touch this sector currently .What really pains is that there has been hardly any bureaucrats or politician been reprimanded till date for this mess when all this was going under these vigil and conveyance . The government will have to bail out this sector because it just cannot let this sector go down as the quantum of money stuck and the number of affected parties is huge . Its not just the  problem between builders ,buyers but banks ,who have lend directly to the builders but in most of the cases they have lent to buyers to finance the transaction . This can boomerang into a social issue as well because housing is a very emotional issue. I hope it does not turn into the "Subprime" type of situation .

What is quite ironical is that the sector which contribute to 20% of GDP  and provided employment to more than 25% population in direct and indirect form,  does not even have an industry status and is mostly in the negative list of the banks,More so when the central government has an ambitious plan of housing for all by 2022.

This sector is in a negative cycle and will definitely come back ,There will be a lot of shakeouts as well but most of the buyers and builders will have to bear the pain and uncertainty for a while. Earlier everybody was buyer and now everybody is a seller . Will take a while for the tide to turn. Moving forward in short term , Real estate which was mainly run by unprofessional and was quite unregulated will go through a self corrective mechanism and pain.

The new RERA regulation will force a lot of discipline in this sector which till date worked as a personal fiefdom .With the RERA(real estate regulatory authority) in place there will be a lot of checks and balances in the system.The only question is that how effectively it is implemented . It had addressed some of the major issues which were due to the developers laxity for eg diversion of funds , quality , timely delivery, professional qualifications of the people involved  etc etc .Dependency on Babudom also needs to be addressed for smooth functioning of this sector .

The buyers also need to do some math on his end that if a builder is selling it cheap than its a PONZI scheme and JUST DONT fell for it . There is basic cost involved in construction  and nobody is going to subsidise it " There is nothing called a free meal". In long term ,once there is a stronger system in place than there will be a better checks and balances in this sector and thereby safeguarding the buyers interest and this asset class will give decent returns in long term .

Some important conventional parameter to judge the riskiness, if buying an under construction property, is whether the developer has all approvals in place , Land payment status , Past record of delivery , professional and dedicated team ,status of the project and whether he has more or less stuck to his project plan , don't ever go for a project just because its cheaper and a must is that one should not buy on down payment scheme even if he is ready to pay your EMI's . If one follows these basic principal of value investing than the chances of one getting stuck is quite less .