Cash Crunch in the Real Estate Sector By Ashok Naidu, Director,Kumari Builders and Developers
One of the biggest and probably the third largest sector globally is under massive turmoil with a cash crunch on its board. Almost all developers are now facing a severe cash crunch and finding it difficult to complete ongoing projects. The situation has deteriorated drastically. As per Anarock data more than 5.75 lakh residential units are running behind schedule since their launch in 2013 or before across the top 7 cities. The developers are now more skeptical of accepting any future projects if the cash crunch continues for another two or three quarters. If the real estate does not recover from this situation and it will turn difficult for the associated sectors and the Indian economy.
The real estate sector contributed about 6-7 per cent of the Indian gross domestic product (GDP) in 2017 and is expected to contribute about 13 per cent by 2025. The industry is also the third largest employer (after agriculture and manufacturing) in the country and presently employs over 50 million people. As per the national skill development council (NSDC) real state and construction sector is expected to demand for over 66 million people by 2022, while KPMG in India forecasts this number to cross 75 million by 2022. Recovery is the need of the hour for an important contributor to the Indian economy.
Real estate heavily depends on liquidity for daily transactions. The cash is mainly used for daily / contract wages, raw material, transporting materials locally and other miscellaneous expenses. But it was shortly disrupted by demonetization which further slowed down the industry’s progress. Demonetization brought a restriction to the number of transactions which they could perform in cash and since people are forced to deposit these notes in their bank accounts all cash was flushed out of the system. This disturbance made the industry to witness a slow down on the purchase of new properties by up to 40 per cent in major cities and another 11 per cent on new project announcements.
The cash crunch situation is forcing small time builders to exit the industry itself while others are avoiding new launches. Few are trying for strategic partnerships with each other in order to survive in the industry. Builders are now focusing on their own strengths. Some are good at construction, and those who are good at land aggregation and trying to stay in their areas of strengths instead of staying in the entire construction process.
The industry has sailed through the toughest period of demonetization and had begun to show some kind of normalcy. It was well supported by the implementation of two key reform measures (GST & RERA) by the Government, which helped the industry to recover from this sluggish situation momentarily. Both reforms helped builders and customers in different ways and encouraged them to invest. The industry has now witnessed an increase in supply and the new launch across the top seven cities in the first three quarters of 2018 stood at nearly 139700 units, increasing by nearly 18 percent against the corresponding period in 2017. Housing sales also increased by 8 per cent in the first three quarters of 2018 as against the same period of 2017.
Now, yet another storm has hit the industry in the form of NBFC crisis. It will once again stop the growth of the industry,which has recovered after a tough sail. NBFC crisis not only freezes funds flow to the real estate sector, but also impacts private equity funds flowing into the sector. It further deepens the wound by impacting ongoing projects and the new launches across cities. And the home loan interests are expected to be increased in the future, which will discourage and disappoint home buyers. Such situations will directly impact the demand and supply of the industry. The industry needs immediate attention to handle this epic cash crunch otherwise the industry will continue to struggle for a longer period of time.
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