By Prof. Dr. P.S.N.Rao
Founder-Chairman, NAR-INDIA
Many reasons could be attributedto the Indian market slow down.It is often argued that the mainreason for the slow down is theinternational melt down. However, a closer examination of the industry as it is organised in the country reveals that there are other reasons too. Some of the main reasons are discussed hereunder:
Excessive dependence on NRI portfolios : Virtually all the real estate developers in the country have been focusing on the NRI ( Non-Resident Indian ) customers. There is no doubt that NRIs have enough reasons to send back monies into the home country and invest in real property. However, Indian developers have put ‘all eggs in one basket’ and thereby started building only ‘high end’ homes which can be afforded only by the NRIs or the extremely rich people in the country. This has led to a highly focused real estate industry catering to a singular stream of supply-absorption. In the current situation of global meltdown, the excessive dependence on one market segment has made things difficult for the developers.
Complete lack of addressal of ‘affordable options’ : Over successive years, the Indian real estate industry has completely chosen to ignore the middle-income segment of the market. As a matter of fact, there is a huge untapped demand in this segment. However, the developers only chose to cater to the demand of the high end customers and not the ‘budget customers’. This is clearly evidenced by the fact that today, when the prices have corrected and some developers have started making ‘smaller’ and ‘affordable’ homes, the take off has increased.
Excessive dependence on IT/ITES sector : The Indian developer industry has also been focusing more on the information technology ( IT ) and information technology enabled services ( ITES ) sectors. As a result, the focus on general commercial spaces / office spaces has got reduced to a great extent. Every developer wants to put up an IT park, rather than a multi-purpose commercial complex as was being done in the earlier decades. This has also led to a narrow focus of operations, neglecting other requirements of the market..
Misplaced focus on ‘global retail’ : Indian developers have also got sucked into what is popularly referred as the ‘mall mania’. A lot of effort has been made in putting all energies into shopping malls and today, with one too many malls; there is an excessive supply in this sector. Business enterprises find it very difficult to pay the high rents and maintenance charges, given the kind of sales turnover that they get. As a result, some shops have even started closing down due to lack of break even.
Inappropriate / skewed risk allocation : It can be seen that as a result of the above, that the Indian real estate industry has been moving on a model of inappropriate/ skewed allocation of resources and as a consequence, risks. On account of a lack of appropriate risk allocation policy in place, real estate markets, particularly developers, have been highly over-leveraged. The recent melt down has clearly indicated that such a policy of ‘putting all eggs in one basket’ syndrome has led to a sharp fall when the assumptions failed.
Absence of a National Real Estate Regulator : India woefully lacks a national real estate regulator which can holistically see the entire real estate market and industry in a comprehensive manner and can advise national, state and local stakeholders to appropriately structure policies, resources and business practices so as to steer the industry in a path of safe navigation. In the absence of the above, real estate in India happens in as many ways as it can, in an unstructured, disorganized and incongruent manner. Often, course correction becomes next to impossible because the multitude of stakeholders chart courses independently and have little answerability. For safe guarding the interests of various stake holders, it is essential that a national level regulator be created.
Inappropriate state level real estate policies – In almost all states of the country, the state governments have chartered their own ways of handling the real estate sector by creating state level policies and partnerships, often ignoring the overall market or social requirements and catering more to the narrow and short term interests of revenue mobilization. As a result, we have many state governments which promote luxury housing, shopping malls, IT/ITES projects, without taking a comprehensive view of the overall requirements of the city and society at large. There is no wonder that most such environments built in the recent past are surrounded by large pockets of illegal and marginal settlements of the middle class and urban poor for whom there is no formal affordable property supply.
Lack of incentives for right sizing the market – Policy itself, be it national level, state level or local level, does not incorporate any incentive for a balanced market to thrive. There are a whole lot of policies related to taxation, renting, stamp duties, etc. which offer little incentive or conducive conditions for the entrepreneurs to participate in a meaningful manner.
Orthodox urban planning systems – Although it is now a well accepted notion in India that centralised comprehensive town planning is a necessity for orderly, healthy and sustainable development of human settlements, the activity of urban/town planning is given little priority. Most settlements do not have comprehensive master plans and those that have, do not have revisions in place; often revised master plans take several years to get prepared and approved. Further, town planners and town plans are not given the due importance they deserve. Often, development proceeds giving scant cognizance to master plans. The orthodoxy is more in the place that town planning has in our contemporary socio-economic-political scheme of things rather than in the way urban planning is done perse.
Primitive real estate investment avenues – The financial and investment environment in the real estate sector in India has not adequately evolved despite talk of the same over several years. The near absence of products such as real estate mutual funds (REMFs) and the meager representation on the bourses have not given a significant opportunity for creating alternative investment opportunities in the real estate sector for the small investors. Real estate investments in India often mean only direct purchase of property and not in any other way and to that extent, the markets can be considered to be primitive.
