Overview of Real Estate Sector

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The real estate boom in India was inextricably linked to the country’s economic stability, which had made India a preferred investment destination.

India is on the verge of becoming one of the fast-growing economies, driven by many factors including multinational entrepreneurialism, buoyant local stock markets, robust economy-changing demographics and the overall emergence of India on the global stage. With great demand for housing for India’s huge population and for commercial and industrial premises for its booming economy, large-scale real estate projects were launched across the whole country. This transformed the real estate business into one of the most lucrative sectors in the country. A sector which attracted venture capital, and diversified sources of funding including overseas, and private domestic funds and private equity funds. To create an environment friendly to foreign investors, foreign direct investment to up to 100 per cent was allowed in 2005 in townships, built-up housing and construction development projects with the liberalisation of FDI regulations. The inflow of funding catalysed the organised development. However, in 2008, the global meltdown in real estate produced a corresponding downturn in the Indian real estate sector.

Needless to say, the real estate sector plays a significant role in the Indian economy: it is second only to agriculture in terms of employment generation and substantially contributes to the gross domestic product of the country. Almost 5 per cent of GDP is contributed by the housing sector, and in the next few years it is expected to rise to 6 per cent. Moreover, the construction sector has also been responsible for the development of over 250 ancillary industries such as cement, steel, paints, brick, timber, building materials, etc. A study by a credit rating agency ICRA shows that the construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the Indian economy. A unit increase in expenditure in the real estate sector can generate a fivefold increase in income.
With the downturn in the economy, and being a capital-intensive industry, the real estate sector started to face a liquidity crunch emanating largely from banks’ cautious approach to financing the real estate companies. This approach was reflected in lower loan-to-property value, construction-linked payment and financing only for projects nearing completion. Further, real estate developers also had to cope with other sources of funding, such as private equity and stock markets, drying up considerably; receivables from residential projects under construction getting blocked; falling demand and buyers deferring payments until they took possession of properties. The resultant fall in valuation in the past few months coupled with high interest rates and low availability of money had put real estate developers on the defensive and kept home-buyers away.

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