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Indian Real Estate: Where to from Here?
Wed, 14 Sep Pre-Open

The Indian real estate sector has now been in the doldrums in recent years. Despite this, new launches continue to happen. This begs the question: Whether and when should one buy real estate in India? To answer this, let us look at some of the nitty-gritties of the real estate sector.

One of the simple reasons for real estate woes lies is the fact that most Indian real estate has been unaffordable for a while now. This, coupled with new launches, has led to a rise in the inventory of unsold homes in India.

Here's what Vivek Kaul wrote in one of the recent editions of the Vivek Kaul Letter:

  • In terms of number of homes, various news reports suggest that around 7 lakh homes are unsold across the eight biggest cities in India.

    Despite this huge inventory, new launches continue to happen. Not a day goes by without one newspaper or another having a full page advertisement from a real estate company, announcing a new project. Having said that the number of these launches has definitely come down than in comparison to the past.

    The question is, are people buying these new homes that are being built? The straightforward answer seems to be that they are not buying as much as is being produced, by the real estate companies.

    This can be concluded from the fact that the overall inventory of the real estate industry has been going up and is now at a ten-year high. If all that is being built was being bought, the total inventory would have been falling and not going up, as is the case. Nevertheless, it would be a stretch to say that homes are not being bought and sold, at all.

So there are two factors playing out at present: First- Demand for real estate has fallen. People are not buying homes as they used to do earlier. Second- Despite this fall in demand, new launches continue to happen, which in turn leads to a rise in inventory level.

Apart from this, real estate companies continue to witness financial problems. The total debt of 120 real estate firms has jumped from Rs 593 billion in 2011-12 to Rs 832 billion in 2015-16. Moreover, rising debt burden has also deteriorated the capacity of firms to service their interest obligations. As per an article in Business Standard, the interest coverage ratio for 120 firms has declined from 2.5 in 2011-12 to 1.79 in 2015-16.

After looking at the above factors, a quick recovery in the real estate sector seems to be a farfetched possibility as of today.

Some questions come to mind: Will property prices in India come down? Will the gap between rents and EMIs shrink?

To find the answers to these questions, we highly recommend you read the latest entry in Vivek Kaul's Diary: Jaitley's New Real Estate Pipe Dream: Where Rents Equal EMIs

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Jan 18, 2018 (Close)