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Real Estate Sector – The easy cash cow, which stopped milking

Estate

Like any other business, real estate profitability is assessed on several parameters. Investors must be aware of the basic valuation system to buy or sell properties. It is quite similar to valuing shares or bonds. The real estate sector was often placed in the cash cow segment of the BCG matrix due to its steady returns that exceed the investment amount. However, there is a steady decline in the real estate segment due to various political, economic and social factors. The free-flowing cash in the sector is now under limited authority. Real estate that was a sure shot gamble has not left anyone with the possibility to try luck. The easy cash cow has stopped milking.

Mythbuster Anushree

Real estate has been fighting to come out of the state of stagnancy since 2008. With increasing prices and protocols, consumer demand has decreased, which has led to unsold inventory and dissatisfaction. Cities like Mumbai, Bengaluru, Delhi, Pune and Hyderabad observed only 4% new house investments in 2015 and almost 7 lakh new units were not sold. Lucrative offers and discounts are not working on the buyers anymore. There are several factors that have contributed to the slow growth of the real estate sector in India.

According to a report published by The Quint on 6th Sept, 2017.

“Real estate consultancy Knight Frank said that new residential real estate launches had fallen 41 percent to a seven-year low. Sales volumes had dropped 11 percent compared to a year ago.”

Increasing Inflation and Global Recession: Almost 2 lakh jobs were lost in the service sector in 2013 that reduced the purchasing power of the potential buyers.

Increased Cost of Production: As the Indian government has increased the protocols with the introduction of RERA, for initiating and completing a plan, builders are not being able to complete their projects on time which has further led to the increase in the overall cost of the property. Because of the piled up unsold inventory, any more investment in the sector is discouraged resulting in a slowdown.

Introduction of New Technology:  Smart homes are trendy and in demand. The old traditional construction is outdated and redundant. People are keen to invest in the newer technology even if they have to pay a little extra but not on the old units.

High Construction Cost: Due to increase in the prices of the construction material, developers are facing real-time crisis. They are not being able to make a profitable margin.

Region Specific Demand: Since 2013, real estate in North India has grown at an extremely slow rate. Delhi NCR’s poor growth rate in real estate can be attributed to poor infrastructure issues. Alternatively, the South Indian states have done well. The consumers invested towards affordable houses and thus managed to keep the sector on the track.

Implementation of Real Estate Regulation and Development Act (RERA) and Goods and Services Tax (GST): Due to the new taxing schemes by the government, home loans growth rate dipped to 14% in the first part of the fiscal year 2018 and investment in the premium segment also dropped significantly.

Experts claim that the current slowdown is just a phase and the market will witness a boom by 2020. The retail and commercial sector will contribute to the Gross Domestic Product of the country largely; We expect a large amount of Foreign Direct Investment too, in the coming years, due to the liberalized approach of the government. The Central and state governments have taken several initiatives like smart city projects that would contribute positively to the growth of the sector. Other schemes like affordable housing and Real Estate Investment Trust (modeled after mutual funds) are expected to improve the current scenario.

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