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CHALLENGES FOR REAL ESTATE SECTOR IN INDIA

Omprakash Sukumalani Shilpa Bhagtani Jyoti Chugh Abstracts The research entitled Challenges of Real Estate in India is an attempt to reveal the issues concerned with real estate investment sector in India. This research is concerned with the challenges of real estate in India and the trends in the concerned industry. The current global financial crisis has badly hit the real estate sector in India. All construction activities have virtually come to a standstill even as the builders are facing difficulty in selling out the existing inventory. Research has shown that a decline in residential investments signals an impending decline in economic activity. Sources of demand for both residential and commercial real estate sectors are similar and this should move the markets in the same direction over the long-run. Since the residential market has already collapsed, the study of real estate sector is important.

Introduction The real estate sector is a critical sector of our economy. It has a huge multiplier effect on the economy and therefore, is a big driver of economic growth. It is the secondlargest employment-generating sector after agriculture. Growing at a rate of about 20% per annum and this sector has been contributing about 5-6% to Indias GDP. Not only does it generate a high level of direct employment, but it also stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, consumer durables and so on.

The Indian real estate industry has been on a roller coaster ride since 2005. Consequent to the governments policy to allow Foreign Direct Investment (FDI) in this

sector, there was a boom in investment and developmental activities. The sector not only witnessed the entry of many new domestic realty players but also the arrival of many foreign real estate investment companies Including private equity funds, pension funds and development companies entered the sector lured by the high returns on investments. The real estate sector has been riding through many highs and lows since then. The industry achieved new heights during 2007 and early 2008, characterised by a growth in demand, substantial development and increased foreign investments. However, by mid-2008, the effects of the global economic slowdown were evident here too, and the industry took a U turn. FDI inflow into real estate dropped significantly and what had emerged as one of the most promising markets for foreign investments experienced a downturn.

Objectives of the Study


The objectives of this study is to find out the challenges of real estate sectors in India

Challenges for Real Estate Sector: The Indian real estate sector has traditionally been an unorganised sector but it is slowly evolving into a more organised one. The sector is embracing professional standards and transparency with open arms. Further, lack of consistency in rules relating to development of SEZs, increased monitoring of the sector by regulatory agencies, tightening of rules for lending to the real estate sector and increase of key rates by the RBI several times during the last few years, have arrested the growth of the sector. The major established domestic players in the sector are DLF, Unitech, HDIL, Hiranandani Constructions, Tata Housing, Godrej Properties, Omaxe, Parsvanath, Raheja Developers, Ansal Properties and Infrastructure and Mahindra Lifespace Developers Ltd to name a few. International players who have made a name for themselves in India include Hines, Tishman Speyer, Emaar Properties, Ascendas, Capitaland, Portman Holdings and Homex. Following are the major challenges or problems faced by real-estate sector in India: 1) Lack of clear land title: For most of SEZs and other industries the major problem is lack of the clear land title, this problem is happen due to lack of co-ordination and transparency in the system. This problem can be resolved with the help of technology, the government need to adopt the efficient information technology to improve the transparency in the system.

2) Absence of Industrial status: Real estate sector is the second most employment generated source for Indian economy, and real estate sector is unorganised sector, this sector is facing the problem of lack of government regulations. There is no regulatory authority for real estate sector. So, to resolve this problem we need to have a regulatory authority for real estate sector. This year might also see the ambitious Real Estate Regulation Bill that aims to facilitate growth and promote a transparent, efficient and competitive real estate market in the country, being tabled in Parliament.

3) Lack of adequate source of finance: The major problem of real estate sector is lack of source of finance, the high interest rate, and low demand impact adversely on the financial potion of the real estate companies. Major real estate players are now opting the OFS (Offer for Sale) to raise the funds. Global recession also impact the foreign inflow of capital in this sector. Domestic slowdown in the economy also causes the lower demand. These factor causing the problem of adequate source of finance.

4) Shortage of skilled labour: Due to unorganised sector the real estate sector is also facing the problem of lack of skilled labour. High competition with global players needs the high skilled labour. But shortage of skilled labour also creates the problem of high wages. If the regulatory authority in real estate sector exists then may be the problem of the shortage of skilled labour may be solved.

5) High interest rate cost: Real estate developers are reeling under high debt and foreign direct investment inflows have slowed. High interest rate cost will lead to increase the cost of construction and this leads lower demand. RBI hikes the interest rate from 2008 to 2011. But in last year the interest rate is constant, but lack of liquidity with banks the interest is still high. The high inflation directly affects the demand of real estate sector. RBI need to reduce the interest rate and easy the norm for the loan to real estate sector.

6) Low liquidity: The problem of liquidity is due to two basic reasons; one is less demand of real estate and another is complicated procedure for loan for buyer and companies. The demand of real estate sector is slowdown in last few years due to slowdown in economy, high inflation and high interest rate.The current global financial crisis has badly hit the real estate sector in India. All construction activities have virtually come to a standstill even as the builders are facing difficulty in selling out the existing inventory. Demand of property in many cities is reduced by 50%. The procedure of loan from bank is complicated due to high NPA of banks.

7) High manpower and material cost: High raw material cost and labour cost leads the increase in construction cost and reduce the demand of real estate in the market. High material and labour cost affect negatively on demand and profitability of the company. Slowdown in these market have resulted in increase the pressures on the margins of the companies in India, which in turn has led to the companies looking cut the costs through reducing expenditure on real estate sector. In the below diagram its shown that the cost of construction and profit in India and USA are different.

8) Slowdown in global & domestic economy: Slowdown in global economy along with the increase in rate of interest by RBI finally seems impact on domestic economy with GDP growth cooling down since past few quarters. The GDP growth recorded in first quarter of financial year 2012 has been slowdown to 7.7% against the 9.3% in first quarter of financial year 2011. Even the projected GDP growth of financial year 2013 has been 5.6%. This is directly impact the real estate sector as reduce in domestic as well as foreign capital flow in this sector. 9) High Competition: According to the latest reforms, FDI up to 100% under the automatic route in township, housing, build up infrastructure and construction development project (which would include, but not restricted, housing, commercial premises, hotel, resort, hospital and educational institutes) is allowed foreign players to operate in India.

10) Policy limitations: Policies for real estate development are very complicate and unpractical in this span of time. The land acquisition act was passed in 1894, and till date there is no reforms was made. The new land acquisition bill is still in pending in parliament. There are many cases of policy limitation, which destroyed the image of corporate India. The case of Tata Motor Ltd. in Singur, West Bengal is one of them.

11) Environmental clearance issue: Many of the projects are suspended of delayed due to environmental clearance issue. There is lack of co-ordination among the various government agencies; this led the problem to real estate sector. Lavasa City in Pune, Maharashtra is one of the examples of this problem. This affects negatively on the financial position of companies in many ways.

12) High supply & low demand: FDI result the high inflow of capital in this sector, but due to slowdown in economy, high interest rate and high property price reduce the demand of real estate. In the report of The Times of India, demand of residential property reduces to 70% in few cities. The main reason of lower demand is high price and excess supply.The current global financial crisis has badly hit the real estate sector in India. All construction activities have virtually come to a standstill even as the builders are facing difficulty in selling out the existing inventory.

13) Approval and procedural difficulties: The approval and procedural complication is one of the key challenges for real estate sector. In efficient markets, information flows so quickly among buyers and sellers that it is virtually impossible for an investor to outperform the average systematically. As soon as something good or bad occurs, the prices of the affected companys stock adjust to reflect its current potential for earnings or losses. Real estate markets are no as efficient as stock markets.

Remedies: To increase demand and transparency most of the companies now selling their properties by exhibition, online and direct sell office to avoid miscommunication.

The sole aim of such an initiatives is to provide then with on job training and also enable the under privileged youth who are seeking to make this a career, a chance to work more professionally, thereby, ensuring that they are transformed as skilled labour. This kind of an initiative plays a significant role in boosting their confidence at work and enables them to enhance their existing skill, and further helping them to increase their income.

Methodology: The present study is of analytical and exploratory nature. Accordingly the use is made of secondary as well as primary data. The secondary data is collected mainly through various newspapers, magazines,Internet and RBI review. To supplement the secondary data, some primary data has also been usedwhich is collected through interviews and personal visits to the various companies to know the present situation of the market.

Conclusion: After studying all the factors of the real estate it can be concluded that the Real Estate is a very wide concept and it is highly affected by the macro-economic factors like GDP, FDI, per capital income, Interest rates and employment in the nation. The most important factor in the case of Real Estate is location which affects the value and returns from the Real Estate. India needs a stronger capital market base for property financing. The debate on the potential introduction of REITs and real estate funds points in the right direction. Another factor that hampers the growth of real estate sector in India is the lack of basic amenities like water supply, roads, power and sanitation. Government should make efforts to increase partnership with private sector companies in building these basic amenities. The participation of private players in infrastructure sector will, apart from bringing latest technology and management practices, ensure timely completion of the projects.

Bibliography: 1) Basu, Kaushik (ed.) (2007). The Oxford Companion to Economics in India A-Z, New Delhi, Oxford Univ. Press. 2) MohantyNirmal, RunaSarkar and Ajay Pandey (eds.) (2009), India Infrastructure Report 2009: Land A Critical Resource for Infrastructure, 3iNetwork, Oxford Univ. Press. New Delhi. 3) Morris Sebastian and Ajay Pandey (2009) in Mohanty Nirmal, Runa Sarkar and Ajay Pandey (eds.) (2009). 4) Morris, Sebastian (2007), Infrastructure, in Kaushik Basu (ed.) (2007). 5) Centre for Monitoring Indian Economy (CMIE)-Prowess