Real Estate Industry Needs Introspection Along with Government Aid

Pranab Datta
Chairman
Knight Frank India

The budget for 2012-13 did not have much to offer for the Real Estate sector and without any stimulus, it is not surprising that the difficult conditions in the sector escalated further. With the absorption of commercial real estate and housing having fallen, the industry finds itself in a tight corner with mounting debts and declining profits.

While the industry should not rely only on government support to bail it out and must look within itself for out-of-box approaches to bounce back at the earliest. Considering its vital importance to the economy and the fact that it provides one of the core basic human needs, it must be acknowledged that it has a legitimate case for appropriate facilitative environment in which the sector can prosper and add value to the economy.

An incremental or a cut-and-paste solution will not do. While the regulatory framework needs to be spelt out through the relevant bills that have been in the pipeline now, it is equally important that some of the challenges that the sector is facing currently are appropriately dealt with.  For instance, the high costs of finance through the successive increases in bank rates over the last 3 years, reduced availability of liquidity and a more congenial environment for the inflow of FDI into the sector are the areas that the government can look into. Without cross border fund flows, the burden will only fall on the banking sector or the private channels (not the best sources). Though the FDI experience so far has been dismal during the learning curve, hopefully future inflows will not have to go through the trauma of the earlier period. The regulatory framework for FDI needs to be relooked so that the constraints can be removed and at the same time funds are not allowed to be employed for speculative purposes.

There is also a need to fast track the creation of structures such as REITS and Real Estate funds and a market created for commercial, retail and hospitality assets to improve the liquidity in the system.

Regarding the hurdles in improving off-takes of housing stock, the price value equation needs to be restored. The slowdown in the sector reflects the operation of market forces, which hopefully will compel new development to factor the consumer paradigm appropriately for better off-takes.

Real estate can make a big difference to the economy and it is important that the government provides the required impetus to the sector to improve national growth rates, given that there is such a huge unmet demand. Some critical catalytical steps can give exponential benefits to the real estate industry and these are essential for long-term sustainable development of the sector.