Before we dwell in 2009, it is pertinent to note that real estate sector witnessed phenomenal accelerated growth from 2005 to first quarter of FY 09, both in residential and commercial segments. The rationale for this spurt in demand was the incentives offered to real estate in the Union budget.
In 2005-2006, the surge was because of some important incentives like income tax exemption upto to Rs 1.50 lakh on interest paid on housing loans, tax exemptions to developers who produced residential units upto a certain size, provision for repeal of Urban Land Ceiling Act, etc.
Extremely attractive interest rates and easy availability of funds for acquisition of residential units provided additional impetus for an exponential growth. As the demand for real estate continues unabated, with a view to cool off the market, the Union Government/RBI intervened through certain monetary and fiscal measures such as withdrawal of the tax exemptions granted earlier, raising of interest rates, etc. This resulted in a peculiar situation. While, on one hand, there existed a demand due to unprecedented number of jobs generated by continued growth of knowledge industries and, on the other hand, the demand could not be translated into deals, mainly due to enhanced interest rates on housing loans. The real estate sector, therefore, entered a phase of sluggishness. Deals concluded were not commensurate with the actual latent demand. Large section of the prospective purchasers preferred to wait and the situation continued till September 2008.
Since October 2008, the world witnessed the collapse of American financial system, preceded by the sub-prime crisis. The latent or the built-up demand found another reason not to surface sufficiently while the investor’s demand remained low in real estate; almost every segment of the Indian economy entered a slow down mode. At this point of time, the Government intervened with encouraging measures to boost real estate demand, since it is considered to be the backbone of Indian economy and is the growth engine supporting around 240 industries. It is the largest employment generator for below the poverty line.
Starting November 2008, the Government has been taking a slew of proactive measures to boost demand for real estate.The RBI’s monetary easing is beginning to take effect with banks dropping lending rates by 50 – 150 basis points for various segments. It also includes concessional interest rates for loans upto Rs 20 lakh, pumping in Rs 3,00,000 crore to the banking system over a few weeks, to ease liquidity, reduction in risk weightage for housing loans, refinance by National Housing Bank at low interest rates and many more such measures. Banks have also announced softer interest rates for loans not only below Rs 20 lakh, but for loans above Rs 20 lakh also. This will prompt developers to consider more construction of mid segment and affordable houses. Apart from this, tier II and tier III cities are also promising good potential options for accelerated growth of real estate in these fast emerging cities. The proactive intervention by government is a major differentiator this time and this is bound to play a crucial role in the revival of the economy. The interest rate cut should prompt those, who were delaying decisions for sometime, now to wrap up deals for their dream homes during the first few weeks of the New Year.
More importantly, reasonable prices for residential apartments in tier II and tier III cities as compared to metros, is also a key factor as the bulk of demand will be seen in these emerging cities. The other good news is that the IT majors have not altered their hiring numbers much. Besides, hiring numbers for banks, insurance and some other sectors are likely to go up drastically. Job creation due to these factors should generate fresh demand for housing.
While at the time when we are looking forward to 2009 as the year of resurgence for Indian real estate sector, we would also seek the support of government in providing industry status to real estate sector as it is the largest employment generator after agriculture in the country and a single component within the industry — housing — contributes roughly 5 per cent of India’s GDP. The sector is therefore strategic to India’s economic progress. Consequently, the sector requires further impetus for continued growth.