The Indian Real Estate Market - Future and Challenges

The introduction of GST, application of RERA, demonetisation and the COVID-19 pandemic are some of the many challenges that the Indian real estate segment has faced in recent years. The real estate market has been struggling with all the primary factors of production including land, labour and capital. However, the quarterly housing sales in Q1 2022 were at an all-time high since 2015 showcasing how the real estate has managed to bounce back despite the hurdles. 

The following are some of the key challenges that the realtors have been facing in the current market scenario:

For a real estate developer, construction materials make up the majority of the overall cost required for real estate development. The costs of these materials have recently witnessed a dramatic increase, including the cost of essential materials like cement and steel. The global shortage of raw materials is the main factor contributing to the price increase. Moreover, rising fuel costs have driven up the logistical costs, pushing up the entire cost of the materials and as a result real estate.

Some real estate agents in Mumbai and also in other cities across the nation worry that real estate construction might have to be put on hold as a result of the rise in raw material prices. Mid-market and small developers are already operating with extremely limited margins post-COVID in order to remain competitive. In an attempt to sustain themselves, they will be forced to raise the pricing and pass the cost on to the customers. The increased property values are anticipated to cause a rise in rental costs as well.

The real estate industry has placed a significant emphasis on manual labor-intensive traditional construction methods. Real estate has experienced difficulties due to a lack of skilled blue-collar labour. Due to the real estate industry's heavy reliance on manual labour, the pandemic caused a standstill in the building industry. Project delays are brought about by low labour productivity and a labour scarcity. Industry estimates indicate that there is a 15–25% labour shortfall at the moment.

The time-taking nature of construction necessitates the need of funding for new small scale developers. But developers have always faced difficulties in availing funds from banks and financial institutions. Decisions are framed on the basis of speculative cash flows. As a result, the financial institutions typically exercise great care and consume a lot of time while reviewing loan application. Due to unavailability of funding and insufficient finance, many realtors actually fail to execute projects on time.

As the COVID-19 pandemic hit the nation, the Indian real estate market suffered hugely. Various corporates and companies adopted the work from home culture to ensure social distancing amid the lockdown. This remote model of working led to a decline in the demand for property in metro cities. As a result, the rental business also witnessed a massive hit. According to research, there was a decline of 14 percent year-on-year sales during the July-September 2020 period. The situation has now improved, and companies are slowly opening up. Still, a lot of companies are functioning on work from home models.

Acquiring land for new projects by developers is a big challenge in India considering the land is not freely available and substantial parts of land are under government ownership. Moreover, the property rates are high, making it difficult for small developers to attain sufficient capital to be able to invest in land.

Tackling these challenges faced by the Indian real estate requires the need to devise innovative solutions that will lead the next phase of growth for residential real estate markets.