Tough Times
Real Estate

Tough Times

Despite the long-term benefits from developments like demonetisation, RERA and GST, distress in real-estate construction will linger, predicts <span style="font-weight: bold;">BINAIFER JEHANI.</span> <p></p> <p> Real estate, which accounts for over 40 per cent of the construction industry's revenue (infrastructure and industrial construction account for the rest) has witnessed significant slowdown in 2017. The industry has hogged headlines over the past couple of quarters with various ground-breaking developments such as demonetisation, RERA and GST. Although these developments are likely to create short-term woes, in the longer term, these changes will benefit the real-estate industry by increasing the share of organised players. </p> <p> <span style="font-weight: bold;">Short-term disruption caused by demonetisation</span><br /> Distress in the industry began with the unexpected announcement of demonetising Rs 500 and Rs 1,000 notes, which put restrictions on cash withdrawals. The sector, which inherently involves high cash transactions across many parts of the country, took a significant hit during the 50 days of demonetisation as developers and contractors found it difficult to handle day-to-day operational costs, especially payments to be made to labourers.</p> <p>India's construction industry, a major contributor to the GDP, was under major threat, with labourers fleeing to their villages with no money to meet their ends. The halt in real-estate construction activities not only affected labourers but also crippled other construction-dependent sectors. Resultantly, demand for raw materials like cement and steel slumped as builders reduced purchases. This resulted in a 20-30 per cent drop in real estate construction, with few cities witnessing even deeper pain.</p> <p> <span style="font-weight: bold;">RERA impact </span><br /> The industry had just started recovering in the first half of the year when RERA was implemented, making registration and compliance for all ongoing projects mandatory. As per the initial announcements, all states and Union Territories (UTs) were instructed to notify RERA rules by May 1, 2017, which most states failed to do. Following that, all ongoing projects were given three months, ie, until July 31, 2017, to get registered under RERA; most developers also failed to meet the deadline. To avoid falling under RERA's purview, many developers also hastened construction to complete their ongoing projects. On the supply front, most developers have dropped new project plans as they continue to focus on finishing the ongoing projects.</p> <p>Although RERA is expected to be a long-term positive by ushering in the much-needed transparency and timeliness in the sector, it has acutely impacted construction players and it will be some time before some stability returns. Contractors/builders are currently being patient as they expect RERA to benefit the industry. Although developers will face pressure to complete projects on time, contractors will be benefitted as they will be able to avoid overhead costs, which increase with every delay and cannot be passed on to developers. </p> <p> <span style="font-weight: bold;">Incremental burden on working capital likely to continue </span><br /> In addition to the aforementioned developments, the GST, too, has impacted the construction industry. Owing to 18 per cent and 28 per cent GST on raw materials steel and cement, respectively, overall working capital has risen sharply for contractors/builders, and meeting the increased working capital requirements is posing to be a challenge as not all payments that come from clients are based on billings. As obtaining loans from banks is a tough ask, contractors and builders are left with no choice but to depend on private investors.</p> <p>Amid these challenging times, affordable housing has been a ray of hope for the construction industry. The government has taken several initiatives to push affordable housing; this has given contractors/builders a new area to explore, though availability of land in key locations remains a major challenge. The way forward<br /> Overall, the slowdown in the real-estate sector sales has impacted the liquidity of most developers, which has in turn resulted in slowdown of construction work at ongoing projects. CRISIL Research does not expect this situation to ease significantly over the next few quarters.</p> <p> <span style="font-weight: bold;">About the author:<br /> Binaifer Jehani, Director, CRISIL Research</span>, leads the research function on the automobile, infrastructure, logistics and real-estate sectors at CRISIL Research.</p>

Despite the long-term benefits from developments like demonetisation, RERA and GST, distress in real-estate construction will linger, predicts <span style="font-weight: bold;">BINAIFER JEHANI.</span> <p></p> <p> Real estate, which accounts for over 40 per cent of the construction industry's revenue (infrastructure and industrial construction account for the rest) has witnessed significant slowdown in 2017. The industry has hogged headlines over the past couple of quarters with various ground-breaking developments such as demonetisation, RERA and GST. Although these developments are likely to create short-term woes, in the longer term, these changes will benefit the real-estate industry by increasing the share of organised players. </p> <p> <span style="font-weight: bold;">Short-term disruption caused by demonetisation</span><br /> Distress in the industry began with the unexpected announcement of demonetising Rs 500 and Rs 1,000 notes, which put restrictions on cash withdrawals. The sector, which inherently involves high cash transactions across many parts of the country, took a significant hit during the 50 days of demonetisation as developers and contractors found it difficult to handle day-to-day operational costs, especially payments to be made to labourers.</p> <p>India's construction industry, a major contributor to the GDP, was under major threat, with labourers fleeing to their villages with no money to meet their ends. The halt in real-estate construction activities not only affected labourers but also crippled other construction-dependent sectors. Resultantly, demand for raw materials like cement and steel slumped as builders reduced purchases. This resulted in a 20-30 per cent drop in real estate construction, with few cities witnessing even deeper pain.</p> <p> <span style="font-weight: bold;">RERA impact </span><br /> The industry had just started recovering in the first half of the year when RERA was implemented, making registration and compliance for all ongoing projects mandatory. As per the initial announcements, all states and Union Territories (UTs) were instructed to notify RERA rules by May 1, 2017, which most states failed to do. Following that, all ongoing projects were given three months, ie, until July 31, 2017, to get registered under RERA; most developers also failed to meet the deadline. To avoid falling under RERA's purview, many developers also hastened construction to complete their ongoing projects. On the supply front, most developers have dropped new project plans as they continue to focus on finishing the ongoing projects.</p> <p>Although RERA is expected to be a long-term positive by ushering in the much-needed transparency and timeliness in the sector, it has acutely impacted construction players and it will be some time before some stability returns. Contractors/builders are currently being patient as they expect RERA to benefit the industry. Although developers will face pressure to complete projects on time, contractors will be benefitted as they will be able to avoid overhead costs, which increase with every delay and cannot be passed on to developers. </p> <p> <span style="font-weight: bold;">Incremental burden on working capital likely to continue </span><br /> In addition to the aforementioned developments, the GST, too, has impacted the construction industry. Owing to 18 per cent and 28 per cent GST on raw materials steel and cement, respectively, overall working capital has risen sharply for contractors/builders, and meeting the increased working capital requirements is posing to be a challenge as not all payments that come from clients are based on billings. As obtaining loans from banks is a tough ask, contractors and builders are left with no choice but to depend on private investors.</p> <p>Amid these challenging times, affordable housing has been a ray of hope for the construction industry. The government has taken several initiatives to push affordable housing; this has given contractors/builders a new area to explore, though availability of land in key locations remains a major challenge. The way forward<br /> Overall, the slowdown in the real-estate sector sales has impacted the liquidity of most developers, which has in turn resulted in slowdown of construction work at ongoing projects. CRISIL Research does not expect this situation to ease significantly over the next few quarters.</p> <p> <span style="font-weight: bold;">About the author:<br /> Binaifer Jehani, Director, CRISIL Research</span>, leads the research function on the automobile, infrastructure, logistics and real-estate sectors at CRISIL Research.</p>

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