The last five years have been extremely challenging for the Indian real estate industry. The whole industry was coming from a high point. The economy was growing, and sales would rise while prices were going up each year. But, following 2013 in 2013, the Indian housing market was stagnant. Since prices didn’t rise and speculators stayed away from the marketplace. With the already high prices of houses, the real buyers are removed from market. The current market can be described as an battle between builders and the buyers. Buyers are waiting to let prices of homes decrease, whereas builders are convincing them that prices won’t be able to drop in the near-term.
It’s important to understand that a large number of real property builders in India were heavily dependent. Therefore, as the sales have declined over time and they’re now facing bankruptcy. In reality, the real estate industry has the highest percentage of bankruptcy applicants in India’s courts since they began to become operational in the year 2016!
The fact is that there’s no doubt that the entire business is in a dire state. According to the latest research ,the total value of sales made from the residential real estate industry in 2018 was just half of the amount that builders must pay in interest on their outstanding loans! But, the impact of bankruptcy for builders is not restricted to only builders. There are many individuals that could be affected.
In the following article, we’ll take a closer look at the potential impact of real estate bankruptcy:
home buyers The first group that is affected by bankruptcy in real estate is the home-buyers. Over the last couple of years, Indian buyers of homes have been at the mercy of real developers of the real estate. This is due to the fact that they weren’t granted the status as financial creditors. Therefore, their claim to the property was less than the claims made by the banks as well as other institutions. In the event of bankruptcy, buyers of homes were most likely to lose their funds. This has changed in recent years. The government has approved an ordinance which states that homeowners will be granted the same rights to financial creditor rights. This means they won’t just get the profits from the sale of any asset but also enjoy the voting rights required. In the end, the buyer today is secured by laws. However, they do not have the time or money to engage in long legal fights.
the NBFC’s the Non-Banking Financial Corporations (NBFCs) are among the most visible consequences of bankruptcy for builders in India. As mentioned above, new rules by the government made the lending of money to builders in a way that was not sustainable. Banks knew the risks when they lend to builders in the current state of affairs. This is the reason banks have increased their risk exposure in the residential industry by 4% over the last three years. However the NBFC’s have gone all out to provide increasing amounts of loans to developers. Their exposures have increased by 46% in the same time!
In addition, IL&FS, which is one of the biggest NBFCs in India, was a target for financial scrutiny when it began to default on loans. The issue soon spread to other banks. Another scam was discovered at DHFL. This is why investors have become wary about lending funds to non-bank financial institutions. The result is that these businesses are lacking money to loan. A majority of their own loans are due to builders who are in a precarious financial position.
Mutual Funds: The NBFCs have a variety of sources of funds they raise. In some cases, they use bank loans to loan further. On the contrary, occasionally, they turn to capital markets. In recent times, lots of the loans provided to builders were made possible by high-yielding debt mutual funds. They would lend money to NBFC’s that would then give it to builders. If NBFCs fail and fail to pay their debts, they won’t be able to pay their debts, and mutual funds could become the next losses.
Why Deleveraging Will Make Matters Worse?
The issue with the real estate market is that it demands to throw good money at bad. In the ideal scenario, once lenders realize they’ve made bad loans, they cease making loans. But it’s not as simple in the real estate market. It is due to the fact that there are numerous non-complete projects available on the market. Without funds, the very viable projects could fail and could result in more bankruptcies and further prolong the cycle. The decline in prices isn’t the solution, as it was rising prices that attracted people to the real estate market initially. The falling price can deter potential buyers, making the situation more difficult. Banks, mutual funds buyers of homes, and NBFCs will need to be mindful of the way they interact with real estate developers, as bankruptcy would not be helpful to anyone.
In a nutshell, the real estate market is experiencing a huge change. It is probable that it will improve its efficiency in the near future. Proptech plays a significant role contribute to this improvement in efficiency.