Homes and gardens

A real estate crisis


With funds drying up and supply exceeding demand, builders and buyers have to find a way out.

Ananth is a worried man, his house is 80% complete and for the rest he is facing financial crunch. He cannot move in unless the house is fully complete. What went wrong with his budget?

When he began the construction work a year ago the prices of materials such as cement, sand, steel, and paint were less. He had not foreseen a steep increase in prices. And he did the mistake of adding one floor to the the original plan.

The financial institutions could not fund him nor could he arrange funds from other sources.

Let’s look at a larger example of a builder or a construction company. The budget runs into tens of crores and most of the finances are based on calculations linked to prevailing prices of construction materials at the time of beginning of the project. It also majorly depends on raising funds from financial institutions and receiving funds from prospective buyers of flats.

Over the last one year, thanks to the IL&FS debt crisis that upset the applecart of the financial sector compounded by the default of Essel group, DHFL and the like, funding across all sectors has dried up; the worst hit is real estate.

It is reported that construction work worth over ₹4 trillion (one trillion is one lakh crore)is stalled across the country. The funds required to finish the projects are expected to be in the range of ₹90,000 crore.

Real estate is the second largest employment creator in the economy and this sector reeling under such crunch can lead to adverse economic implications; thousands have already lost their jobs and more are expected to lose if the situation persists.

Why did the situation escalate to such levels? Is the government only to be blamed for this situation? Until a decade ago the names of the builders that passed common people’s mind were only a few; but over the last few years builders and developers have mushroomed in every corner of the cities. Their expectations were very high and in this melee supply exceeded demand.

Being aware of the distress, last week the government announced it would pump-in ₹10,000 crore for the stalled and stressed projects and another ₹10,000 crore would come from financial institutions.

Of course, this sop is too little considering the gravity of the situation; also it is not clear what methods would be deployed to complete the projects.

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Printable version | Dec 12, 2019 2:49:10 AM |

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