Forget the vitamins we need steroids for the real estate industry

In an environment where the rest of the world is bracing itself for a potential repeat of the 2008 financial crisis, trying to fix one industry’s woes would be like prescribing vitamins, when what we need are stronger doses of vaccines and in some cases antibiotics and steroids. Even though the real estate industry is the biggest employment generator of the country, we have to recognise the fact that the industry is not the core driver of the economy.

One bright spark for us in India is the start-up buzz. Never before has the world recognised our human capital to have the capability to start and build businesses or change-the-game in existing industries. Through ‘Start-Up India’, the government is taking the right steps to create an environment where this enterprising spirit can thrive and where investments into, as well as, exits from such ventures do not suffer from some of the legacy bureaucratic hassles and myriad of tax laws that past investments in traditional businesses have had to go through. One way the real estate sector could play a role in supporting Start-up India is by building work spaces tailored to the new economy. Flexibility in pricing (pay-per-use), workspace features (plug-and-play), co- sharing, funding-liked-payment terms could be some ways that the real estate sector could support these industries.

We need to make it more efficient to do business in India, after having dealt with job creation and infrastructure. Currently, India is ranked 183rd in the World Bank ranking of ‘dealing with construction permits’. The real estate sector is bearing a huge cost of ambiguity and uncertainty in approval processes leading to delays. These delays can increase the cost of the projects from 10 to 30%, thereby eroding margins and leading to inelasticity of pricing. Technology enabled single window clearance is the only solution forward and while real estate is a state subject, bringing consistency and efficiency in the approval processes is an initiative that the Central Government should drive by incentivising the state governments to stream-line and standardise their approval processes within a specified timeline.  

The real estate and the construction industry will continue to be the highest employment generator for the years to come – a point we started with. The industry could further reduce upwards of 10% in their construction costs if construction workforce efficiency could be improved with skill development. Developers lose money with constant turnover of workers in their sites and lack of skilled workers. The costs of workers have also increased significantly without corresponding improvements in their efficiencies. This could turn out to be a recipe for disaster in the coming years and could also be a concern from a safety aspect. Strict guidelines need to be enforced on the training of construction workforce and the government should look at allocating funds to training and skill development.

How will all this help the real estate industry and the government? New jobs and a growing economy bring positive sentiments. That good news is desperately required for the residential segment. Today land prices in location with relatively adequate infrastructure continue to remain high even though sales of the final product have slowed significantly. The main reason for this is that people remain averse to invest in newer locations, where infrastructure is inadequate, as they do not have visibility of when it could change. Products with lower price points could be developed in peripheral locations if infrastructure needs are comprehensively addressed in these newer locations. Finally, developers are unable to bring down their prices even when sales slowdown because their costs of construction, costs of approvals and inefficiencies in construction are only contributing to increases in costs.

 

About the author

Joe Verghese, leads the Colliers International India National Executive team as Managing Director through the second phase of Colliers’ Accelerating Success business plan, aimed at focused client engagement & excellence in service delivery. Joe is a Fellow Member - Royal Institute of Chartered Surveyors (FRICS) and has been a part of Colliers since 2006.


 

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