India’s 2024 Real Estate Landscape: Boom and Bust No More?

In Tier 1 cities like Mumbai, the soaring cost of land has discouraged many potential investors from purchasing or investing in land. Transactions involving the funding of land acquisitions are few and far between. Most real estate development is in the form of joint ventures, meaning landowners contribute their land and receive part of the finished project or future sales revenue in return.

In today’s market, maximising land value has shifted towards prioritising customer satisfaction in both commercial and residential projects. This focus has led to several positive outcomes, such as reduced risk for developers through lower exposure to real estate fluctuations, and an easing of the burden of hefty interest rates on housing projects.  

Due to the government’s proactive stance on the redevelopment of existing buildings and the granting of permission to unlock additional development potential on the same land, Mumbai is seeing an explosion of redevelopment. Flat owners are teaming up with chosen developers to redevelop their existing premises. This allows them to get bigger flats and better amenities, while the developers can build and sell additional units on the same land.

To help both slum dwellers and flat buyers in stalled redevelopment projects, the Slum Rehabilitation Authority has allowed lenders to choose developers who can finish these projects. However, a recent Bombay High Court ruling requires developers to deposit two years’ worth of rent for displaced slum dwellers before starting work.

To improve cramped living conditions in some areas, the Planning Authority has permitted “cluster development”. This allows combining and redeveloping small, crowded buildings into a single development, providing residents with spacious layouts, open spaces, and amenities they typically would not have access to.

Mumbai is also ready to welcome its new airport. A 20 km bridge across the Arabian Sea connecting the airport to the city is an engineering marvel. The new infrastructure has resulted in a lot of interest from real estate players in areas surrounding the airport.

India’s Real Estate Regulation Act (RERA), introduced in 2017, has finally come of age. Under its current Chairman's leadership, the RERA Authority has prioritised project completion, aiming to rebuild trust with both investors and developers. Standardised agreements and fair penalties for delays in possession or payments have streamlined dispute resolution, boosting confidence in a fair real estate environment.

With Mumbai’s construction boom in full swing, finance follows close behind. Developers need cash to build, and expensive projects demand efficient capital allocation. To avoid stalling, many projects rely on pre-construction sales to buyers. Fortunately, home and office buyers benefit from readily available financing at favourable interest rates during construction phases. However, this dependence on pre-sales makes the entire system vulnerable to potential failures. A strong and stable financial system is essential to ensure against such risks and prevent cascading effects on the entire market.

The Reserve Bank of India (RBI) has through its policies ensured that lending is restricted to banks and financial institutions, or alternative investment funds (AIF) registered with the Securities and Exchange Board of India (SEBI). Moreover, it has established stringent measures to prevent private individuals from taking over debts owed to banks or financial institutions, stipulating that such debts can only be transferred or resolved between the concerned banks and financial institutions.

Additionally, the RBI has outlined specific criteria requiring that an originator of debt retains a minimum amount of debt for a defined time period before any transfer, thus ensuring the resilience of the financial system.

The RBI recently restricted banks and financial institutions from investing in AIF funds that lend to companies already funded by those same banks and institutions. This prevents the practice of “evergreening”, where debts are repeatedly rolled over or restructured without addressing the underlying financial issues.

Securitisation laws empower banks and financial institutions to collect outstanding debts efficiently, without needing to navigate lengthy court proceedings. These laws also enable banks to take control of and “clean up” the assets, removing any legal encumbrances before their sale. This enhances their market value and reduces the overall stress on banks’ balance sheets. Finally, securitisation laws grant banks swift access to magistrate courts, empowering them to secure possession of properties quickly if borrowers fail to comply.

The recently introduced insolvency laws prioritise replacing promoters who cannot repay their debts within a defined timeframe. For secured lenders, they provide the final say on debt resolution, ensuring greater control and certainty. Further, home buyers are now treated on a par with financial creditors, offering them significant protection and a stronger voice in the resolution process.

Prime Minister Modi’s vision for infrastructure development is undeniably evident in the reforms he has championed. The real estate sector is operating within a fairer and more controlled environment thanks to these changes. This balanced approach ensures not only growth but also the protection of certain stakeholders like home buyers.