WITH a housing shortage of over 22m units and millions of young urban middle-class buyers seeking that elusive apartment, the real estate sector in India should apparently have no cause for complaints.

But recent years have seen fortunes of the industry swing both ways — euphoric during bull runs and depressed at the time of slowdowns. The change in government at the centre has, however, brought some cheer for the industry, which expects a lot from the Narendra Modi government.

Many in the industry had despaired over the lack of reforms in the housing sector during the United Progressive Alliance (UPA) regime. The biggest blow to the industry was the enactment of the Land Acquisition Act, which would have made it virtually impossible for developers to buy vast tracts of land in cities.

The act, which has been passed, but still not come into force, envisages doubling of compensation for acquisition of land in urban areas and four times more compensation for land acquired in rural areas.

While on one hand the central government — and even many state governments — wanted to encourage low-cost housing, urging developers to put up sprawling townships, the Land Acquisition act made it virtually impossible for developers to get land parcels of 100 or 200 acres near the cities.

Large housing projects were also stalled because of the refusal of the environment ministry to give clearances. Urban housing projects, including the setting up of new cities such as Lavasa near Mumbai, were delayed indefinitely because of confused thinking within the UPA government.

The notorious ministry of environment and forests was always battling other ministries, developers and business groups, refusing to give speedy clearances, or deciding matters one way or the other.

Fortunately, the new government has promised to review the Land Acquisition act, making it easier for developers — and businesses to buy large tracts of land — and without having to get the consent of 80pc of the land owners. Many state governments have also raised objections to some of the impractical clauses in the new act.

Another major complaint that the real estate sector had against the government was the resource crunch with banks and other lenders refusing to extend finance. Of course, many state-owned banks had burnt their fingers giving loans to developers, many of which have ended up on their books as bad loans.

The balance-sheets of many public sector banks have turned messy after loans given to infrastructure firms — including power plants, road builders and other infra developers — turned delinquent. The infra firms blame the environment ministry for not giving them the necessary clearances, which upset their plans and destroyed their finances.

Over cautious banks have been refusing to lend money to developers. And the high interest rates — which have remained high because of the Reserve Bank of India’s fears of inflation — have discouraged people from taking housing loans, depressing demand.

IN Mumbai, which is one of the biggest real estate markets in the country, there are thousands of flats in high-rise buildings that are vacant. Many investors have bought these flats, hoping to sell them at hefty profits.

However, the economic slowdown in India in recent years — which has affected several industries — has resulted in dampening of sentiments in the real estate sector. Property prices in Mumbai had also shot up to unrealistic levels.

There have been transactions in Mumbai’s upmarket localities where apartments have changed hands at absurd prices. In some south Mumbai areas, flats are sold at rates of Rs100,000-plus for a sq ft of built-up space. Of course, these are not the norm, but every year there are a number of transactions at such high rates.

But generally property prices in Mumbai and Delhi are still very high. In Mumbai, it averages between Rs10,000 and Rs25,000 a sq ft in many suburban areas, whereas in the posher localities it ranges between Rs50,000 and Rs60,000.

Developers with deep pockets, however, continue to promote projects, especially in central Mumbai, where the old textile mills have been replaced with soaring towers, many rising to 60 to 70 floors high. Investors, including many NRIs, buy these apartments, hoping to sell it off at hefty profits when the flats are ready for occupation.

Investors are active in real estate markets including Mumbai and Gurgaon, which lies within the National Capital Region (NCR). Surprisingly, despite the absence of buyers, prices in both these cities refuse to come down and the investors continue to hold on to the apartments.

The Indian government has been toying with the concept of Real Estate Investment Trusts (REITs), which are quite active in many parts of the developed world. However, the 2008 economic crisis resulted in a setback to the plans for setting up REITs India.

The new BJP government has now revived plans for REITs. Finance minister Arun Jaitley, in his budget, promised to tweak the tax laws to make it more attractive for foreign investors to set up REITs and list them on the stock markets.

Many international private equity funds have been active in the Indian real estate sector, partnering domestic developers, or funding specific projects. Now with REITs likely to become a reality, many of these funds will have opportunities to exit projects/companies.

The real estate sector is also eagerly waiting for clarity from the government about the concept of ‘smart cities.’ Jaitley had announced that the government planned to promote 100 ‘smart cities,’ meant for the emerging ‘neo middle class.’

Of course, if the Land Acquisition Act is not amended, making it easier for developers to buy land, the ‘smart cities’ concept would be difficult to take up. The government’s focus on urban infrastructure — including transport — is expected to boost sentiments in the real estate market.

Cities such as Mumbai, Bangalore and Delhi have seen several new transport projects — including metros, freeways, expressways and flyovers — being executed in recent months, which are having a major impact on the real estate industry. While property prices are firming up along these corridors, developers are also finding it difficult to buy land along the routes, as prices have soared.

Published in Dawn, Economic & Business, July 28th, 2014