India's Property Market Faces Tough Times as Sales Peak and Funds Dry Up

With markets from Tokyo to New York on edge this week, the warning sign flashing around a large Mumbai builder didn’t get much attention. But Indian investors were keeping a close eye. When Oberoi Realty missed analysts’ forecasts for sales and profit and posted a smaller operating margin in its residential unit, there was a stampede out of Indian property stocks.

Unease with real-estate developers in India has been growing for some time. The BSE Realty Index is down more than 30% from its peak in June 2024. Last week, though, the sense of foreboding deepened. And the reason for that goes back to the stock market.

When the economy reopened after the pandemic, retail investors’ financial portfolios were stuffed with hefty gains from the previous two years. As some of that wealth began to chase new homes, builders’ stock prices zoomed. And they responded by buying up land at crazy prices and launching a flurry of new projects. The market saw their bulked-up balance sheets as a sign of confidence—and rewarded them with still higher valuations.

Then the music stopped. The froth in equity valuations became a drag on investor returns. With white-collar wages battling the combined threat of artificial intelligence (AI) and geopolitical uncertainty, affordability became a concern for the middle class. It’s only India’s extreme wealth inequality that kept the market propped up last year. Buyers of homes priced above ₹10 crore did most of the heavy hitting, especially in large urban centres like Mumbai. However, nationwide sales growth has peaked and developers are feeling the pinch.

There is not much of an overhang of unsold apartments, whose inventory in the top eight metropolises is equivalent to what would ordinarily sell in 19 months. That’s the lightest load in at least 2 years. But as Liases Foras, a property research firm, has argued, the problem is with constructing what has already been sold.

In 2017, when regulation was brought in to check delayed deliveries and broken promises, builders were putting 3.3 million square feet of new supply on the market. Back then, they were able to complete construction on 2.4 million square feet, or 74%. Last year, when they were hawking 3.6 million square feet, they finished only 2 million square feet, or 57%.

“Slower construction means delayed revenue recognition, higher execution risk and potential defaults,” the researcher said in a November report. It also means lower margins. That’s because the annual price increase of homes under construction is not enough to compensate builders for inflation. Nor can it sustain demand from speculators who book multiple apartments in newly announced projects, hoping to flip them closer to completion. No wonder then that the stock market has soured on property firms. The broader implication is that developers’ keenness to lift their valuations by launching new projects is not resulting in commensurate economic activity.

How much further will the current bout of pessimism run? The answer depends on how the industry boosts its efficiency. In Delhi, hazardous air pollution, already a serious impediment to outdoor work, has led to temporary construction bans. In Mumbai, builders struggled to get environmental clearances last year. Skilled plumbers, electricians and carpenters are earning better in the gig economy than on real-estate projects. Meanwhile, giving cash to women has become a part of the standard toolkit for politicians to win state elections. That could be affecting their participation in construction crews far away from their village homes. (Women, often hired together with their husbands to headload bricks and cement bags, break stones, mix mortar and cement, sift sand, or to clean, account for 11% of India’s construction workforce.)

A simpler explanation for the slowdown in construction may be that builders are starting to run out of funds as demand slows down. If completions continue at their current pace, buyers may turn anxious about financially weaker players’ ability to hand over finished homes. The so-called pre-sales model, under which a booking amount is paid before construction has even begun, may come under question, as it has in China. But there the problem is many times bigger. China Vanke alone has $19 billion in presold properties pending delivery. That’s nearly a quarter’s worth of residential real-estate sales in India—by all companies.

Vanke’s liquidity crisis is set to choke construction funding amid faltering sales and strained financing, analysts note. A similar point of panic hasn’t arrived yet for Indian developers, but fear has definitely made an entry.