Water crisis: Construction ban in Bengaluru may dent realty sector growth

The real estate sector in Karnataka, which has been facing a slump since four years, may be headed towards another crisis. This is on account of the state considering a ban on construction of new apartments in Bengaluru, for the next five years. The ban is being considered with a view to combat water shortage.

Industry officials say that though they are ready to follow stringent water conservation measures, a blanket ban will not only kill the nascent recovery witnessed of late, but also lead to thousands of job losses.

“A ban on construction will lead to severe job losses, adding to unemployment woes. To deal with the water crisis, the government can take corrective measures to conserve water through restoration options, manage its sources, and ensure strict implementation of rainwater harvesting,” said Niranjan Hiranandani, national president of the National Real Estate Development Council (NAREDCO). “Rejuvenating hundreds of lakes in the city, as well as desalination, could be other options.”

Bengaluru has been at the forefront of real estate recovery in the past few quarters. Even on a two-year basis, overall housing sales have seen a growth of 80 per cent in Q1 of CY19 in the city, compared to the same period in CY17. According to data by real estate consultant Anarock, overall unsold stock has also dropped 44 per cent from 2017-19.

The growth was not limited to the residential sector alone, as the city also saw the highest absorption of office space last year. According to JLL India, of the total absorption of 33 million units of commercial real estate, Bengaluru alone had the lion’s share of demand, with 33 per cent of overall absorption in 2018. Growth of a healthy start-up ecosystem, apart from co-working spaces, was a major factor.

The revival in demand was mirrored in net profit numbers of realty firms based in the city. For instance, Sobha posted a 63 per cent surge in net profit to Rs 113 crore in Q4FY19 on a YoY basis, while Puravankara reported a 59 per cent rise to Rs 39 crore during this period.

However, some real estate players feel such a blanket ban is unlikely to be imposed. “The statement from the government definitely highlights the importance of water management. But, our belief is that nothing of this sort is likely to happen, unless and until the state government consults all stakeholders. The real estate sector is not the only stakeholder,” said J C Sharma, vice-chairman and managing director of Sobha. “Presuming anything of this sort does happen, it has to be on a prospective term and not on a retrospective basis,” Sharma added. 

He said the industry has engaged with government officials after the minister’s remarks, and the general feeling was that it may not happen. Other realtors said they would have no option but to take legal recourse if the state government proceeds with the decision. 

“This type of a blanket ban is not feasible. We are discussing it with our legal team and if needed, will take the legal route,” said a senior vice-president of a real estate development firm in southern India.

On Friday, reacting to a possible ban on construction in Bengaluru, shares of city-based developers slumped. After falling over 4 per cent in intra-day trade, the Sobha stock settled at Rs 535.95, down 1.70 per cent against its previous close. Similarly, Prestige fell 3.81 per cent, while Puravankara dropped by more than 5 per cent on Friday.

“The water crisis is a real issue in many cities today. The real estate sector has to take cognisance of the situation and move towards more sustainable development processes,” said Shishir Baijal, chairman and managing director of Knight Frank India.