While aspiring home owner deal with rising prices and poor constructions, and public sector banks are burdened with bad debt, builders continue to make profits. The current slowdown in the realty sector is a good time for a reset
India’s real estate sector is fast losing people’s trust due to the unaffordable prices, endless wait, incomplete projects and unprofessional attitude. This is also affecting the economy in many ways. The worst sufferers are the public sector banks their Rs 61,500 crore of housing loans to 25 real estate companies have turned into bad debt.
There are also other small groups, who owe at least Rs 20,000 crore. Crisil director Sushmita Mazumdar said, “Twenty-five developers account for half of the bank lending to the real estate sector.”
In 2006, Mr Himanshu Joshi, director of the Reserve Bank of India’s monetary policy department published a paper which raised concerns about the rapid growth of the housing market and its sustainability. The paper said that house prices in India were correlated with interest rates and credit growth, and had little to do with the growth of real income. This has caused many convolutions. The housing sector now fixes arbitrary prices. People are exposed to debt value of at least 36 times their income and. when projects are delayed, their interest costs increase.
But the builder is stated to make a fast buck, by pledging the same money elsewhere at a higher interest rate. So, even if the houses remain incomplete, it does not break the builders.
In October 2013, the RBI issued an advisory to the buyers and the banks. Instead of releasing the funds in one go, it asked the banks to release the sanctioned individual housing loan amount in phases, linked with the stages of construction. The unlinked loans used to act as cheap credit for builders.
The builders, to get more from prospective buyers, said that their inventory cost is increasing. This has led to severe impoverishment of the salaried class.
It is a misnomer that debt-laden developers in the country’s key property markets like Mumbai, Bangalore, Chennai and the National Capital Region are struggling with slow sales. Their high unsold inventory, delayed construction and stalled projects may bother the bankers, but not the real estate business. Its profits are growing and bank finances are being used for other purposes than in the core business.
A KPMG study has said that there was a housing shortage of 18.7 million unit in 2012 and India needs to develop almost 45 million to 50 million units by 2028. It says that the weaker sections need about 90 per cent of it. Another seven per cent is needed by the middle class.
In July 2013, the State Bank of India took ownership of a condominium project called Teen Kanya in Kolkata after the builder, Bengal Shelter, defaulted on Rs 177 crore. About 400 people, who had paid up to 90 per cent of the prices, found themselves in legal complications. In July, lIC Housing Finance limited put up the Orbit Residency Park project of Orbit Corporation, in Mumbai, for auction for Rs 125 crore.
These are only few of the known cases. The National Housing Bank in 2013 stated that 22 of 26 indexed cities were seeing a fall in prices, but the builders were not selling their units, with a hope that they could sell it at an enhanced price in the future.
According to liases Foras, a research firm, it was reported that about 650 million square feet of assets or about six lakh housing units remained unsold at the end of June 2013. It has now increased to seven lakh units. Of this, 1.9 lakh units are in the NCR alone.
The NCR region is unlikely to see any improvement in demand for many reasons including that Haryana, Uttar Pradesh and Delhi are constantly fighting over levying more toll, green taxes on the residents of the NCR. Poor infrastructure as well as public transport, choking roads and law and order issues are other detriments to rising demand. Knight Frank India chairman Shishir Baijal says, “We do not see any improvement in the residential market across the top eight cities until the end of 2015 in terms of sales”.
One reason for the slowdown in the housing sector is credited to tough anti-black money measures of the NDA Government. At least 50 per cent of the sales were for speculation and parking black money. It is one sector, which, despite huge demand, is sagging for lack of transparency, regulation.
As per Prime Minister Narendra Modi’s dreams, the real estate sector has great potential to create jobs and improve living standards. The slowdown is an opportunity to reform the real estate sector and change its game-plan. Housing costs have to be linked to incomes and not investments or bank lending.
Prices will automatically come down if the sector becomes more ethical and less profit-oriented. If the housing sector stabilises, many of the economic woes will be remedied and banks will not have to bother about high non-performing assets.