Debt is an exasperating problem facing the industry and economy at large. We are witnessing a double whammy of sorts where higher leverage and higher interest rates are not supported with adequate revenue receipts. In such a scenario, credit-hungry industries are crying about lack of policy-driven liquidity support. Real estate is one industry that is perceived to have been hit the most.
Availability of adequate liquidity, it may be recalled, was the reason for almost a decade long boom in the real estate industry. The combination of attractive interest rates and cheap fund was responsible to keep the demand-supply equation in balance. As macro deteriorated, interest rates shot up mellowing the demand side of the equation while the supply-end continued to zoom-up leading to massive inventory build-up. Not only is the real estate inventory in the residential space at an all-time high, builders are sitting on huge unsold inventory estimated at more that Rs. 58,000 crores.
Due to various factors affecting negatively, banks are slowing down on their exposure to the sector. In such scenarios, builders are left with having to depend on funds from private equity, non-banking finance companies to even black money. While black money is pretty much sucked out of the system, thanks to an elongated election season, private players are selective in doling out money to projects that face bleak future, at least in the short term. The end result is sharp, and sudden, tightening of liquidity leading to unforeseen cash flow crunch on the builders.
For real estate players, liquidity crunch means that they are unable to finance their shorter end operations. As a result, most of the builders are facing difficulties in maintaining healthy speed of construction. This is again a double whammy because without construction, they cannot raise fresh payments from existing buyers. To make the situation worse, RBI banned dubious 80:20 schemes that allowed alternative funding from banks through buyers. In other words, almost all the avenues of easy and cheap money are now out of question. The industry needs to invent new ways to move ahead.
To a large extent, it is the real estate industry that is to be blamed for the situation they have landed themselves into. like other industries, the demand-supply equation of the market must have been deliberated to forecast the upcoming change and make necessary adjustments to dealing with it. One of the adjustments real estate players could have responded with was by strategic price corrections and other accommodative deal structures. Instead, industry continued to mark up the prices in the primary market. Secondary market, on the other hand, continued to behave contradictorily sending strong signals for price correction. Industry was forced to fall in line eventually. Some players worked around ‘affordable housing’ theme in order to make quick sale but such strategies cannot be sustained for long.
While industry’s response was suboptimal, other factors including inflation and labour did not help either. Prevailing volatile inflationary pattern proved restrictive in taking definitive call on the cost side. With margins already under pressure, developers could not respond proactively on the price end to accommodate the change. In such scenario, looking at policy-driven liquidity bailout is a natural reaction.
However, artificial generation of liquidity has its own limitations unless it is effectively supported with fundamentals. As it stands today, money is India is not cheap. With inflation yet to be contained, it is unlikely to get cheaper anytime soon. It essentially means that even if money is made available cheaply, it is not going to stimulate demand. In such scenario, cheaper money could only complicate the economy instead of saving it from possible precipitation. Complications from easy money are evident from US market. Even with near-zero interest rates, real estate in particular and economy in general has not been responding despite desperate spray of $2 trillion hard money in the market. If infusing cash in US market is not working, we can only imagine the state of an already fragile economy such as India’s. Industry will need to innovate and respond differently. liquidity may not be the solution.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)