Economic Highlights

New Delhi, 23 April 2011

Realty Goes Downhill

COARSE CORRECTION VITAL

By Shivaji Sarkar

The realty sector escalation has stymied raising doubts about the official GDP growth figures of 8.5 per cent. The sector follows the pattern of industrial and manufacturing slowdown. Apparently high inflation, interest rates and rising payment defaults are taking its toll on the housing sector.

It is faced with squeeze in cash flows and consequently their ability to repay bank loans. The banks have taken a tough stance and are refusing loans to the sector. This segment is stated to contribute 15 per cent to the GDP figures.

Significantly, sales have gone down in recent months. Some of the developers are over-leveraged due to a constraint in cash flows because of a slowdown in sales and difficulty in getting loans. Speculative pricing and over-pricing have also added to the woes of the sector.

The sector has also lost the charm of being an investment destination as prices even in prime cities have either started stagnating or falling in real terms. The recent tirade against black money has also hit it, as the sector was considered an easy parking area.

The emergence and unprecedented growth of the Indian realty sector was the hallmark of the India’s growth story of the past few years as this segment came to be recognised as one of the major drivers of the country’s growth along with infrastructure, organised retail and aviation sectors. The best period was supposed to be 1999 to 2004, when prices were affordable, interest rate was low and the salaried class was moving to their own dwelling units.

But June 2004 onwards, the situation started hardening and by 2009 it reached its plateau. Since demand for real estate is a derived demand, dependent on the nation's economic growth and availability of capital, the depth and duration of the current slowdown will largely be determined by the macro-economic scenario and change of outlook from providers of investible global capital. Real estate projects, particularly those in peripheral and emerging locations are being impacted.

The scenario is unlikely to change in the coming months as the industrial and manufacturing growth in February was at 3.6 per cent and March 0.8 per cent, a continuation of the trend seen almost through a major part of 2010. Since September 2010, the low growth phase has become the reality. This has led the international rating agency Goldman Sachs to lower the GDP growth to 7.8 per cent from its earlier projection of 8.7 per cent.

The surmise is that the realty sector would be facing graver problems. It is not they alone but with them the private sector banks are also losing huge deposits of small investors. As these banks had made the realty sector virtually their bread and butter.

Lending to real estate is the highest among new private sector banks comprising 32.3 per cent of their advances. This is quite a high figure. Thus, almost one-third of the banks' lending is to the real estate sector. The non-performing assets (NPAs) --- bad unrecoverable debt --- as a percentage of advances increased from 0.8per cent in 2006 to 1 per cent in 2007.

Besides, provisions made for NPAs increased by a whopping 39.43 per cent in private sector banks as compared to a 6.23 per cent decrease for all SCBs. This has led the Reserve Bank of India to issue revised stricter guidelines.

Shockingly, the realty sector has to repay an overall Rs 1.8 lakh crore of debt to various banks and financial institutions. This malaise has afflicted 39 banks. Six of the big companies alone have a debt of over Rs 20,000 crore. These loans were rescheduled and were to have been repaid by March 31 last. However, in most cases it has not been done.

The situation is seemingly getting worse. All major banks and financial institutions have stopped financing over uncertainties looming over the sector, bad debt repayment history and poor stock valuations.

According to an evaluation of the State Bank of India the realty sector is one of the major defaulters. Many of these have not yet been termed NPAs as the 90-day final default period is yet to be completed. It is to swell NPAs of many public sector banks.

Besides banks, private equity firms are also shying away from investing in realty due to their involvement in some of the recent scams.

The developers have also failed to learn from the past slowdown. There are very few projects on schedule. Many lending agencies consider the problem as their own creation. They raised fund for one project but invested in purchase of land or other activities delaying all. In many cases, the projects had cost overrun leading to further default by the purchasers.

Over 50 projects around the National Capital Region alone have been delayed. A senior Bank of India official said a few realtors have approached banks seeking relief in the form of fresh finance. They have approached different banks for fresh loans, possibly to repay the old debt, he said.

At least five to eight firms have failed to meet the deadline for repayment, said Anand Gupta, honorary treasurer at the Builders’ Association of India, a national lobby of developers which says it has a membership of around 5,000 developers.

As the big players are struggling to get or readjust their loans, the small ones are trying to sell their projects by offering “assured returns” of 10 to 15 per cent on both residential and commercial projects. Many such assurances have been found to have no real back up.

Some even moderately medium sized companies used the ploy to raise funds and then renege on their promises to simply fold up.

As the sector has no regulator, entry and exit of fly-by-night operators is easy. Many are already on the verge of stress sale. The cost of finance has gone up to as high as 25 to 30 per cent, says a real estate agent, adding to the problem.

This is not all. The situation has some similarity with the sub-prime crisis in the US. But there is a difference. The US had the problem of over-supply. India has still shortage of 26.53 million units at the end of the Eleventh Plan, according to the technical group constituted by the Ministry of Housing.

Experts say that the problem has no easy solution. Mortgage institutions in the country are more circumspect in providing loans if they want to contain the level of default and rising NPAs. As of now a solution does not seem easy as the sector is too fragmented. True, the latest RBI strict risk management practices are likely to prevent an US sub-prime like crisis. But overall the realty sector needs to operate on realistic price situations. A policy reorientation and a strong regulator may start the process of correction. ---- INFA

(Copyright, India News and Feature Alliance)