A very reputed real estate developer with a multi-city footprint was on national television stating that if the credit-squeeze continued, about 10 million people in the construction industry would be losing their jobs. Alarming, right?
I mean, when so many people linked to the construction industry for their livelihood face the possibility of seeing their incomes come under a big question mark, policy makers and leaders of all dispositions need to sit up and do something about it.
The above statement seems so simple and straight-forward in its articulation and the intent behind it. Well, I am not sure that easing credit is the solution and I’ll tell you why!
To understand my point, you have to understand the genesis of the mess the Indian real estate business finds itself in, today. In the early part of this decade, when the real estate and housing construction industry was emerging from the shadows of the mid-nineties’ real estate meltdown, newly constructed real estate in Mumbai suburbs was available, at up to Rs. 2000/- p.sq.ft. in areas north of Andheri, a suburb in western Mumbai. Plenty of plots were available at affordable rates for builders to launch residential projects, sell under-construction property backed by easily available and affordable loans from banks driven by the ‘retail revolution’ mantra.
The going was ‘good’ for all – manufacturer, financier and customer. But, then, who knew that ‘9/11’ and its resultant after-effects would lead to a ‘windfall’ in Indian real estate with such far reaching consequences? Post 9/11, the loose money policies of central banks, globally, led to a ‘boom’ in consumer lending in India, which the real estate industry was quick to ‘spot’ and cash-in on.
As, there were no entry barriers, thanks to the lack of a “Housing policy” or a “Housing regulator”, speculators masquerading as developers, had a field day. Anybody with a plot of land would launch a project, get the necessary plans approved (?) and then in turn seek project approval from banks which ensured that a buyer of a flat in that project was eligible to get a loan from the said bank. Nothing wrong about this scheme of things, except, that there was hardly any check on the developer in terms of track record, capital adequacy, project completion deadlines, end-use of funds received towards part payment for sale of units etc.
Also, the very possibility that people with questionable credibility can become developers, mean customers buying ‘under construction’ projects are unknowingly taking a ‘risk’ (the execution risk) on the builder which they are not ‘aware of’ and have not ‘built into the price’.
What transpired subsequently was laissez-faire of the worst kind.
Builders would launch projects with sketchy details, sometimes without necessary approvals, banks would be desperate to get a piece of the action, and the customer would be ‘sold’ stories by ‘friendly brokers’ (make no mistake, they were not friends of the customers but the developers) about how prices would go up and the customer would have to pay a higher rate if the ‘deal’ was not finalized within the ‘deadline’.
And so the party continued! Builders showed record growth in sales (nobody spoke in terms of square feet area developed, sold and possession given), bankers counted the number and value of loans sanctioned and disbursed (I am sure till date they don’t track the number of customers who got possession of newly constructed flats) and everybody in the food chain was happy!
However, not everybody was complacent. The RBI was skeptical and reasonably so – the rate of growth of loan disbursals to the industry - to retail borrowers as well as developers and the speedy rise in prices of land and property across the country did set-off an alarm in their minds, they knew that if this was not checked, it lead to a ‘bubble’ that could damage the housing industry and also seriously endanger the banking system.
It took measures to check the problem – the risk weights for all mortgage loans and relevant interest rates were raised. Gradually, the abundant liquidity enjoyed by the real estate industry began ‘drying up’.
As the cost of borrowings increased, the loan eligibility for retail buyers fell and increasingly the affordability factor started to pinch buyers. Meanwhile, the surge in global commodity prices was playing itself in the form of an ‘unforeseen rise’ in input prices. While, earlier the builder found it convenient to ‘divert’ project funds and book/purchase plots of land for future development (remember there is no law to enforce time deadlines for completion of ongoing projects), with rise in input costs, he was having to pay a very heavy price for all delays in project execution.
The only way out for the builder was to hike sale prices further. Thus the twin developments of rise in real estate prices and higher interest rates and hence lower loan eligibility led to a steep fall in demand for units. Builders who got hit by the falling sales and overall liquidity squeeze, put up a brave face, refusing to ‘reduce’ prices citing that they had ‘enough past profits’ to see them through the period of downturn. Of course these were stories circulated by the developers with the help of a friendly media (don’t forget the huge ad spends of builders) and the friendly brokers – buyers, who fell for it paid a heavy price, literally, both for the units they bought as well as the rates of interest on the loans.
With the last trickle of buyers, also, now deciding to ‘wait & watch’ before entering into a transaction, builders have finally woken up and started giving alarmist ‘sound bytes’ to the media. They are trying to paint ‘horror images’ of people losing jobs – but then that is the story across all industries today, thanks to the global liquidity crunch, and not restricted to the real estate industry!
The point is, sensible buyers (prospective) have understood that real estate prices are on the verge of a significant correction (I am deliberately not using the word ‘crash’ because the difference between the two is a matter of perception and perspective) and is waiting for ‘attractive prices’ and is clearly not in a hurry to finalize deals!
For policy makers, mortgage lenders and of course the RBI and NHB – the writing is on the wall – For the stable and sustainable development of the real estate and mortgage industry the time has come for the formulation of a ‘Housing Policy’ and the formation of a Central Authority to monitor and regulate the real estate industry, pan India. A look at the evolution of capital markets and the telecom industry in India, would obviate the need for a debate on this.
As for the Indian real estate developer, he still does not show signs of waking up to the reality of realty – because the cost of credit should reflect the inherent risks, appropriately!
*The reference to Mr. Hiranandani, is purely incidental, as he is a prominent and well-recognized face of the industry. This post does not reflect our views of him, personally or his group of companies. We feel our views would be vindicated if individual developers like Mr. Hiranandani (whose views on ‘affordable housing’ are well-known) take the lead in urging the Govt. for initiating the much required radical changes, which is the ‘crying, need of the hour’!
I mean, when so many people linked to the construction industry for their livelihood face the possibility of seeing their incomes come under a big question mark, policy makers and leaders of all dispositions need to sit up and do something about it.
The above statement seems so simple and straight-forward in its articulation and the intent behind it. Well, I am not sure that easing credit is the solution and I’ll tell you why!
To understand my point, you have to understand the genesis of the mess the Indian real estate business finds itself in, today. In the early part of this decade, when the real estate and housing construction industry was emerging from the shadows of the mid-nineties’ real estate meltdown, newly constructed real estate in Mumbai suburbs was available, at up to Rs. 2000/- p.sq.ft. in areas north of Andheri, a suburb in western Mumbai. Plenty of plots were available at affordable rates for builders to launch residential projects, sell under-construction property backed by easily available and affordable loans from banks driven by the ‘retail revolution’ mantra.
The going was ‘good’ for all – manufacturer, financier and customer. But, then, who knew that ‘9/11’ and its resultant after-effects would lead to a ‘windfall’ in Indian real estate with such far reaching consequences? Post 9/11, the loose money policies of central banks, globally, led to a ‘boom’ in consumer lending in India, which the real estate industry was quick to ‘spot’ and cash-in on.
As, there were no entry barriers, thanks to the lack of a “Housing policy” or a “Housing regulator”, speculators masquerading as developers, had a field day. Anybody with a plot of land would launch a project, get the necessary plans approved (?) and then in turn seek project approval from banks which ensured that a buyer of a flat in that project was eligible to get a loan from the said bank. Nothing wrong about this scheme of things, except, that there was hardly any check on the developer in terms of track record, capital adequacy, project completion deadlines, end-use of funds received towards part payment for sale of units etc.
Also, the very possibility that people with questionable credibility can become developers, mean customers buying ‘under construction’ projects are unknowingly taking a ‘risk’ (the execution risk) on the builder which they are not ‘aware of’ and have not ‘built into the price’.
What transpired subsequently was laissez-faire of the worst kind.
Builders would launch projects with sketchy details, sometimes without necessary approvals, banks would be desperate to get a piece of the action, and the customer would be ‘sold’ stories by ‘friendly brokers’ (make no mistake, they were not friends of the customers but the developers) about how prices would go up and the customer would have to pay a higher rate if the ‘deal’ was not finalized within the ‘deadline’.
And so the party continued! Builders showed record growth in sales (nobody spoke in terms of square feet area developed, sold and possession given), bankers counted the number and value of loans sanctioned and disbursed (I am sure till date they don’t track the number of customers who got possession of newly constructed flats) and everybody in the food chain was happy!
However, not everybody was complacent. The RBI was skeptical and reasonably so – the rate of growth of loan disbursals to the industry - to retail borrowers as well as developers and the speedy rise in prices of land and property across the country did set-off an alarm in their minds, they knew that if this was not checked, it lead to a ‘bubble’ that could damage the housing industry and also seriously endanger the banking system.
It took measures to check the problem – the risk weights for all mortgage loans and relevant interest rates were raised. Gradually, the abundant liquidity enjoyed by the real estate industry began ‘drying up’.
As the cost of borrowings increased, the loan eligibility for retail buyers fell and increasingly the affordability factor started to pinch buyers. Meanwhile, the surge in global commodity prices was playing itself in the form of an ‘unforeseen rise’ in input prices. While, earlier the builder found it convenient to ‘divert’ project funds and book/purchase plots of land for future development (remember there is no law to enforce time deadlines for completion of ongoing projects), with rise in input costs, he was having to pay a very heavy price for all delays in project execution.
The only way out for the builder was to hike sale prices further. Thus the twin developments of rise in real estate prices and higher interest rates and hence lower loan eligibility led to a steep fall in demand for units. Builders who got hit by the falling sales and overall liquidity squeeze, put up a brave face, refusing to ‘reduce’ prices citing that they had ‘enough past profits’ to see them through the period of downturn. Of course these were stories circulated by the developers with the help of a friendly media (don’t forget the huge ad spends of builders) and the friendly brokers – buyers, who fell for it paid a heavy price, literally, both for the units they bought as well as the rates of interest on the loans.
With the last trickle of buyers, also, now deciding to ‘wait & watch’ before entering into a transaction, builders have finally woken up and started giving alarmist ‘sound bytes’ to the media. They are trying to paint ‘horror images’ of people losing jobs – but then that is the story across all industries today, thanks to the global liquidity crunch, and not restricted to the real estate industry!
The point is, sensible buyers (prospective) have understood that real estate prices are on the verge of a significant correction (I am deliberately not using the word ‘crash’ because the difference between the two is a matter of perception and perspective) and is waiting for ‘attractive prices’ and is clearly not in a hurry to finalize deals!
For policy makers, mortgage lenders and of course the RBI and NHB – the writing is on the wall – For the stable and sustainable development of the real estate and mortgage industry the time has come for the formulation of a ‘Housing Policy’ and the formation of a Central Authority to monitor and regulate the real estate industry, pan India. A look at the evolution of capital markets and the telecom industry in India, would obviate the need for a debate on this.
As for the Indian real estate developer, he still does not show signs of waking up to the reality of realty – because the cost of credit should reflect the inherent risks, appropriately!
*The reference to Mr. Hiranandani, is purely incidental, as he is a prominent and well-recognized face of the industry. This post does not reflect our views of him, personally or his group of companies. We feel our views would be vindicated if individual developers like Mr. Hiranandani (whose views on ‘affordable housing’ are well-known) take the lead in urging the Govt. for initiating the much required radical changes, which is the ‘crying, need of the hour’!
Referring to your last para, Hiranandani Powai is no exception to what you say earlier in the blog.Only difference is that the brand name Hiranandani covers up the real practices of the group which also has delayed construction of Sierra in Powai for over 1-1/2 years and has not even bothered to inform the buyers let alone compensate them for the delay.Further while most of the buyers of Sierra at Powai are now demanding refund of their deposits,Hiranandani is not refunding the same.Perhaps it is the beginning of the end for brand Hiranandani.
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