BS IMLC: 'Developers looking beyond capital, aiming to tap smaller cities'

With multiple avenues of funding at their disposal, the builder community is extending its focus beyond capital — actively seeking inputs on strategy and scale-up. The industry is also identifying potential in smaller markets. ABHINANDAN LODHA, chairman, Lodha Ventures; SANDEEP MENON, managing director (MD) and chief executive officer (CEO), Vastu Housing Finance; VIPUL ROONGTA, MD and CEO, HDFC Capital Advisors; SHOBHIT AGARWAL, MD and CEO, ANAROCK Capital Advisors; and STUART TAKE, board member at India Mortgage Guarantee Corporation (IMGC), Global Mortgages Business Leader, engage in a discussion on constructing a robust housing finance ecosystem with Tamal Bandyopadhyay, consulting editor at Business Standard. Edited excerpts:

There is confusion among buyers regarding the distinction between land and a house due to issues with land records and opaqueness. 

How do you change the buyer’s approach towards land?

Lodha: The shift in approach begins with educating the buyer. Land records in most states are transitioning to digital formats. Embracing transparency and allowing the digital sharing of land records can address most issues.

Menon: A massive opportunity lies in bridging the urban-rural divide and extending beyond the top 40 cities. It involves identifying the right opportunities, aligning with growth, leveraging technology and data science, and fostering realistic aspirations — building patiently.

What are the challenges on both sides — for developers and retail buyers?

Agarwal: The demand for newly built homes has doubled since the onset of the pandemic. Previously, we were selling 200,000 homes a year; now, we are on track to reach 500,000 homes. This marks the highest level since the peak in 2014, indicating a 10-year recovery period. Not only is the volume increasing, but pricing is also on the rise. The shift is noticeable as we move away from affordable housing, with fewer and fewer projects in this category. Instead, there’s a trend towards mid-market, upper, and luxury apartments, reflecting changes in demand profiles.

Why is it a challenge for the affordable segment?

Agarwal: From a demand perspective, people seek more room at every level. We’ve defined affordable housing as properties below Rs 45 lakh. However, the challenge arises as houses are shrinking. For the bottom of the pyramid, this is due to the increasing price point and construction costs. Despite this, the government’s definition considers Rs 45 lakh as affordable. This prompts the need to reassess the definition and the qualifying criteria for affordable housing. It’s essential to shift focus from pricing to unit size.

What should India learn from other markets?

Take: Market resiliency hinges on cultivating a culture of trust between lenders, consumers, and investors. This involves several key elements. Firstly, establishing a robust infrastructure around lending norms, underwriting, appraisals, title insurances, foreclosure laws, and collections laws is crucial and needs to be consistent. Secondly, a broad and strong regulatory oversight is essential, covering not only financial soundness but also aspects of financial inclusion and consumer protection laws. This ensures that individuals are willing to take the risk of borrowing money. Lastly, the environment should be conducive to both local and foreign investments, including participation from multinationals.

How is the housing market in India different from others?

Take: India’s housing market exhibits a reasonable level of transparency, especially at the consumer level. This contrasts with global markets. Transparency is a vital element that fosters trust within the ecosystem. A big lesson from the 2008-09 financial crisis, particularly in the US, highlighted the existence of exotic products and a lack of transparency, leaving borrowers unaware of the risks. In the Indian market, such a lack of transparency is not observed.

On the supply side, what are the issues? We do not know how much of a cost/time overrun might happen. 

Roongta: The regulatory approach in India has been relatively conservative, urging developers to introduce equity into the equation. Equity sources can include the public market, capital market, private equity, or funding against other projects. Looking back 20 years in China, not a single developer held a market share exceeding 1 per cent. However, after the implementation of a Real Estate Regulatory Authority (Rera)-equivalent in China, the top 10 developers secured a market share of more than 50 per cent. A similar trend is going to happen in India, with the consolidation of Rera driving increased professionalisation among developers. This shift will likely prompt heightened attention from entities like SBIs and HDFC Banks, integrating them more actively into the mainframe.

Do you think there will be reshuffling in the real estate segment?

Lodha: Consolidation is underway. This doesn’t imply that smaller players will cease to exist. Rather, there will be a big distinction between those who are able to command a premium and can borrow at a lower cost; and those who adhere to the traditional mindset of considering ownership of an asset more crucial than owning it as an inventory.

Roongta: To illustrate, a decade ago, no developer was selling residential properties exceeding Rs 10,000 crore annually. This year, it is anticipated that eight to nine developers will surpass this mark, with a few exceeding Rs 15,000 crore in sales. 

Agarwal: Amid the pandemic, the share of listed developers in sales was 19 per cent. Presently, it is 39 per cent. Consolidation is the path forward, as transparency improves. 

An entity like Vastu Housing needs to go to a sector not financed by banks. Who are the others who can fund, and what are the new segments you are looking at?

Menon: A large portion of India is engaged in self-construction, individual houses, and rural residences, presenting a singular biggest opportunity. The key lies in fortifying regulations like Rera and achieving uniform stamp duty structures across states. If these measures come to fruition, leading to increased affordability, a genuine market beyond the apartment business emerges. This provides an opportunity for us to secure a 2-3 per cent market share in smaller towns. Currently, different debt capital pools exist, indicating the development of a mortgage security market in India.

What are some suggestions for mortgage market development?

Take: I believe a proper government-sponsored securitisation market will greatly enhance fin­an­c­ing within the system and likely stir international interest. I think the underwriting norms are very sound in India, and deviating towards exotic products or abandoning under­writing guidelines would not be advisable. Also, providing a mortgage guarantee offers a sense of comfort for individuals when it comes to lending.

For alternative investment funds in this space, what are the challenges and what is the way forward?

Roongta: A venture fund’s role extends beyond financing; it encompasses providing strategic inputs, product-related insights, and assistance in scaling up the organisation. Real estate developers constitute a growing community, and financiers must play a role far beyond providing capital. Whether it’s in the form of debt or equity, the involvement needs to be strategic, product-specific, and focused on facilitating their scalable growth. And that, in my opinion, results in delta.