 "Piramal opens purse strings for builders")
The problem in the real estate sector is clearly highlighted in the response of the sector’s representative to RBI governor Raghuram Rajan’s remark on reducing real estate prices for a pick-up in demand. While delivering the Y B Chavan Memorial lecture, Rajan said that he was hopeful that as interest rates come down there will be more credit and buying. He also said that he was hopeful that prices adjust in a way that encourages people to buy.
In reply to Rajan’s remark, various statements of real estate players have been reported. Confronting the governor, industry is coming forward with excuses like 90% of the home supply in the country has already shown price correction. If prices fall further, it will lead to NPAs and non-delivery of projects.
But the areas that have the maximum inventory have not seen appreciable correction. Further, builders no longer have the luxury of holding on to unfinished construction, especially with the new real estate law in place, thus the point of lower prices resulting in NPAs does not hold.
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Company executives have pointed out that prices have already corrected by 35-40%.
The report says that inventory in the sector has risen to 2.9 years in first half of 2015- 16 (April-March) compared to 2.6 years in 2014-15 and 2.2 years in 2011-12, which is a concern especially in the current scenario when sales are falling.
The writing is clear on the wall: few people are buying real estate. In fact, investors have all but disappeared from the sector. A PropTiger report titled Realty Decoded points out that nearly 97% of the realty market was driven by end users in the fourth quarter of FY16 as compared to only 77% in the first quarter of FY16. This clearly suggests that investors do not see positive returns from their investments in real estate sector and prefer to stay clear of it.
If end users are the buyers, then one factor clearly stands out above everything else is affordability. A buyer will not even bother to check the construction quality of the house or the view from it if he cannot afford buying it. Only if the place suits his pocket will he consider taking the second step of checking out the place.
Rajan is not alone in pointing out that real estate prices needs to come down. India Ratings and Research has said that revival of property demand would depend on a meaningful reduction in prices or a drastic improvement in economic growth resulting in positive customer sentiment. But with most of the projects financed through high-cost debt, the research firm does not expect rates to come done by end of the fiscal.
Incidentally, there is no dearth of investors in the sector. But they are attracted to the commercial space where rates have corrected and rental yields are high. Blackstone, with over $330 billion assets under management (AUM), has started lapping up retail assets in India. In December, it acquired two retail assets of Alpha One Malls in Ahmedabad and Amritsar. It has recently bought 1 million square feet from L&T Realty at Navi Mumbai. Singapore's sovereign fund GIC is buying out a 50% stake in Thane's Viviana Mall. GIC, one of the world's biggest investors, with over $100 billion in assets in over 40 countries, is also looking for more such assets in India. It is also one of the top 10 real estate investors in the world. Many equity brokers have moved into real estate business by launching funds and raising good amount of money from foreign investors.
If this is the interest for the sector, clearly the builders lobby have got the game wrong.
Their apprehension for further cuts in prices is understandable given the fact that the Real Estate Regulatory Bill is now a law. There is a small window of opportunity before it become strictly enforceable, especially since the law is applicable to existing projects. By holding on to prices, developers are trying to squeeze out the last bit of money possible before the law becomes enforceable and a penalty on non-adherence to the law leads to a further correction.
Home buyers and investors know that real estate is slowly becoming a buyers’ market. It is only a matter of time before the sellers (builders) realise it.
