What lies beneath India's property boom?
The last decade (2003-2013) has been a one-off property boom era fueled by a high growth economy, excessive leveraging and rising income levels. However recent economic indicators are proving that growth is on the decline - Rupee is on a 20-year decline, inflation is not reigning in, manufacturing index (PMI) has been declining, FIIs exiting from stocks & debt markets and employees are being fired (but as a huge relief, agriculture is expected to produce better results this year!).
Given this doom & gloom situation, one would expect property prices to decline as well - surprisingly they have not budged in, we are told that Realtors have deep pockets, so prices would not correct. But a quick check on the listed realty companies shows they are sitting on a mountain of debt & their stocks have lost up to 80% of their peak value. So, what is keeping the property prices up? Lets answer by looking at some of the key underlying factors.
How is the real estate sector funded?
Leveraging by banks has opened up the builders market who develop large scale housing projects using bank credit. As of mid-2012 banks total credit exposure to the real estate sector was Rs.5.3 Lac crores. Despite rise in bad loans from housing sector, banks have been rolling over property debts even if developers have not repaid their debt (every sector from aviation to power to textile to infra have a debt of Rs.1-3 Lac crores each with no sign of any recovery - so banks decide to focus on the urban Indian's housing demand rather than continue funding other unprofitable sectors).
Additionally, the opening up of the real estate sector to FDI (Foreign Direct Investment) in 2005 for investing up to 100% in select real estate projects have led to a glut of easy credit. Private equity, large fund houses, hedge funds and sovereign wealth funds have pumped in over $22.4bn (~Rs.1.04 Lac crores) till 1H2013 - further heating up the Indian property bubble and taking the prices up by several folds in the recent 7 years.
There is also the hidden hand of the "unaccountable" parallel economy which spreads all across the realty sector including but not limited to housing, commercial premises, hotels, resorts, hospitals, educational institutions and recreational facilities. Since none of the creditors are in a rush to exit, developers too are in no rush to sell their inventory. Infact they kept launching new projects due to the availability of easy credit (so called "deep pockets"). These factors have led to a huge surge in supply side in housing which according to estimates is 700 million sq.ft of unsold inventory.
Could a India realty crisis be averted?
RBI's recent directive to banks to stop making upfront 80% payments to developers in the 80:20 scheme is the first of a series of measures to protect property buyers from risk of delay/default by developers. More needs to be done to systematically deleverage the sector so that property prices are not held up artificially to sustain the bubble which could only become bigger and burst in a larger scale than it is now. For developers who fail to repay debts on time, banks should not roll-over their debts - instead they must follow stringent measures such as auctioning the project, which is consistent with an individual's home loan (where failing to pay EMI for 6 months leads to auctioning of the property). Bank credit needs to be managed well so as to let property prices reach market equilibrium and become more affordable to genuine buyers instead of being used to create greedy profits for speculative investors.
Given this doom & gloom situation, one would expect property prices to decline as well - surprisingly they have not budged in, we are told that Realtors have deep pockets, so prices would not correct. But a quick check on the listed realty companies shows they are sitting on a mountain of debt & their stocks have lost up to 80% of their peak value. So, what is keeping the property prices up? Lets answer by looking at some of the key underlying factors.
How is the real estate sector funded?
Leveraging by banks has opened up the builders market who develop large scale housing projects using bank credit. As of mid-2012 banks total credit exposure to the real estate sector was Rs.5.3 Lac crores. Despite rise in bad loans from housing sector, banks have been rolling over property debts even if developers have not repaid their debt (every sector from aviation to power to textile to infra have a debt of Rs.1-3 Lac crores each with no sign of any recovery - so banks decide to focus on the urban Indian's housing demand rather than continue funding other unprofitable sectors).
Additionally, the opening up of the real estate sector to FDI (Foreign Direct Investment) in 2005 for investing up to 100% in select real estate projects have led to a glut of easy credit. Private equity, large fund houses, hedge funds and sovereign wealth funds have pumped in over $22.4bn (~Rs.1.04 Lac crores) till 1H2013 - further heating up the Indian property bubble and taking the prices up by several folds in the recent 7 years.
There is also the hidden hand of the "unaccountable" parallel economy which spreads all across the realty sector including but not limited to housing, commercial premises, hotels, resorts, hospitals, educational institutions and recreational facilities. Since none of the creditors are in a rush to exit, developers too are in no rush to sell their inventory. Infact they kept launching new projects due to the availability of easy credit (so called "deep pockets"). These factors have led to a huge surge in supply side in housing which according to estimates is 700 million sq.ft of unsold inventory.
Could a India realty crisis be averted?
RBI's recent directive to banks to stop making upfront 80% payments to developers in the 80:20 scheme is the first of a series of measures to protect property buyers from risk of delay/default by developers. More needs to be done to systematically deleverage the sector so that property prices are not held up artificially to sustain the bubble which could only become bigger and burst in a larger scale than it is now. For developers who fail to repay debts on time, banks should not roll-over their debts - instead they must follow stringent measures such as auctioning the project, which is consistent with an individual's home loan (where failing to pay EMI for 6 months leads to auctioning of the property). Bank credit needs to be managed well so as to let property prices reach market equilibrium and become more affordable to genuine buyers instead of being used to create greedy profits for speculative investors.
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