There is not enough money for the industry to build residential houses. So why should you be worried as a property buyer? Unless there is institutional money available to build the towers, you may not get the houses you have booked or are planning to book.
“With a plethora of new laws to protect consumers from being duped, the cost of construction is now 3x that of earlier,” says Niranajan Hiranandani, chairman Naredco. In addition, because of the historic mismanagement of funds and weak delivery, the risk weightage is very high. The traditional sources of money were non-banking financial institutions, banks and mutual funds. The only other structured fund was from buyers.
Anuj Puri, CEO, Anarock Consultants explains this further. Buyers are holding out and sales are slow during the construction phase. Buyers are now looking for completed projects with Occupation Certificates (OC) which don’t attract GST. Debt from banks has stopped because of RBI guidelines on risk to lending to this sector. NBFCs which were pumping in money till three years ago have now dried up after the IL&FS debacle. Equity too has abandoned residential real estate, not only because they lost money but because the product and the partner made money while the fund did not.
Another reason why Puri finds sales slow is because earlier the sales were on paper. Now when the consumer waits for the product to be completed, the final unit seems way too small for their aspirations or lifestyles. In addition, the fact that Pradhan Mantri Awas Yojana (PMAY) projects do not come packaged with parking slots is a detraction. “Affordable housing projects with parking slots are selling like hot cakes,” says Puri. In addition, projects with good common facilities are able to sell even when the actual unit sizes are small.
Puri expects a great consolidation to happen. It has already begun and Category B and C developers are going with bigger and better developers to complete the projects in this RERA driven world. “Those who are overleveraged or with bad accounting practices are being weeded out,” he adds.
Naredco, representing the industry, has asked the government for a few sops such as a rental housing policy that is to be revealed in the next three months, a taxation facilitation of Section 43 CA in notional rent and easing of capital gains norms if the property is sold at lower than 5% of the ready reckoner rates that the industry feels is not revised frequently enough.
Puri maintains that there should be no direct facilitation of capital to the industry by the government as that would allow even unwarranted players, who need to be weeded out, to get back in the game. “The banks who did not do their due diligence, even though they had the capability to do so, are equally at fault,” he maintains.
Hiranandani points to the investor consumer who could afford to pay for only one house on borrowed money, but bought three more as investments to be sold off and profits booked. Today in a slow market, they are unable to encash these investments.
So will Indian real estate be able to raise the banks of money they need to get going? “There are no easy solutions to get to the solution,” says Hiranandani. The smart players will learn and manage, not necessarily the big players. Puri too expects mass scale consolidation. He maintains that the industry is three quarters into the solution. “Another quarter of pain is left.” How long this shake-out will take is anybody’s guess. But after a hesitant start the end user has decided to wait for the right deals in terms of size and price. Till buyer money starts flowing freely, the perceived risk in real estate will persist.