Concentrated wealth: A rising concern for real estate sector
The term ‘real estate’ has been one of the most preferred words by anyone in India willing to invest a lump sum for fruitful returns. Such a notion was fuelled due to agreeable demographics, trouble-free credit and shooting up of black money in the market. Furthermore, bailing out excess liquidity during the period 2009-2012 has acted as stimuli and found its relevance in real estate through a number of transmission channels.
The slackening in the sector was due to a number of reasons namely-rising inflation,unstable equity markets and lack of customers for properties. However, dearth of customers for properties came on the scene to be one of the prime causes for the fall in all kinds of funding programs for the Indian realty sector. 2010 marks the year for 82000 unsold housing units that rose to 12000 by 2011. Thus, developers came up with numerous schemes to woo the potential customers-the popular 20:80 payment model being one of the many. However, the RBI, in its recent move have said ‘NO’ to the aforesaid scheme.
Deep Insight
In a move to create a stir, the RBI has tightened the monetary policy that has compelled the Indian banks to deleverage. The current scenario highlights the high investment to deposit ratio of 108% is presently deployed by the banks. The direct real estate lending that comprise of construction loans, mortgages and property loans, stack up a whooping amount of USD 235 billion.
There was a dash of foreign direct investment into the Indian realty sector at its initial stages, however, with time it started to dry up. Foreign, domestic and private equity players have scaled down their exposure significantly. Dripping down of the investments by 36% in 2012 over 2011 bears testimony to this fact. For those, who still have faith in realty projects, have taken on a new route and started offering loans rather than acquiring equity, pegging an interest of 20% (or more) and seeking collateral two times the loan size.
In their bid to remain adrift, the builders are now laying down the law of one-sided agreements on buyers where the developers hold the key. The gap that existed between new launches and sales have also taken off significantly. Drop in the number of home loans from 13.2% to 11.9% from Dec. 2009 to 2010 has made matters further worse. The only good news is, home loan defaults have fallen off since 2010 and stands at less than 3% in 2012.
Sluggish growth rate
The looming elections in the country will call for more funds and will draw attention to the outflow of cash from the sector in the coming 18 months. The fiscal deficit will rise with farm loan waivers, food security schemes and hikes for government staff. At present, subsidies remain high at 42% of gross fiscal deficit.
The measure to put a lid on the rising fiscal deficit comprises of disinvestment, shrinking subsidies and reduced borrowings. The present current account deficit in the nation can be boiled down by promoting foreign investments and encouraging exports. Cutting down of the fiscal deficit will aid in controlling inflation and reduce the interest rates. It will also help to tone up the currency and reduce the load on policy makers.
According to government survey reports, only 35 million taxpayers( that sums up to 3% of the overall population), have made significant wealth contribution towards the economic health of the nation.
Statistics confirm that only 1.5 million people spill the beans and display their annual income of over million rupees that acts as the only helping hand for the real estate sector.The fact that wealth is concentrated in the country is evident and the frequent tax evasion, which is exceeding bounds, is a further bane for the economy.
New Take
There exists a favoritism towards housing units instead of commercial. The fact that three quarters of the Indian real estate market has been residential confirms this phenomenon. This is due to the reason that commercial units include long gestation period and are extremely cash sensitive, whereas in residential projects developers enjoy the inflow of cash from the day of inception.
According to property experts, additional structural tweaks might help to get the real estate sector more funds. Realty players are required to showcase better transparency during transactions and head for improved government standards, to give passage to higher finance and excellent sale of their products at a certain premium.
Realty firms of well-known groups find it easy to lure private equity. Furthermore the the legislation of the regulatory that direct companies to adhere to norms can also help to rise the ladder of growth.
The realty firms are required not to over-leverage and exist within their means. In addition to it, the residential yields also should improve and rental housing must have an independent floor space index. Experts suggest that the present time calls for innovative strategies for the realty sector to keep going. It is high time the real estate bubble should be deflated to bail out households and financial institutions and route the public resources for better reasons.
