There’s too much at stake for both builders and their lenders, as a correction would put both in a tight spot
It seems that everyone, except real estate developers, wants property prices to fall. But there is some serious doubt it will happen soon, or ever. What potential buyers can hope for at best, is a slow rate of growth in prices or a miniscule revision, especially in big cities.
The reason is quite simple: Too much is at stake. Most builders have borrowed from housing finance companies, banks and private equity players. The latter have lent at rates as high as 25-30 per cent a year. Yet, resistance to rate cuts is unlikely to come from them.
It is more likely to come from housing finance companies and banks that have funded both builders and borrowers quite aggressively in the past. They would be quite petrified at the thought of a real estate slump.
Though the Reserve Bank of India limited loan-to-value to 80 per cent and took registration and stamp duty charges out of the loan component a couple of years ago, enough players lent as much as 100 per cent before these guidelines came into place. Some gave even more than 100 per cent of the residence value, if one includes payment for stamp duty, registration fees and sometimes, even home improvement loans.
If there is a sharp correction – say even 20 per cent – buyers, especially those who own second and third properties, will simply dump them. Worse still, investors who are helping builders hold on to prices will exit at the first inkling of any correction. In such circumstances, both builders and financial institutions will be stuck very badly. The latter, as we know, are already saddled with non-performing assets in various sectors.
What else justifies an inventory of 80,000-plus flats (report by Knight Frank on July 2012), with an average price of Rs 1.2 crore, lying unsold in just one city… Mumbai? That is, flats worth almost Rs 1,00,000 crore have no takers, still builders are unwilling to cut prices sharply. In addition, another 50,000-100,000 flats are supposedly vacant, but not available for sale, suggest reports.
It’s not that bankers have not been wary of lending to builders. But builders raised money at obscene rates to repay debts as well as to hold on to prices. Like a private equity player said, “One builder wanted a loan of Rs 100 crore just for one month, after deducting interest, because he did not want to default on his bank repayment. The interest cost: Rs 5 crore for just one month.” In other words, he was willing to pay 60 per cent interest instead of selling his inventory.
A little chat with market players will tell you that some banks are helping builders raise funds to avoid any default or disaster. Many banks, through their wealth management arms, are roping in high-networth individuals with lucrative offers. Others are using their private equity arms to fund them.
Yes, there can be corrections, in fact sharp ones. But only if the Reserve Bank of India and the government step in. RBI can make loans for investors or second/third property holders very difficult. Also, if projects are not completed or delayed, financial institutions should be able to take them over and sell them, much like the Sarafaesi Act. This way they can protect themselves.
The government can put pressure on civic bodies to use powers vested with them to check a builder’s record before giving clearances. If a developer has delayed a project or sold more than 10 per cent of a previous building to investors, they should not be given clearances for the next project. But that is called… living in hope.