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Why relaxed lending norms for realty won't help the home buyer

The Finance Ministry is readying a package to boost real estate activity by tweaking lending and provisioning norms for banks to build on the recent softening in interest rates. But it has offered no sops to actually make houses affordable.

The National Housing Bank, the regulator of housing finance companies, has so far identified 76 incomplete but viable projects , but most of these are in tier II and III cities, says a Business Standard report.

"Tier II and Tier III project are the least speculative and do not require much funding either. The actual funding requirement is in the metros," said Pankaj Kapoor, MD at realty consulting firm Liasas Foras.

Banks have been asked to resume lending to these partially completed projects where delays occurred for reasons beyond the developers' control like land acquisition and clearances.

"However, a finance ministry proposal is not a mandate for banks. They need to do a proper due diligence, assess their profitability and the risk involved in funding developers," said Samanthak Das, Director-Research at property consulting firm Knight Frank. He added while the ministry's plan to revive the sector is a positive, both developers and investors are on a wait-and-watch mode, at least for the next one year, given the political confusion in the country.

Banks have been asked to resume lending to these partially completed projects where delays occurred for reasons beyond the developers' control like land acquisition and regulatory clearances. Reuters

Analysts also feel that the government should go beyond offering fiscal concessions and address issues like greater availability of land, tax incentives for the economically weaker sections and the low-income groups, lowering land costs through higher floor space index and a quick approval process for projects.

While dismissing the perception that unsold property inventories are high, developers have been expressing concern that many projects are stalled due to lack of funds. But even if the builder is short of cash, then instead of reducing the ticket price of his existing project, he launches a new one with different specifications at a lower price point. This is because the builder has already sold a part of the project at a higher cost. So if he reduces the price further the previous buyers will come back for a rebate and investors will lose confidence. Hence the builder may freeze the price, throw in the parking free but an outright reduction in prices will be the last resort, explained Knight Das.

At the joint meeting between the developers' body CREDAI and the Indian Bankers Association, bankers insisted on the one-project, one-bank account norm and opening escrow accounts to track the usage of project-specific funds, under which payments made by buyers will go toward servicing the debt and ensure the safety of the loan.

But by asking the banking industry to fund realtors, the government is only exposing them to more risk. "Had banks not restructured loans to the sector, the real estate industry would have been healthy," said Kapoor. If too much money is made available to them, developers will continue to hoard projects and a price correction will be delayed.

Lenders also asked developers to move to a project-specific borrowing model, because under a corporate-specific model, exposure to developers requires a higher charge on capital, so banks have to set aside more funds if they lend to companies.

They also want the RBI to relax norms on asset classification to facilitate credit flow.

The growth in bank lending to commercial real estate declined sharply to 4 percent in June this year against 23 percent in the year-ago Knight Frank said in a report.

The waning interest of the banking sector towards commercial real estate lending is reflected in the decline in loan exposure growth rate, it added. The silver lining is that "declining property sales coupled with stretched balance-sheet will remain a concern in the short term, leading to a moderation in property prices in some markets".

But in cities like Mumbai and NCR, where 70 percent of property is bought by investors to underwrite the project, a price cut in the near term looks unlikely as these investors don't make money by selling flats to the end-user but by leveraging. This means if an investor has money to buy one flat, he will book five flats with a 20 percent down payment. Even the intermediaries (big brokers, brokers , sub-brokers in the market) have their own margins to take care of before an apartment reaches the end-user.

Despite unyielding returns, investors continue to put money in realty to absorb their black money. " If the government examines current value and the agreement value, 80 percent of investor demand will go away," said Kapoor.

Secondly, some builders have recently started inserting restrictive clauses in the sale contracts that prevent buyers from selling the house before a specified time because the builder does not want housing units to be out in the market at a lower price (by the seller) in times of a slowdown.

According to the Ministry of Housing and Urban Poverty Alleviation, India faces a urban housing shortage of over 18.87 million houses, but as many as 11.09 million are lying vacant because the better off hoard homes for purely speculative reasons and many will not rent it out for fear of being unable to get them back due to our old rent control laws. Mumbai alone needs some two million houses to accommodate its growing migrant population and people from slums, but 92,000 units in the Mumbai Metropolitan region are lying unsold, according to Liases Foras.

If 80 percent of the vacant houses are made available to the rental market during 2012-17, the need to build additional houses will come down by over 88 lakh units, the government study pointed out.

While the ministry has suggested increasing the floor space index and introducing transferable development rights to address affordability, such measures will only result in benefiting the politician-builder nexus and not the urban poor. As Firstpost reported earlier, such measures ensure the supply of urban land is carefully regulated so that property prices do not crash with large new housing stock coming into play.

But perhaps bringing in vacant houses into the housing market through taxation and policy incentives could somewhat address the problem. Says Kapoor, the only solution is government provisioning in terms of higher tax, charges and interest rates for second or third property purchases.

Ironically, India's housing policy is pro-investor even though it talks of the needs of the end-user who is stripped of his right to own a house.