Revival in realty funding and launches imply prices won't come down

The year 2013 is being touted as the year of recovery for real estate players due to new launches, interest rate cuts and quicker project approvals.

Finance minister P Chidambaram has already identified partially completed projects, which can resume work, after securing fresh line of credit from banks, while the central bank is likely to ask banks to resume lending to stalled projects where debt servicing has been impacted.

But the move is a silver lining neither for buyers nor lenders. While the finance minister’s directive will only increase lenders’ exposure to risky projects, buyers are unlikely to see any respite on the price front.

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Last year, in September a research report by real estate consultancy firm Knight Frank had highlighted that banks have cut down on their lending to the real estate sector.

“This growth rate has come down from 23.2 percent in June ‘11 to 4 per cent in June ‘12,” said the report.

At the time, outstanding bank credit to the real estate sector stood at Rs 531300 crore. Of this, 78 percent was given towards the housing loan segment and the remaining 22 percent to real estate developers.

“Declining property sales coupled with stretched balance sheet will remain a concern in the short term, leading to moderation in property prices in some markets,” Knight Frank had said.

The logic is simple. When liquidity was tight and interest rates were high, builders were being forced to sell properties to even end-users during the pre-launch stage at discounts to lure buyers and increase sales volumes. Several big developers like Lodha, Unitech, DLF, Godrej Properties, L&T Realty and Indiabulls are seen pursuing this model.

While legal funding through the ECB route and banking funding for affordable housing is welcome, Pankaj Kapoor, MD at research firm Liases Foras told Firstpost that at least 70 percent of this money goes into acquiring land for luxury projects.

Hence further lending by financial institutions will only add to the stress on the economy and provide the builders an opportunity to continue holding prices at high levels.

What’s even worse is all this noise about infra status. While according infra status to affordable housing still makes sense, infra status to housing as a whole will only burn realty further.

This is because infra projects become non-performing assets only if they are delayed by over 2 years, while a delay of six months will cause them to be NPAs if they are not an infrastructure project.

The former helps banks which have provided loans to builders, whose projects are now seriously delayed, since the recognition of an NPA means that banks have to provision for it.

By giving infra status to the housing sector as a whole, the RBI will only increase the exposure of banks to an unregulated sector. If the government is serious about ensuring affordable housing it needs to check speculation and reduce the “bubbly” nature of the real estate game

A report in the Economic Times said sales at new projects in Mumbai said new projects are showing signs of recovery and a lot of new launches are being worked based on customer responses. Property sale registrations in the city rose to a 24-month high in December, while sales of Omkar Realtors’ Worli Project, L&T’s Emrald Isle in Powai and Lodha’s Lower Parel project received a giid response in the prelaunch phase.

However, this revival in demand will not result in lowering of prices due to the increased cost on account of higher input costs and newly introduced payment for additional FSI at increased ready reckoner rates as well as expectation of new supply once the approval cycle revives, an Axis Capital research report pointed out today.