Nirmala Sitharaman plans booster dose for realty sector but unless realtors shed their greed and cut prices, no stimulus will work

Union Finance minister Nirmala Sitharaman has hinted about specific measures to address the slowdown in the country’s real estate sector. The minister has acknowledged that of the many reform measures announced so far, the one which has been excluded so far is real estate.

"The government is very keen and is working very clearly together with the Reserve Bank of India (RBI) to see how best we can, where necessary, tweak the existing norms to help the people who are affected in the realty sector," Sitharaman said at an NSE event.

It’s not entirely correct that the government hasn’t announced any measures for the sector so far. Some time ago, the government had announced a dedicated Rs 10,000-crore special fund to provide last mile funding for the real estate sector. It also said external commercial borrowings (ECB) guidelines will be relaxed to help housing developers obtain overseas funds.

Representational image. Reuters

The ECB guidelines will be relaxed to facilitate the financing of homebuyers who are eligible under the Pradhan Mantri Awas Yojna (PMAY), in consultation with the central bank. But this, logically, will have only limited impact since this was designed to only help affordable segment and performing assets.

At this stage, what are the additional options before the government to help the real estate sector? Sitharaman has hinted that the government will consult with the Reserve Bank of India (RBI) on this. There could be some more nudging on the banks to lend more to the sector and offer lower rates; further, there could be some tweaking of the risk weights. The government can also look at offering more tax incentives to attract more homebuyers. But, will these measures be enough?

It is important to understand the real reasons that have been ailing the sector. True, the economic downturn has had a telling impact on the purchasing power of the borrowers. The oversupply of inventory in major pockets would have led to stock-piling up and a problematic job situation would have added to the worries.

There is no doubt that the prevailing general economic sentiment and the uncertainty surrounding it have taken the confidence element away from the potential homebuyers. People fear job losses and so they do not want to commit a big liability. Cash exchange has slowed since the demonetisation in 2016.

The unemployment rate going up to record highs (a tad above 6 percent at the last count) shows the pathetic state of the employment situation. Also, stricter LTV (loan to value ratio) rules mean that the buyer has to bring in at least 30 percent money upfront, which is not possible for many. This wasn’t the case before when banks used to offer even up to 90 percent of the cost (in some cases even higher).

Also, buyers do not see much sense in taking up a big liability on something where the cost of acquisition is too high and the return on investment (RoI) is too low. This is true for appreciation on a residential real estate property or rental yields. For instance, in Mumbai which is one of the biggest markets for high-end real estate inventory, prices haven’t appreciated much in the last 5-6 years. Investors do not gain much with a meager return on money locked in for a considerably long period where the rental yields are less too (2-3 percent post-tax).

But, there is also another side to the story. The persistently high prices in major pockets have severely impacted the prospects of the real estate sector. Real estate cartels have been artificially keeping the rates high for too long creating a stalemate in the sector. This needs to be corrected. Unless realtors show a willingness to cut prices to attract buyers, it will be difficult for demand to revive.

According to Anuj Puri, chairman of Anarock Property Consultants, there are more than 5.5 lakh units that are stuck or delayed in the top seven cities alone and the number is likely to be much higher if we consider all cities and towns.

Anarock estimates that real estate projects worth Rs 1.8 lakh crore are stuck right now. The bottom line is that the government/RBI stimulus will have only a limited impact on the sector unless the real estate developers show a willingness to cut the high prices. In the present economic situation, it is high time realtors woke up to reality and shed their greed.