Worrying signs: The end game in Indian real estate might just have started

The Reserve Bank of India puts out the sectoral deployment of credit data every month. This data gives details about which sectors are banks lending money to. As per the latest data released, the overall lending by banks grew by 8.5 percent during a period of one year ending 29 May 2015. In comparison, the overall lending had grown by 12.7 percent during a period of one year ending 30 May 2014. Hence, there has been a marked slowdown in overall lending by banks. This has primarily happened because the public sector banks are accumulating bad loans by the dozen and are going slow on new lending. But that is a story which is well known by now.[caption id=“attachment_2291392” align=“alignleft” width=“380”]  Real estate issues. AFP[/caption] The interesting bit is the lending by banks to commercial real estate. It has grown by just 7.5 percent during the course of one year ending 29 May 2015. This is slower than the overall lending by banks at 8.5 percent. For a very long time the lending by banks to commercial real estate had been growing faster than overall lending. Take the case as on 30 May 2014, last year. The overall lending by banks over a one year period had grown by 12.7 percent. The lending to commercial real estate during the same period grew by a much higher 17.8 percent. Even at the end of 2014, the lending to commercial real estate had been growing at a much faster rate than overall lending. For the period of one year ending 26 December 2014, the overall lending by banks grew by 9.6 percent. The lending to commercial real estate grew by 15.1 percent. This trend has been reversed now. And what does this mean? It means that funds that real estate companies got from banks are drying up and aren’t as free flowing as they were in the past. In fact real estate companies in the past had been using new loans from banks to pay off their old loans and also to complete their old projects. With the bank lending to real estate companies slowing down, they won’t be able to continue to do so in the days to come. And this is good news for people who want to buy homes to live in. Data from Prop Equity shows that the number of new projects launched in 2014-2015 fell by 37 percent. For the fourth quarter of the financial year (i.e. the period between January and March 2015) the number of new launches fell by 48 percent in comparison to the same period in 2014. This essentially means that one of the ways in which developers used to fund themselves is not working as efficiently as it used to in the past. One of the reasons why developers have been finding it hard to sell new launches is the fact that their delivery record over the years has been really very bad. As a recent news-report in The Economic Times pointed out: “Of the 17 lakh apartments launched between 2008 and 2011, 55 per were delayed by at least one year and 20% by over 48 months, many of which have still not been completed, according to Liases Foras [a real estate rating and research firm].” Many real estate companies are sitting on a lot of unsold homes. If the lending to commercial real estate by banks continues to grow at a slower pace than the overall lending then the real estate companies will be forced to cut prices on their unsold homes. This will happen because the funding of real estate companies will slow-down or dry up and they will have to generate money from somewhere. This money will be needed to pay off past debt as well as complete existing projects. In fact, some real estate companies are already feeling the pinch. Mantri Developers is currently promising double your investment in just three years. This means a return of 26 percent per year. When would any real estate company promise such a high rate of return? Only when it is not able to raise money through the conventional routes. Mantri Developers are promising assured 100 percent return. The question is how is it being allowed to advertise such an investment scheme with the word “assured” in it. How can anyone assure a return of 26 percent per year? This is a clear example of how weak the financial regulators in this country are. A builder can advertise 26 percent per year assured returns and get away with it. Nevertheless, it shows how desperate the builder is to raise money. And that can only be good news for prospective buyers to buy homes to live in. To conclude, two major sources of funding for real estate companies, bank loans and new project launches are drying up. The third major source, black money, still remains. For reasons only best known to the government, it has chosen to concentrate totally on foreign black money and not do anything about the domestic black money, a lot of which ends up in real estate. It’s time the Narendra Modi did something about the domestic black money as well, in order to make real estate in this country more affordable. Why should only those with black money be able to buy homes? What about the others? (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)