The Reserve Bank of India has taken a decision to push banks to clear their balance sheets by identifying non-performing assets, resolving bad debts of large defaulters after which taking them to bankruptcy court for liquidation, this has focused attention on the crisis in a few sectors.
Real estate is one among those sectors like power, steel and textile. Real estate sector broadly consists of housing, commercial real estate and hospitality assets. Firms such as Unitech, Jaypee Infratech and Amrapalli are being pursued by banks and home buyers who had paid them advances but not received their houses have turned to the courts.
However, finished contract or houses are yet to be handed to banks and home buyers. They fear they would lose out in case of liquidation because home buyers’ claims will be looked upon only after those of secured creditors like the banks have been settled.
The post-liberalisation evolution of this sector reveals quite starkly the characteristics and contradictions of post-reform growth. An overriding objective of neoliberal reform is to get (domestic and foreign) private investment to drive economic growth by providing it the right platform and offering it the appropriate incentives. But in a market economy, while supply side initiatives may help improve into an activity a private sector afflicted with inertia, those initiatives would work only if such activity finds a right market. So even if it is not among the stated objectives of reform, a parallel thrust of policy must be that of stimulating demand for ever growing real estate sector.
However, there are certain issues pertaining to the downfall of real estate sector in the recent times.
Private preference – This is challenging for a policy frame that refrains from using autonomous state expenditure as the principal stimulus to growth. The belief is that this is not essential and should be curbed down when tax and other concessions are used to incentivize private investment, since increased public expenditure would lead to large deficits that defeat the purpose of fiscal reform. It must also be avoided because it goes against the grain of a growth strategy that seeks to give allowance to the private sector. This implies that demand must come from the private sector. If business does well, demand for office space increases.
The rise of housing loans – One area that benefited from this credit splurge was real estate. The growth of housing loans reached momentum at the end of 1990s and remained at extremely high levels right up to 2006-07, before the start of global crisis. As a result, the share of housing finance in total credit rose.
Defaulting developers – Within the real estate sector, it is developers rather than home buyers who seem to be defaulting on payments. Competition between developers led to massive accumulation of land, as they built up land banks as a strategic weapon against others. Borrowing for this purpose and land development meant that the interest burden accumulated by developers was high, and was in excess of what could be met by the development and marketing of house properties and commercial floor space. Hence, leading developers have also stopped servicing debt and have become part of the NPA issues.
A fallout of the NPA problem is, banks are less willing to lend as they work on clearing up balance sheets and finding funds to recapitalize themselves. This has hit even the housing sector, where defaults have been far less than in areas like construction and real estate is concerned. Here too, while credit and demand for housing are still growing, they are fast losing momentum.
RERA- With the implementation of Real Estate Regulation Act (RERA) many new and existing real estate projects have slow down. Residential project launches have fallen by 8% since the Real Estate (Regulation and Development)Act 2016 was announced.
RERA makes it mandatory for all commercial and residential real estate projects where the land is over 500 sq. mt. or eight apartments to register with the regulator before launching a project. The act also impose regulations on the promoter and ensures that construction is completed on time.
Many bankers are worried that the project financed by them would get stuck under RERA. Bankers have also invested money with a buyback guarantee or an option of converting debt to equity and taking over part of the project, in some cases, they have even demanded personal collaterals from promoters. Despite all this safeguards lenders expect that new bad loans will arise from the real estate sector.
According to the Reserve Bank of India (RBI) data, loans of commercial real estate have dropped by over 3.3%. After demonetisation, the sharpest slowdown took place in the cash-intensive real estate sector and the situation become worse after the introduction of RERA. The construction sector has suffered from relatively high leverage and high-interest burden.
According to experts, the reasons include demonetisation, the RERA (Real Estate (Regulation and Development) Act, the high court’s stay on approvals, lack of clarity on Development Plan (DP) and lakhs of unsold inventory remaining with the builders.
However, experts believe that real estate market is going through a transitional state. Things are going to function better over time and the reforms will help in shaping up the sector to a more consumer friendly market.
The real estate sector, which witnessed a slew of policy measures through the year, experienced a market slowdown but the affordable segment emerged as its growth element, as mentioned by most property consultants and developers.
The policy reforms, however, promise to make residential real estate dealings more transparent than ever before and the market is expected to see at least a partial recovery in 2018 which will help improve the confidence of homebuyers, fewer new launches, improving sales and declining unsold units.
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