They came through the automatic approval route under FDI (foreign direct investment) and money came in quickly as equity deals do not need prior approvals. They are mostly convertible debentures and preference shares, with conditions that before three years they will be redeemed. The developers borrowed money from overseas to fund their land deals at 18-20% interest. The land prices have crashed but they have committed to pay high phenomenal interest rates. Overall, 60% of such deals could be debt and the rest equity, and my estimate is that between $12 billion and $15 billion (Rs53,160-66,450 crore today) has come through the FDI route.
Is there some more pain coming?
Yes. How will they (developers) pay back? Where is the liquidity? Sales have stopped. The developers have bought land when prices were at their peak. So, there will be some pain in the real estate sector. Even those financial institutions, who have disbursed money carelessly, will find themselves in trouble as a large number of builders will face difficulty.
We need to categorize developers’ investments in various segments — malls, shopping centres, commercial and residential complexes. The malls have been worst-hit and the residential units the least-hit.
The advantage with the residential segment is even if the prices come down, there is some demand because of the shortages, but the malls are going abegging and people are converting malls into offices.
The Maharashtra government last week issued circulars saying IT (infotech) includes commercial banks, investment banks, stock broking companies, asset reconstruction firms, private equity, venture capital, brokerages, insurance companies and so on and they can get 80% of the space meant for IT (in an IT development). As you know, IT buildings get higher FSI (floor space index, a measure of how much space can be developed on a piece of land), but demand for IT buildings has slowed down. So, a builder can get extra FSI in the garb of IT, build more and give it to the financial sector.
Isn’t this essentially a rescue operation?
Obviously. I don’t know how the Maharashtra government acted so fast but it’s a rescue operation. (But) I think it’s done in good spirit.
So, the correction phase is not yet over.
I don’t think it’s over as yet. How much pain is left depends on the locality. For instance, in south Mumbai, there is a shortage and hence prices will not come down drastically as you are not reclaiming more land, increasing FSI and redevelopment is not happening. Where are the new buildings? So, prices cannot go down. But in the suburbs, they can…
What about other cities?
I worry about Bangalore, Chennai, Hyderabad because supply was ten times last year.
Even in West Bengal, Kolkata was developing well and they were trying to create an extension of Salt Lake by building Rajar Hat, a new town, but I don’t think it will be fully utilized. This is because IT has slowed down and the West Bengal government has not supported the IT sector. When Wipro Ltd first went to West Bengal, it was assured that it would be a 24X7 operation but there have been many stoppages.
The maximum pain left is in the retail segment; followed by IT and commercial segments; and finally residential segment. I’d think that Mumbai will be relatively less affected because of lack of land here.
How do you make housing affordable?
I am pretty hopeful on slum development, particularly in Mumbai. We have taken up a massive programme for slum development.