Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Real estate: in need of a regulator
BackBack

Real estate: in need of a regulator

Lack of structured financing ails the realty sector

The mismatch between demand and supply is an inherent part of the realty puzzle. Photo: Hemant Mishra/ Mint Premium
The mismatch between demand and supply is an inherent part of the realty puzzle. Photo: Hemant Mishra/ Mint

Mumbai: The panellists at Mint’s annual real estate conclave agreed that a complex Indian real estate sector needed a watchdog, especially to regulate the biggest stakeholder—the Indian government. They also pointed the mismatch between demand and supply as being an inherent part of the realty puzzle. The participants were Maneesh Srivastava, CEO, Muthoot Housing Finance Co. Ltd; Anuj Puri, chairman and country head, Jones Lang LaSalle India; Vikhyat Srivastava, co-founder, Groffr.com; Akash Deep Jyoti, director, real estate ratings, Crisil; Gaurav Gupta, director, Omkar Realtors and Developers Pvt. Ltd.

The 27 July panel discussion on Reviving Residential Markets: are innovative financing options driving growth? was moderated by Mint’s Lisa Pallavi Barbora. The discussion covered the dynamics of the real estate sector and what the future holds. Edited excerpts:

Lisa Pallavi Barbora: What does the fall in absorption rates mean, are genuine buyers and investors not buying?

Anuj Puri: A lot of government data say demand is infinite and, as of 31 March 2012, there is a shortage of over 26.3 million dwelling units. When you look at the demand and the shortage, it really is infinite. I think what has happened here is that the demand is in one category and the product is being placed in another category. This has been seen largely in the three cities of Delhi, Mumbai and Bangalore. Outside of these three cities, the pricing, demand and supply is stacking up well. In Mumbai, 80% of the cost is the land cost, and unless we bring in better infrastructure land prices will continue to remain high. The builders are left with the balance 20%, making it very difficult for them to bring the price down.

Barbora: Muthoot looks at affordable housing, loans for up to 10-15 lakh—is there demand in that segment?

Maneesh Srivastava: There is a lot of demand in the affordable housing space. As Anuj said, the demand exists in a certain space but there is a larger opportunity with the number of houses coming up in urban cities. The urban population in the cities is going to be 600 million in the next 15 years. That is the creation of at least another 20 Mumbais. Clearly, a city like Mumbai or a city like Delhi is not going to take such a load, and whether you like it or not, it is going to happen. Decongestion needs to happen from some of the larger cities and a larger plan needs to be taken up to allow planned development in some of the upcoming urban centres across the country. Unless and until we do that, we are looking at a situation which is likely to turn into a crisis. The whole question of whether the supply matches the kind of demand that is there, nothing can be done unless there is the right kind of supply to match the demand.

Jyoti: First of all, we cannot have an overall demand and overall supply in context of the Indian real estate sector as the sector is very complex altogether, and cannot be compared to the real estate sector of any other country.

There is no concept of overall demand and supply as far as the sector is concerned and it is all about offering the right kind of product to the market. So, while there could be humongous demand and humongous supply, the matching has to be product-specific and cannot be in terms of numbers. I think it is about time we moved beyond demand and supply and looked at other dimensions. In terms of city specific demand, there is demand in some cities that has really not dried out. In others, like Mumbai, there is demand and the pricing is really never going to come down. Then there are cities where we see demand coming down. The kind of diversities that exist from the various cities is very different. For example, NRI (non-resident Indian) wealth could be driving the real estate demand in Kerala. While cities like Bangalore and Gurgaon are getting driven by IT (information technology), and Mumbai has some other aspects.

Vikhyat Srivastava: When you look at it fundamentally, 50% of India is still below 25 years of age and when these guys grow up, they will need houses. So the demand will always be there but what we need to focus on is at what price. As Akash pointed out, there is a product perspective to it and there is a pricing perspective to demand. I would say that demand is definitely there and supply is slowly coming up, especially in places like Mumbai and Gurgaon.

Barbora: The other side of demand is supply, so is inventory a burden?

Gaurav Gupta: I think India is the only country where we pay real estate prices upfront. If you go world over, people buy real estate and hope for the prices to increase. That is how the world phenomenon is. Coming to Mumbai, as Anuj mentioned, 80% of the price of real estate is land cost and that the developer has to pay upfront. So, to say that a very small scale of stock is enough to complete the project is not the case. First, we should look at the financial costs in terms of debt, in terms of equity and in terms of NBFCs (non-banking finance companies). So, after taking all these factors into consideration, the debt is so high, the pricing is so high, that the product has to be priced accordingly. In Mumbai real estate, the regulations have changed and have again added to the cost.

Barbora: Are we at a stage where we need a common regulatory authority for the Indian real estate, considering the fact that it is such a complex affair and transparency has been a problem with this sector?

Maneesh Srivastava: Yes, absolutely, we need regulation because it becomes more relevant as we go down the social ladder. This whole debate of what type of housing is in what part of the country—I think India is a large country. To start looking at the big numbers downwards, you will have to dissect that demand. The fact of the matter is that there is enough entrepreneurism to be able to construct according to demand as per the geographies. But what is obstructing is that the people who want to actually construct in those space are finding themselves constrained by the amount of time it takes to get approvals.

Barbora: Is transparency a problem?

Vikhyat Srivastava: Yes, like what is happening in Noida all these years. There has been lack of structured financing, because of which a lot of developments are stuck there.

Barbora: What does a regulator mean for the developers?

Gupta: The regulator is always welcome but again you cannot regulate demand and you cannot regulate supply. And the provision of the regulator should be such that we should equally benefit from them. Historically, the sector used to be very fragmented with small developers; with FDI (foreign direct investment) coming in, many corporates have entered, thus improving corporate governance and transparency.

Jyoti: When we talk of regulators, immediately the stock market or capital market comes to mind; here there is a regulator in place and we are seeing that the regulator really does not determine the prices but facilitation in terms of price discovery and I think that component is completely missing in real estate. Transparency is also missing in this sector. When I think of regulation, it is not in terms of the regulator alone. No sector can only work under the regulator alone, I think it should be self-regulation to begin with, second component is market regulation. The market should be made more powerful and institutions that facilitate flow of information should be brought into this sector and lastly the regulator’s regulation. And each one should have their own role to play. This country needs more enforcement than regulation.

Barbora: Is it possible to regulate such a complex sector?

Puri: Our transparency index has improved, as eight years ago India was 72 on the index of nations in terms of transparency and corporate governance and we have moved up to 44, and at 44 we have actually beat China. The regulator needs to cover the entire sector, geographies and stakeholders. At the moment you are regulating the various stakeholders and not the government, the biggest stakeholder. Secondly, if regulation wants to come in its true sense, bureaucracy needs to come in. Some of your best corporates are already in, be it Mahindra, Godrej, Tata and in the process will bring more efficiency.

Barbora: Old projects are not getting sold and even then new projects are coming up. It is a well-oiled machinery, there is enough funding through private equity funds, NBFCs and non-convertible debentures (NCDs) available for HNIs (high net-worth individuals). On the other hand, conversions are not happening and sales are slowing down. So, is this kind of supply and pricing creating an asset bubble?

Puri: I think in real estate, money can’t be enough, so I am not sure what is enough money. There may be enough money but it is not sufficient money. Out of the three, this is the most important topic of discussion as it is one of the biggest challenges at this point of time given the liquidity situation in the country. I see this challenge coming from scheduled banks, dried up private equity, NBFCs running out of money, sales going down and combining all that the Reserve Bank of India coming heavy on interest costs. Would that lead to prices coming down? As Gaurav mentioned, this depends on demand and supply and they cannot be regulated. Not many know that post Lehman, from January 2009 to March 2009, the prices of real estate have gone down 20 to 25%, so it is not true that real estate prices only go up. But they are back up, because the demand came, the money came in and the liquidity got pumped in.

Vikhyat Srivastava: I totally agree with his last point. You look at the economy in the bull market, it is the strongest player that leads the prices and in a bear market it is the weakest player that pulls the market down. In this bear market, transactions have slowed down a little, either due to external factors like in Noida or lack of approvals in Mumbai Private equity financing is replaced in a big way by NCDs. If transactions do not pick up and approvals do not come in and other factors do not loosen up, this sector is going to face some heat.

Maneesh Srivastava: We had a project or we worked on a project in Ahmadabad that got sold out quickly. And these people financed the developer as the developer constructed. The question here comes in whether I am constructing for the right type of audience? I don’t think the debate is whether financing is available, as there is a lot of money available for the real home buyer who is restacking it in one way or the other waiting for the prices to come down.

Gupta: What happens is that every developer has his own business plan and redevelopment is a very different industry. Take Mumbai and Gurgaon where land acquisition is very difficult, so they have their own set of business plans. Some say they want to do two projects in three years or say 20 projects in three years so the demand, pricing and product all depend on his business plan. Real estate is an industry and in the micro market the price range of the product can range between 15 and 20%. Financing from a private equity player is important as they should be confident putting their money and should have studied the market.

Barbora: Does financing need to be more broad-based?

Jyoti: Maneesh made a relevant point about the product. If in the residential market the product is right, we do not need any other form of financing. The customer finance available to incur all the financial costs puts you in a very good situation. Having said that, the private equity funds, banks or NBFCs—they really have to make sure that the value addition is not restricted to the funding alone. If that happens and say if the product is not right, to begin with you will need alternative financing as the customer funds are not coming in.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 17 Aug 2012, 12:03 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App