Real Estate woes

The real estate sector is in dire straits — the tight liquidity condition and the rise in interest rates have affected realty sector hard. Because of the RBI’s policy of discouraging banks in lending to real estate developers, the fund flow to the sector has dwindled. This might even force a number of units to close down. The construction sector, which is the second largest employment provider in the country, is facing tough time because of the government policies, says CMD of Parsvnath Developers, Pradip Jain. He says that government must change its policy and allow the flow of funds at low interest rates so that people may buy houses. He said that banks should be allowed to lend directly to developers to meet their construction schedule. This, he emphasized, will enable the sector to tide over the current crisis and help save the jobs of lakhs of poor construction labourers. Builders and developers feel that interest rates on home loans should be brought down to less than 10% from the present 13% to enable end users to buy houses. Since the global financial crisis came to a head, the banks have been discouraging home loan customers. The floating home loan rates of most of the banks have gone up to 13%. This has affected the affordability of end users. The EMI of the same amount of loan for 20 years has gone up by almost 50% in the last four years as the interest rates have gone up from 7% to 13%. In fact, a senior developer says the problem arose after the government and the RBI started treating the real estate sector as a den of speculators. He says that instead of finding a remedy for the market crisis, they decided to kill the sector itself by discouraging banks from giving loans to developers. CMD of Assotech, Sanjiv Srivastava, says that the sector played an important role in the high growth of new economies like IT, BPO and retail by providing them state-of-the-art buildings with all amenities, matching their new requirements. The crux of the matter is that the new economies grew only in those cities where world-class realty development first started. In the NCR also, after the realty development first kicked off in Gurgaon, it came up as a hub of IT and BPO centres. Later, because of the availability of quality retail space, organized retail in the form of malls also came up, with Gurgaon showing the way, once again. Only after similar quality constructions started in Noida, did all these new economic activities start moving to that suburb. Therefore, Srivastava argues that real estate development played an important role in driving the economic activities. The promoter of Gaur Sons, Manoj Gaur - an NCR-based developer - contested the theory that real estate sector made money by jacking up the prices and burdening the end users. He said that developers had always priced their product at a reasonable level, between Rs 1,500 per square feet and Rs 2000 per sq ft in 2003, in the suburbs of NCR, depending on the quality of construction. But the real profit was made by the investors, who bought them from developers and sold to end users at Rs 3,000 per sq ft to Rs 3,500 per sq ft. Sniffing demand from the premium segment end users, he says developers also increased the specification of construction and amenities offered in an apartment, and then started launching the products on 25% to 30% discount, to the prevailing market prices. But again, the investors entered the market and bought apartments to sell them to end users at substantially higher prices, he alleges. A realty consultant argues that the government could have addressed such problems by creating a regulator for the sector. Besides, banks could have been asked not to give home loans to investors to buy a second house. At the same time, he said if the government had increased the supply of land for the construction of houses, the prices would not have witnessed such a steep rise. If government announces that it will make available 10,000 hectare of land in a particular area for the development of residential units, the prices will not go up. But, they announce the conversion of land use from agriculture to residential or commercial purpose in small blocks of 25 acre or 100 acre and then auction them to builders. As demand for residential units is always high, and supply of land in the pipeline always inadequate, developers quote very high prices in the auction. In most of the cases, since 2005, the land acquired by builders have been at such a price that the floor area cost of a constructed unit invariably comes in the range of Rs 2,000 per sq ft. In that situation, Pradip Jain says that as the cost of construction is in the range of Rs 1,100 per sq ft, the minimum cost at which developers could sell an apartment in these areas would be at around Rs 3,200 per sq ft. So the cost of a 1,500 sq ft threebed room flat works out to roughly between Rs 45 lakh and Rs 50 lakh. If the interest rate is brought down from 13.5% to 10% the EMI for 20 years loan will come down by over Rs 10,000 from Rs 58,578 to Rs 48,251. This will improve the affordability of end users to enable them to buy a house.