By Ubaid Parkar
Indian Real Estate has been defined as wary for the last few months and may continue to do so for the next few months. It is easy to maintain that the global recessionary has had a hand in this and point fingers on the Government’s ineptitude to bring about a change similar to the promises of the American President Barack Obama.
Although the change in US economic standpoint and the comparisons drawn to similar economic trends is flak, as all it needs is stability before it can start sucking other nations dry again, the Indian economy though has promise in its instability.
The RBI’s monetary policy in tandem with the economic stimuli in December 2008 and early January 2009 was aiming for iquidity in the market to wipe damp consumer sentiments. However, blame it on petty politics or the over-cautious approach of financial institutions or the hamfisted decisions in risk management of entrepreneurs and businessmen; it seems that the economic atyachar may continue.
Government policies appropriately injected
The fact of the matter is that policies by the Government and the RBI were not accepted in spirit. The Indian Institute of Plagiarism, a disease which has spread from Bollywood to money matters saw Indian giants seeking further help from the Government. In a letter dated the 5th of February 2009 to the Maharashtra Chief Minister Ashok Rao Chavan from the Maharashta Chamber of Housing Industry (MCHI), it requested a ‘Stimulus Package for Real Estate Sector’ demanding banal tax cuts and reduction of FSI rates. MCHI satirically had held an exhibition for affordable housing in Mumbai which was quoted “a success”. It is hard to refurbish success with hidden sordid agendas.
Interest Rates slashed, Financial Institutions clawed
The RBI’s move in reduction of interest rates was to facilitate home loan rates. SBI, like a supreme opportunist, announced a reduction of home loans to 8%. Other factors that were underplayed was the money margin, the loan-to-value rate increased drastically and also Credit Information Bureau (India) Limited (CIBIL), it’s illegitimate offspring tightened its noose to curtail mass borrowers through strict regulations on borrowers. This would ensure that the loans are not disbursed as per the fortitude of the stimulus packages or the RBI’s interest rates reduction. To add cream to this morning kicker of Colombian coffee, it is important to note that the special discounted rates are applicable only for new customers and for a limited period, after which prevailing rates will be applicable. SBI’s offer of 8% is only applicable for only one year and is valid up to May 2009. HDFC’s special rate of 9.75% for a Rs.20 lakh loan with a 20 year tenure will be offered only up to the end of February 2009, beyond which prevailing rates will apply.
If the cream was not enough, add a bit of cinnamon to the freshly brewed coffee. HDFC marks the move by SBI as a ‘gimmick’. SBI retorted that the move was to kick start demand in the market and was primarily meant for existing customers. With SBI and HDFC fighting like a soon to-be-divorced couple, the inconsequent worry is what about their destructive son, CIBIL.
The length of time for which these lower rates can be availed of may be insufficient to make a decision on buying property, and therefore may not translate into transactions. The Governments role The Interim Budget also received a lot of criticism which the acting Finance Minister Pranab Mukherjee said was for the “aam aadmi”. This can only be assumed to the overwhelming advantage rural India has had in shaping poll outcomes.
A laissez-faire economy talks about a minimum government intervention. Debates falred when, in 1969, 14 banks were nationalized by Prime Minister Mrs. Indira Gandhi. We have come a long way from the clutches of national bankruptcy in 1991 when the then Finance Minister and the current Prime Minister Manmohan Singh broke the shackles of Socialism and let the economy loose towards Privatization. It has been a tedious journey since then and today adequate freedoms are promised by the state to private sectors. But then it’s a system of checks and balances that avoids extremist philosophies like Anarcho-Capitalism or Market Anarchism. The Government, it is to be realized, has done its best to ‘stimulate’ the economy but if private sectors, like the one of Real Estate, need greater levels of foreplay then it may as well give up or chose ground breaking innovative avenues.
‘Devil’opers firing the furnace
This leads on to practices employed by developers. When demand falls, prices drop too. This particular theory has not squirmed through the ears of developers. “Where flats are more expensive, the drop will be sharper than where the flats are cheaper…correction is bound to come.” HDFC Chairman Deepak Parekh told reporters recently. With speculative transactions leading to hyper inflated prices and massive land banks waiting to be seeded, developers are holding on to their prices. In 2007, prices in Thane were offered at Rs. 3000 per sq. ft., and are lo and behold, prices are still at Rs. 3000 per sq. ft. Fabricated market prices by builders are negating the natural route of pricing. Although there have been reports that property rates are now dipping in some quarters but the transition has not been as appropriate as expected.
Foreign Investment leeway
Furthermore, the Government has exercised its leniency towards foreign investment as well. Foreign investors who have less than 50% stake in an Indian company are treated as domestic equity thus limiting the definition of Foreign Direct Investment (FDI). This widens the horizons for non-Indian investors but also keeps a vigilant glance in terms of its characterization. There has been denigration on some quarters that this may lead to exposure of the Indian economy to the global recessionary trends. But this neglects that foreign investors who have the capital to invest but cannot do so in Europe or Obama’s America have India as a savior. It is a symbiotic relationship.
Revival still on the cards
The realty sector has proved the most sensitive to the prevailing economic crisis. Last month, the Realty index declined by more than a quarter. DLF and Unitech, prominent developers, exemplified the damage. Developers who last year bid for and won highly lucrative land deals are now struggling to service installment payments. Notable examples of this are the BPTP bid of Rs.530 million per acre for a 95 acre prime commercial plot in Noida, NCR.
Rajeev Talwar, Group Executive Director at DLF, from an interview with CNBC, was of the belief that Realty equilibrium may reach as early as mid-2009. Cynics may deem this as too optimistic.
The ‘wait-and-watch’ policy has waited quite a lot ignoring Government packages and ensuing slumps. Commercial Real Estate may salvage the ongoing recessionary trend when consumerism wakes up again.
Revival period: June to August 2009 perhaps.