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Misconceptions in Real Estate concepts in India

By Ubaid Parkar
There are numerous schools of thought of what ails the Real Estate sector in India, a range of which expands from micro levels of demand-supply corrections and price control monopolies to the blind eye of the Governments for decades not recognizing the sector as an industry.
When micro-elements are magnified, they are quantified into broad generalizations, almost mythological in nature and with copious amounts of documents and presentations fed into the system; they accumulate into a non-existent perspectives they catapult itself into a mud-fest of jargons.
For instance, a relaxation in lending norms versus Non-Performing Assets (NPA) versus affordability contributes to a triangle
of contradictions.
Relaxations can be served as guidelines by the government as per their monetary and fiscal policies but whether they see the light of day is governed by not only their gestation period but the financial institutions outlines towards profit margins. The Sub-Prime crisis saw an extremity of both these cases and subsequently led to a volcanic island called recession. ICICI, in February, wrote-off bad loans to the tune of Rs.1600 crore, a prime example of lax policies of the Government added with poor risk management strategies by financial institutions. Then the third apex of affordability denies gains to not only developers but financial systems alike.
On a micro level again, developers who function on speculative transactions, result in inflated prices and valuations of land-banks, a highly subjective issue, gather dust to create a concrete, near  unattainable levels of prices.
It is to be reiterated that the Real Estate sector is not recognized as an industry. The Confederation of Indian Industry (CII) in a report submitted to the government on March 1 suggested that the Indian realty sector should be accorded an “industry status” and the integrated township development activity an “infrastructure status”. The report addressed its linkages to 250 industries. If approved, an “if” which has reverberated over the last two decades, it will mean recognizing contractual labour, promise them health benefits, Provident Funds, health care and other services which will result in constructions costs to skyrocket and reduce profit margins of developers. A child born today will grow into puberty to the resonating demands for calls of the Real Estate industry status and will consequently echo on his deathbed at this rate. The fact is developers vulture on meat of labour supply.
Real Estate functions to the best of its abilities on the basic laws of economics, or at least it tries to. High demands lead to high prices and a diminishing demand leads to decreasing prices. Stock prices for the companies in the Real Estate sector in India tumbled after its peak in early January-February 2008 but corrections in prices started as late as March 2009. This was accredited to developers holding on to their transactions anticipating the market to miraculously revive itself. Prices have to come down if sales have to be triggered without which it is as good as defying the laws of physics.
It is believed that the market supply was the least in 2006 to early 2008, but BPTP had acquired a land deal worth in excess
of Rs.5000 crores for 95 acres in early 2008 and that too by beating DLF for the deal. Furthermore, inflated prices are not
merely the function of an oversupply of money within a limited inventory. The demand factor in this case is unaccounted for. That is why IPO’s of Parsvnath Developers and Sobha Developers dipped more than 85% during the bearish stock market.
Now due to the slump, sales are expectedly slow and interest rates are still not viable enough to boost transactions. Foreign investment avenues are cautious as it may open the floodgates to the global downturn. India is relatively cushioned against it so far.
Interests and incomes are said to be the only factors governing affordability but then again interest rates are the lowest in four years but the loan to value rates have gone high. Financial institutions have now to ensure that their bad debts do not
weigh out their liabilities column. The recent fall in interest rates do not imply that there will be a rush in the housing sector, albeit the demand for these houses exists, and this has caused developers to realize the invisible third option, reduce prices. To perceive income and interest rates the only facets of affordability is fallible. The gap in prices and disposable incomes is still wide and developers intend to keep the gap as wide as possible. Developers need to keep themselves aware of market conditions as realistically as possible, but then again without government regulations in a sector which doesn’t have the title of the industry, its leads to an oligopolistic state of affairs.
Panic in the near future is out of the question as either the government will intervene or developers will drop prices to feed their bloated bellies. Funding may as well have dried up but regulation relaxations in foreign equity are an aspect that have not explored. If current projects are facing an uncertain future and constructions have stalled, it is not due to a depleted inventory but due to an oversupply. Commercial spaces have been hogged up for construction of malls, with no takers. If the retail market is plummeting, then there is an obvious mistake of retail inventories. And with residential housing formulating a demand, developers have their priorities messed up. Even Section 80IB, a tax incentive for those, under terms, provide a fraction for housing the needy was not well utilized. Speculative transaction is the work of the devil. The French economist JB Say’s principles works only in a depression and not in a slow down. The current scenario of a slow down in
a capitalist state has government intervention to disallow further damage. The US of course, forgot their principles.
Notwithstanding the underplaying of job losses, it is to be understood that the job losses would only affect the Real Estate sector and not its ancillary units. Migration of labour has more freedom than the Freedom of Speech. Labour losses are just
another way of emotionalizing the issue and seeking grants. MCHI’s success in its recent exhibitions still saw it looking for grants from the government on the basis of labour support. Unskilled labour has no social securities, so the job losses are gains for ancillaries at a lower cost.
Comparisons drawn with the Lehman Brothers is preposterous. The fact is that the builders lobby will not allow the sector to collapse. As seen recently, they are now catering to “affordable housing”, offering one or one and half BHK propositions, at rates which are still deemed secondary.
And finally, the revival of Real Estate is a factor for GDP growth but it is not the factor. The Real Estate sector will not be the engine that pulls out India, but it’s the success of the Indian economy, a service based at that too, will revive the lagging sector.

By Ubaid Parkar

There are numerous schools of thought of what ails the Real Estate sector in India, a range of which expands from micro levels of demand-supply corrections and price control monopolies to the blind eye of the Governments for decades not recognizing the sector as an industry.

When micro-elements are magnified, they are quantified into broad generalizations, almost mythological in nature and with copious amounts of documents and presentations fed into the system; they accumulate into a non-existent perspectives they catapult itself into a mud-fest of jargons.

For instance, a relaxation in lending norms versus Non-Performing Assets (NPA) versus affordability contributes to a triangle of contradictions.

Relaxations can be served as guidelines by the government as per their monetary and fiscal policies but whether they see the light of day is governed by not only their gestation period but the financial institutions outlines towards profit margins. The Sub-Prime crisis saw an extremity of both these cases and subsequently led to a volcanic island called recession. ICICI, in February, wrote-off bad loans to the tune of Rs.1600 crore, a prime example of lax policies of the Government added with poor risk management strategies by financial institutions. Then the third apex of affordability denies gains to not only developers but financial systems alike.

On a micro level again, developers who function on speculative transactions, result in inflated prices and valuations of land-banks, a highly subjective issue, gather dust to create a concrete, near  unattainable levels of prices.

It is to be reiterated that the Real Estate sector is not recognized as an industry. The Confederation of Indian Industry (CII) in a report submitted to the government on March 1 suggested that the Indian realty sector should be accorded an “industry status” and the integrated township development activity an “infrastructure status”. The report addressed its linkages to 250 industries. If approved, an “if” which has reverberated over the last two decades, it will mean recognizing contractual labour, promise them health benefits, Provident Funds, health care and other services which will result in constructions costs to skyrocket and reduce profit margins of developers. A child born today will grow into puberty to the resonating demands for calls of the Real Estate industry status and will consequently echo on his deathbed at this rate. The fact is developers vulture on meat of labour supply.

Real Estate functions to the best of its abilities on the basic laws of economics, or at least it tries to. High demands lead to high prices and a diminishing demand leads to decreasing prices. Stock prices for the companies in the Real Estate sector in India tumbled after its peak in early January-February 2008 but corrections in prices started as late as March 2009. This was accredited to developers holding on to their transactions anticipating the market to miraculously revive itself. Prices have to come down if sales have to be triggered without which it is as good as defying the laws of physics.

It is believed that the market supply was the least in 2006 to early 2008, but BPTP had acquired a land deal worth in excess of Rs.5000 crores for 95 acres in early 2008 and that too by beating DLF for the deal. Furthermore, inflated prices are not merely the function of an oversupply of money within a limited inventory. The demand factor in this case is unaccounted for. That is why IPO’s of Parsvnath Developers and Sobha Developers dipped more than 85% during the bearish stock market.

Now due to the slump, sales are expectedly slow and interest rates are still not viable enough to boost transactions. Foreign investment avenues are cautious as it may open the floodgates to the global downturn. India is relatively cushioned against it so far.

Interests and incomes are said to be the only factors governing affordability but then again interest rates are the lowest in four years but the loan to value rates have gone high. Financial institutions have now to ensure that their bad debts do not weigh out their liabilities column. The recent fall in interest rates do not imply that there will be a rush in the housing sector, albeit the demand for these houses exists, and this has caused developers to realize the invisible third option, reduce prices. To perceive income and interest rates the only facets of affordability is fallible. The gap in prices and disposable incomes is still wide and developers intend to keep the gap as wide as possible. Developers need to keep themselves aware of market conditions as realistically as possible, but then again without government regulations in a sector which doesn’t have the title of the industry, its leads to an oligopolistic state of affairs.

Panic in the near future is out of the question as either the government will intervene or developers will drop prices to feed their bloated bellies. Funding may as well have dried up but regulation relaxations in foreign equity are an aspect that have not explored. If current projects are facing an uncertain future and constructions have stalled, it is not due to a depleted inventory but due to an oversupply. Commercial spaces have been hogged up for construction of malls, with no takers. If the retail market is plummeting, then there is an obvious mistake of retail inventories. And with residential housing formulating a demand, developers have their priorities messed up. Even Section 80IB, a tax incentive for those, under terms, provide a fraction for housing the needy was not well utilized. Speculative transaction is the work of the devil. The French economist JB Say’s principles works only in a depression and not in a slow down. The current scenario of a slow down in a capitalist state has government intervention to disallow further damage. The US of course, forgot their principles.

Notwithstanding the underplaying of job losses, it is to be understood that the job losses would only affect the Real Estate sector and not its ancillary units. Migration of labour has more freedom than the Freedom of Speech. Labour losses are just another way of emotionalizing the issue and seeking grants. MCHI’s success in its recent exhibitions still saw it looking for grants from the government on the basis of labour support. Unskilled labour has no social securities, so the job losses are gains for ancillaries at a lower cost.

Comparisons drawn with the Lehman Brothers is preposterous. The fact is that the builders lobby will not allow the sector to collapse. As seen recently, they are now catering to “affordable housing”, offering one or one and half BHK propositions, at rates which are still deemed secondary.

And finally, the revival of Real Estate is a factor for GDP growth but it is not the factor. The Real Estate sector will not be the engine that pulls out India, but it’s the success of the Indian economy, a service based at that too, will revive the lagging sector.

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