The Reserve Bank of India’s latest consumer confidence survey should be enough to give any government the blues. With 39% of the respondents having perceived a “worsening of the employment scenario” in H12017, compared with a year ago, consumer sentiment on the current employment situation has stayed subdued. The respondents also felt their income levels had, in fact, fallen over this period. Worse, their levels of optimism on future income continued to dip.
This less-than–cheerful mood, to put it mildly, is also reflected in a CRISIL study which noted that demand for residential property was unlikely to revive over the next 12-18 months. Indeed, over the last five years, sales of houses or apartments have stagnated, slowed or slipped. In the last one year, the pace of home-loans has decelerated sharply, falling to 10.5% y-o-y in July, the lowest in at least four years in. In September 2016, home-loans were growing at 18% y-o-y. And that’s despite property prices having corrected by 8-10% depending on the micro-market in the last 12 months or so, and interest rates on home-loans having come off by at least 50-75 basis points.
Not surprising, then, that inventories continue to pile up with the NCR, now boasting anywhere between 48 and 54 months of stock. In a somewhat frightening assessment, CBRE says units under construction represent 93% of the inventory in the top 10 cities, of which 30-35%—or a third—would remain stranded since developers do not have the financial wherewithal or cash to complete the projects.
Here’s how the government needs to step in. A team must identify all the troubled real estate projects across the country and come up with a plan to complete them. Just as RBI has identified companies which are bankrupt or near-bankrupt, and has asked lenders to come up with a resolution plan under the Insolvency and Bankruptcy Code (IBC), there needs to be a similar strategy for half-finished real estate projects.
To be sure, there will be complications—land is after all a state subject, and builders in the unorganised segment are not easy to handle. Many of them have strong political connections, and that is the tough part because local politicians are often stakeholders in real estate ventures. Also, most projects would not have been registered with state Real Estate Regulatory Authority (RERA).
But the government must, with the help of homebuyers associations where they exist and bankers, zero in on developers and come up with ways to resuscitate projects. Many projects are stuck merely because the necessary clearances have not come through while in some instances the land may not have been fully acquired. The state municipalities must be persuaded to give the approvals. Again, there could be projects left half-done merely because the builder doesn’t have the funds to finish it; such projects could be auctioned off to bigger builders.
Of course, not too many builders might be willing to re-work half-built properties especially if they perceive the quality to be inferior. In that case, perhaps NBCC or some state-level housing construction institution could be asked to take up some of the projects. Typically, builders are reluctant to lower prices—even if doesn’t hurt their financials—because the initial lot of buyers or investors would have paid a higher price. However, prices must be allowed to fall so that all the apartments are sold, and the project can get going.
Wherever possible, the projects can be revamped to make the homes more affordable. Several reputed and financially-strong corporate builders plan to launch affordable housing projects—and should the government offer attractive terms, they could be convinced to take on some of the existing projects. The unorganised and smaller builders will have little choice but to exit the market. If need be, the government can seek the help of the courts to get possession of the projects and, in the process, errant builders will be eased out. Even before NBCC starts utilising the land belonging to PSUs, as it intends to do, the government should try and see if some incomplete projects can be handed over to it.
On a rough reckoning, troubled loans to the real estate sector would be around Rs 20,000 crore, or about a fourth of the total credit outstanding to the construction sector, of Rs 81,100 crore. The completion of even some projects would help banks retrieve their money. If banks see enough of an increase in demand for home loans, they might be willing to further lower interest rates on loans. However, as most industry experts have pointed out, it is the high—and often outrageous—price of the asset that deters buyers and leaves them sitting on the fence. While home finance companies might say houses are more affordable today than they were a few years back, the fact is, for the vast majority of the population, they are not. Only if property becomes more affordable will buyers will be prompted to buy it.
The multiplier effect created by the real estate sector is very high, probably the highest of all sectors. If the government can get even a third of the stalled projects going, the impact on the economy can be fairly high and banks would have a better chance of recovering both the corporate loans as also the retail loans. Imagine what the purchase or possession of six lakh flats, valued at an average of `50 lakh, could do for the economy. Even if half of these, or three lakh homes, are occupied, sales of a range of products, from cement and steel to tiles, electrical products to white goods, will get a boost. The construction of the projects will ensure jobs are created. It does not require any new legislation to be passed by Parliament, just a team that liaises between banks, builders and home buyers. That the BJP rules in key states such as Haryana, Uttar Pradesh and Maharashtra which have the largest inventory should make it easier. Going after errant builders will win any government more than brownie points.