One-time loan restructuring, fire sale of inventory: Deepak Parekh’s prescription for real estate

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Published: April 15, 2020 5:20 AM

They must partner with developers to ensure easier travel and enhanced insurance cost to bring migrant labour back to the construction sites.

He asked for a one-time restructuring of stressed developer accounts as that would offer a better way to renegotiate timelines of repayment than the legal complications of triggering force majeure clauses. He asked for a one-time restructuring of stressed developer accounts as that would offer a better way to renegotiate timelines of repayment than the legal complications of triggering force majeure clauses.

Housing Development Finance Corporation (HDFC) chairman Deepak Parekh on Tuesday rolled out his prescription for the stressed real estate sector, seeking a one-time restructuring of loans and exhorting developers to sell existing inventory at any cost. Parekh also said that he expected real estate prices to come down anywhere between 15% and 20%.

Over a video call with leading representatives from the real estate sector, Parekh said state governments, the Reserve Bank of India (RBI) and developers themselves need to do their bit to get the sector back in shape, which is the second largest employer after agriculture.

“For starters, I believe that real estate prices have to come down and they will come down. Naredco’s (National Real Estate Development Council) estimate is 10-15%. I had said somewhere that one must be prepared for even 20%,” Parekh said.

He recommended state governments to incentivise migrants to return to work. They must partner with developers to ensure easier travel and enhanced insurance cost to bring migrant labour back to the construction sites.

“For instance, you can offer for the first 45 days, if the migrant labour comes back from their village, the government and the developer community will help them and partly pay for their travel cost and insurance cost,” Parekh said, adding that developers must be prepared to increase wages to lure workers back.

State governments should also be pushed to waive stamp duty and registration charges on housing in September and October when the country is back to normal and is gearing up for the festive season. States should also review ready-reckoner rates more frequently. Further, they should permit a staggered or deferred payment schedule on various levies pertaining to land transactions for a short period of time.

Parekh urged the Reserve Bank of India (RBI) to recognise that monetary policy transmission is not happening effectively in the current environment. Yields have risen despite a 75-basis point (bps) cut in the repo rate as markets expect the central and state governments to borrow more. Banks continue to remain risk-averse.

“Many recommendations have been made to RBI to directly purchase corporate bonds and commercial papers of the private sector as the primary markets have dried up,” Parekh said, arguing in favour of such an action along the lines of that by other central banks across the world.

He asked for a one-time restructuring of stressed developer accounts as that would offer a better way to renegotiate timelines of repayment than the legal complications of triggering force majeure clauses. For a prescribed, pre-defined period of time, the central bank must allow the industry to shift to a 180-day non-performing asset (NPA) recognition regime from the current 90-day regime as a temporary measure.

Parekh told developers to be willing to offload some inventory “for whatever price” as they need liquidity and cultivate long-term relationships with their lenders.

The moratorium should be used as a last resort, he said, because there will be a cost to availing it. Promoters of construction firms must also draw reduced remuneration, Parekh said. Developers need to raise their equity cushion. “Make some compromise on valuation. Anyone — foreign, private, sovereign wealth fund, high networth individual — who is willing to put some money as equity. You need equity,” Parekh said.

Developers are finding it increasingly difficult to raise liquidity in the form of debt as many of them are already overleveraged and shunned by lenders and investors alike.

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