Builders ask govt to buy unsold flats

Yet another dumb, foolish, stupid, retarded, moronic, idiotic, asinine, (your favorite adjective) idea to prop the realty market. Trust nitwits like realtors to come up with these pearls of wisdom.

Indian express reports
New Delhi: In the first of its kind bailout demand, real-estate companies are planning to ask the Government to buy out their unsold flats at current market prices and sell these at a later date. The proposal floated by one of the big Delhi-headquartered and listed real-estate companies is one of the many ideas to be hard sold at the Planning Commission tomorrow.

A real estate company’s chairman and managing director who did not wish to be quoted told The

Indian Express, “We will discuss this tomorrow with Planning Commission Deputy Chairman Montek Singh Ahluwalia.” He, however, did not disclose the inventory position of the large firms in India.

According to Jaskirat Singh, owner of Delhi-based real estate broking firm Grand Real Estates, about 30-45 per cent of properties worth Rs 50 lakh and above launched over the last six months remain unsold for DLF and Unitech. In the case of Omaxe, it is 25-30 per cent, he said. These companies do not disclose their ready but unsold assets.

When contacted, a promoter of another leading Delhi-based and listed developer said this was not the only proposal on the table to bail out the sector. “We want states to enter into joint ventures with big real-estate players by offering land as equity. State-owned banks must also be directed to start disbursing home loans now that they do not have a problem of funds,” he said.

To boost consumer demand and give a fresh stimulus to the sector, the companies are also seeking a further cut in interest rates on home loans. “It should be slashed to 6 per cent for loans up to Rs 5 lakh and to 7-7.5 per cent for loans up to Rs 30 lakh. What the public sector banks have done is grossly inadequate,” a developer said. Tax incentives to home buyers must be enhanced and rental income be made tax-free to incentivise purchases, he added.

Stung by the liquidity crisis, real estate companies also want the Reserve Bank of India to refinance the cash gap in existing projects. Most companies are borrowing at rates over 20-22 per cent to complete ongoing projects. “But, now, loans from banks have virtually dried up,” a promoter said.

How India Avoided a Crisis

NYTimes article on what could have been a super inflated bubble in real estate. The article reproter fails to mention that black money and corruption was responsible for the spike in prices. Reddy left the private equity folks, hedge funds and "Black Money" to take the risk of escalating land prices. These folks are the sub-prime of India. Not the bank.

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

Get Real : Times of India editorial

The newspaper which prints "Property Times" and subtly promotes real estate bulders through carefully planted advertorials is now playing to the public sentiment. Alas we know TOI is the wolf in the lamb's clothing. As soon as prices drop 10% they will be back with articles promoting how people are lapping up properties by the dozens. Whether it is in god-forsaken places is another matter. What they care about is advertisements from builders. In a city of 20 Million like Mumbai, if 200 people buy an apt in Khandeshwar, Karjat or Panvel, far flung exhurbs in Mumbai it makes front page news. So much for the grand old lady of the Bori Bunder.

Real estate is one boom-gone-bust that's proving hard to tackle. At the government's prodding, public sector banks recently offered concessional
interest rates on new home loans up to Rs 5 lakh and between Rs 5 lakh and Rs 20 lakh. This was welcome, save that discretionary lending could still thwart loan aspirants. Also, the rates weren't retrospective, giving existing borrowers cause to grumble. As a palliative, the government appealed for lower floating interest rates. Its efforts paid off. State Bank of India, the country's largest bank, is to offer cheaper loans. Earlier, HDFC, India's largest private mortgage player, announced cuts in home loan rates for both new and existing borrowers. ICICI also hinted at reductions. So the soft rate trend is emerging in major private loan disbursing institutions as well. Reportedly, other realty-boosters under the government's consideration are an external commercial borrowing window, a service tax cut and rationalisation of stamp duty on property deals.

Realtors must accept that their big margin-driven boom-time is over for now. Much of their woes are their own doing. They overbuilt assets, riding on a bubble. With depressed demand, they continued to expect unrealistic profit margins. And now they're resisting top-end price corrections. Inflated asset prices are such that even the moneyed are sweating over purchases in tier-I and tier-II cities. Shifting gear from luxury and high-end to mid-level and affordable housing is required. Demand for low-cost housing is massively unmet; the potential for investment here goes beyond the context of today's economic downturn. India's young demographic profile, rapid urbanisation and high savings rate can keep propping up the property market. But housing prices in some segments need to fall by as much as 30 per cent to match affordability.

However, difficult bank financing can hobble low-cost housing projects. Banks need to ease lending, for which they may have to lower deposit rates. Further rate cuts from the RBI would help. Also, apart from builders' pricing, the issue of artificial land shortage keeping prices up needs addressing. Some of realty's demands converting short-term bank loans to long term and rate cuts on home loans of all categories have grounds. Others are mad-hatter expectations, such as wanting a government buyout of unsold assets at current market rates. Realtors have sensibly refrained from formally soliciting any such morally hazardous bailout.

The health of real estate has strong macroeconomic multiplier effects, both in terms of contribution to GDP and employment generation. The more the sector is stimulated, the faster India's economic turnaround will be. The real estate sector has to get real about the changed market environment, doing itself, consumers and the economy a favour.