Amidst the economic downturn, it’s once again crisis time for the real estate sector, especially as policy glitches are creating roadblocks preventing the revival of the sector, writes Vinod Behl.
Today, the biggest challenge faced by the capital-intensive real estate sector is the shortage of funds. Banks which are the largest and cheapest source of finance, are shying away from lending to real estate companies. Moreover, bank funding is only restricted to project financing (excluding land) and is available to select developers with healthy balance sheets. While NBFCs have exposure to only debt funding and that too at a much higher rate of interest, the expensive PE players are either not deploying their funds or exiting the scene.
Even on the FDI front, there’s a dismal scenario, with the share of FDI plummeting from eight per cent in FY 11 to three per cent in FY 14. Though 100 per cent FDI is allowed in construction development (townships, housing, built-up infrastructure) through automatic route, the restrictive conditions – minimum capitalisation of US $10 million in case of wholly-owned foreign venture, minimum built-up area of 50, 000 sq mts, minimum 50 per cent project development in five years and lock-in period of three years are proving to be a dampener.
There is a clear casefor relaxing lock-in period to facilitate early exit, reduction in minimum capitalisation and threshold built-up area. The Ministry of Housing & Urban Poverty Alleviation (MoHUPA) has already recommended that the minimum area requirement be reduced from 50, 000 to 20,000 sq mtrs. And the delay in launching Real Estate Investment Trusts (REITs) is further adding to the woes of the fund-starved sector.
While on one hand, funds to the real estate sector have been drying up, on the other hand interest cost as a percentage of sales has grown from 12 per cent in FY 10 to 18 per cent in FY12, making debt repayment difficult for developers.To make matters worse, debt restructuring or loan re-casting has been made difficult by banks on the directive of Finance Ministry.
One fails to understand why the Finance Ministry is fighting shy of granting infrastructure status to real estate to help it access cheaper capital, especially when MoHUPA has already recommended it.
And now, the RBI’s recent directive banning subvention schemes has closed the option of raising cheaper finance, despite the fact that there have been hardly any defaults. The long and cumbersome approval process is further adding to the prevailing real estate crisis. There’s an urgent need to lay down guidelines that prescribe simple, clear, transparent and time-bound procedures to fast track building approvals. Unfortunately, the Real Estate Regulatory Bill has overlooked this important aspect.
However, recently, the expert committee constituted by MoHUPA has come up with a reform blue print in this regard. One hopes that it gets implemented to check large-scale delivery delays that not just add to the cost of the property but also shake the confidence of the property buyers/investors.
A recent study by global property advisory, CB Richard Ellis has said that the real estate sector can double its share in GDP to 13 per cent, provided the cost of borrowing is reduced, approval process is fast-tracked and bottle necks in infrastructure are removed. It’s high time the government pro-actively takes initiatives on the policy front to not just revive real estate but also to put it on fast track.