Good times ahead

Realty Check

Vishwakarma | New Delhi | 8 December 2008 |

With the entry of Prime Minister into North Block and expectations that he will rely more on Montek Singh Ahluwalia, the Indian public in general and corporates in particular are looking at what this duo who fashioned the first round of economic reforms in the 90s will do to stimulate the Indian economy.

According to information available, the Government is likely to announce a stimulus package for the housing sector which may include a drastic cut in the interest rate apart from increasing the home loan limit from Rs 20 lakh to Rs 40 lakh under priority sector lending, redefining the norms of non-performing assets (NPA) and enhancing the limit of tax benefits, particularly for first time buyers. Government may also create a Rs 25000 cr fund to buy out distressed assets, the reserve price can be fixed in consultation with banks and independent valuers.

The slowdown had hit most sectors hard, especially the retail, auto and realty sectors. The last mentioned sector has seen many players cutting prices to stimulate demand, which has not helped them really as people have adopted a wait and watch policy, as buyers feel there will be a further fall in prices. One major decision the mandarins in North Block and central bank will need to take is a cut in the key rates. Indian inflation has eased for the third successive week to a six-month low in mid November as demand slowed in the economy and the central bank was seen cutting rates soon to boost faltering growth. The attacks in Mumbai last week may force the Reserve Bank of India to bring forward its policy plans.

Analysts were of the view that there was definitely a need for easing monetary policy, they wanted the central bank to reduce the repo and the reverse repo rates by 150 TO 200 basis points each.

Though there is good news in store for the badly hit sectors as it has been announced that the Prime Minister would be coming out with his economic stimulus package that would try and make cheaper bank credit available to the industry as also provide home and car loans at lower rates of interest to boost the real estate and auto sectors.

Real estate companies have found a small way out to get out of the quagmire of the slowdown by getting used to the concept of mid-segment housing. These companies that earlier built luxury villas and houses for higher segments, have suddenly started chanting the mantra of ‘affordable housing.’ According to housing industry watchers villas for Rs 1-2 cr are out, now-a-days apartments for Rs 20-40 lakh are in. In 2007 when real estate sector was going strong DLF visualised the need of affordable housing and started launching ‘premium homes’ across the country at a price ranging between Rs 2000 to 2800 per square feet, depending on location. It has helped DLF to overcome the liquidity crunch as it sold a record 8000 units in the last 9 months, which was a record for the company.

The industry is now targeting young professionals who may not have been affected by the recession. Companies now rushing into the Rs 20-22 lakh range include DLF group, Janapriya Engineers Syndicate, Puravankara Projects, Golden Gate and Modi Builder’s among others. Though others say that there is no definition of affordable housing and state it is just that builder’s think a home that’s priced around Rs 20 lakh is within the reach of more buyers.

The idea of affordable housing would surely rank high when it comes to a positive multiplier effect. Developers are also buoyed by volumes. India’s housing shortage increased from 19.4 million units in 2004 to 22.4 million in 2005-06 and there has been a steady 25 per cent year on year growth for the past five years in the segment

A comprehensive programme to build low-cost housing, which is aimed at incentivising the buyers (and not just the builders) could not only revive the demand for iron, steel and cement, but also protect the livelihood of countless unskilled construction laborers. For lenders, low-cost homes are a safe mortgage because of low price volatility, as compared to premium mortgages which have contributed to the asset price bubbles.

A well thought out interest rate subsidy to banks would significantly lower the equated monthly installments (EMI) burden on buyers and also give comfort to banks. The demand certainly exists.

An affordable housing project by a private developer at the outskirts of Mumbai city received 66,000 applications for its first phase of 3,000 units, of which 40 per cent are one-room-kitchen flats, measuring 300 sq ft and priced at Rs 3 lakh each.

The project aims to create affordable housing for low-income groups without government subsidies, while being commercially viable. In 2007, a strategy consulting firm that has been doing extensive work in the area of affordable housing in India, conducted research that highlighted enormous demand for housing among low-income groups.

This unwavering demand has led to a steady price rise in the segment that has never seen a ‘correction’, not even during the current slowdown. Builders like DLF have been in the low cost market for over a year and are not looking to attract investors but are looking to attract real first time buyers.

They have launched their projects with a minimum lock in period of a year that will dissuade investors who are looking at quick bucks.