Coming to terms with reality

Coming to terms with reality
The Hindu Business Line, May 10, 2009, Page 15

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There are positive signs in the market. New projects are being announced and residential construction is picking up. Slow but sure signs of a change for the better.
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R. Balaji

Getting the market to face reality is the biggest challenge confronting the realty sector today, according to Mr Kumar Gera, Chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI). The market perception is being moulded by the media based on the performance of listed companies that represent a small fraction of the industry.

Mr Gera, who was in Chennai earlier this week, spoke to Business Line on a range of issues facing real estate developers, the market situation, the prevailing perception of the market, the proposed law to regulate developers, project funding, and infrastructure development to grow the peripheral areas in the urban centres.

Market perception

On market perception, Mr Gera says the challenge is getting the assessment as close to reality as possible. For now, the media focus has primarily been on listed companies whose information is in the public domain. The fact is that the couple of dozen listed companies together account for just about 5 per cent of the market share, but the “entire industry is being painted with the same brush.”

These companies also account for about 60 per cent of the debt from banks and financial institutions, which are biased by “the perception of transparency.” There is a mismatch in distribution of debt and the market share.

On the other hand, over 95 per cent of the market is with a large number of small players — partnerships, proprietor-run and joint venture companies. The bulk of the industry is represented by these “small players with a high equity in the business and little outside funding.”

So what is the reality or the developers’ perception of the market? “It is a buyers’ market,” says Mr Gera. Developers have adjusted to the market conditions. The market is not as bad as it was at the start of the year. Following the global financial crisis towards the end of last year everything came to a halt and the market hit a downturn. Banks were worried that asset prices would fall steeply and cut back on funding, insisted on higher margins to cover for a possible drop and potential customers decided against spending.

But now the market has adjusted to the change — prices are down, banks have brought down interest rates and customers are getting a good deal. There are positive signs in the market. New projects are being announced and residential construction is picking up. Slow but sure signs of a change for the better, he says.

Affordable segment

Affordable housing is one segment where there is some activity. This is not a well-defined segment — effectively, customers find it affordable when they see value for money. This category spans the entire gamut of the residential development and market segments. CREDAI is pushing for Special Residential Zones (SRZs) to bring in organised large-scale development of residential zone.

The governments have to bring in infrastructure and provide utilities upfront. But typically in most cities buildings come up first and people wait for water, power and sewerage facilities. Schemes such as the Jawarharlal Nehru Urban Renewal Mission have to be dovetailed with the development of SRZs.

When infrastructure is well spread out more land becomes available and prices will not spiral upwards. Look at any of the metros — Chennai, Delhi, Mumbai, Kolkata — there is no supply in the main areas of the city and these are all growing in the periphery. Ahmedabad is a good example, says Mr Gera. Infrastructure development in the periphery helps to keep prices down.

Law to regulate

The Central Government has proposed a law to regulate the developers — Mr Gera is a part of the committee framing the draft — which is likely to be drafted in the coming weeks. But the initial drafts focus primarily on regulating the developers. This is essential, he acknowledges, but how about the other parties involved, the buyers, banks, financial institutions and local authorities, he asks.

According to Mr Gera, it would be unfair to blame developers alone for a shortfall in service. Everybody with a stake in the transaction has a responsibility. Financial institutions that agree to fund a project must stick to their commitment; local authorities who have to give approvals need to stick to schedule, provide basic utilities and infrastructure — they profit from levies, charges and taxes. They need to be accountable; banks and housing finance institutions delay disbursements to buyers which in turn hits the developer.

Buyers band together after signing on the dotted line and start dictating terms to the developer. So all concerned have to be brought under the purview of the proposed law argues, Mr Gera. CREDAI will work towards this objective, he says.

Real Estate