Realty players tempted to toe govt line in housing sector

Realty players tempted to toe govt line in housing sector
The Economic Times, July 12, 2009, Page 8

Aman Dhall, ET Bureau, NEW DELHI

The government is considering a proposal that could indirectly regulate the real estate market. The plan advocates a private-public partnership where public agencies such as National Housing Bank (NHB) and Delhi Development Authority (DDA), backed by government financing agencies, would underwrite the housing units constructed by private builders.

According to a source close to the development, the move would ensure in case a developer is unable to sell the housing units in the market, which is in line with the government programme, then public agencies would intervene and purchase the unsold inventory.

While this would not apply to a project entirely being executed by a private builder, it would apply to only projects where there is a government role. The way it would work is as follows. Say a state housing board, for instance Haryana Urban Development Authority (HUDA), acquires land and the housing agency sells it to a private developer for construction and delivery of housing units. The HUDA could fix a ceiling on the maximum price the developer would be able to charge the buyers and in case there is unsold inventory then the HUDA may have to purchase it.

As per various estimates, India has a shortfall of 20-25 million housing units in the urban areas and this would only mount as the country gets more urbanised areas. Public agencies have possession of huge land stock and engaging private developers for construction can help solve the problem of quality and affordable housing in India.

The blueprint, if it gets the nod, is expected to ease liquidity in the housing sector and enhance confidence among the suppliers of credit for housing projects and the suppliers of housing units. The proposal aims at a larger objective of providing affordable housing to the masses. "The idea is to harness the synergies in the public-private partnership via a supply-side intervention," the source said.

The scheme will work on the same principles as the underwriting of issues (corporate bonds, initial public offers) by the financial intermediaries, in case there is a shortfall in subscription by the targeted investors. The project was initially planned to run on a trial basis with a state government that is not constrained by the Fiscal Responsibility and Budget Management norms, the source added. The source said a high-level committee comprising various stakeholders would soon be set up to fine tune the proposal.

There is a competing demand from various sectors on the two critical resources - land and finance - both of which are in short supply in the housing sector. "The model will ensure greater discipline, transparency and accountability in the construction industry, resulting in all round confidence," the source said.

RV Verma, executive director of NHB, feels it is a step in the right direction and would result in higher efficiency, sustainability of funding and construction with the 'backstop' underwriting facility extended by the public agencies with government support. "The whole efficiency of the structure would lie in the clarity around the role of each actor, commonality of objective and performing to scales in a partnership mode," he feels.

Jai Mavani, executive director, head of infrastructure and government practice, KPMG, however, feels that though the proposal may result in credit enhancement, developers should not be completely abstained from risks pertaining to the project. "Underwriting could certainly be a carrot for developers but could backfire if they have no skin in the game. Complacency could result in lowering of the quality standards and timeliness of the delivery," he said. According to him, underwriting ideally should cover only costs and not the margins, otherwise it would operate as a subsidy. "This is not necessary given the maturity of the industry and existence of a number of players," Mr Mavani said.