Teaser rates a marketing gimmick
Mint, December 29, 2009, Page 1
The confidence in the real estate sector is not yet back, people feel that prices will keep going up
Tamal Bandyopadhyay
Mumbai: Deepak Parekh, chairman of India’s oldest and biggest mortgage firm Housing Development Finance Corp. Ltd, or HDFC, does not see demand picking up for commercial real estate in the near future, with the action continuing to be in the residential space where there is a huge shortage. The prices of residential property in some parts of the country have almost returned to the 2007 levels after a slump and may go up further, depending on the demand-supply gap in a particular market, but cannot rise hugely from the current level as there will be resistance from buyers. “The builders will try (to raise prices) but...they won’t get the buyers if they do it,” Parekh said.
Consumer first: HDFC’s Deepak Parekh says India should have a regulator for the real estate sector. Abhijit Bhatlekar/MintAccording to him, consumer confidence has not yet returned. One way of restoring this could be the creation of a real estate regulator.
In an interview on Monday, Parekh, 65, who will step down from the executive chairman’s post later this week, said India should have a regulator for the real estate sector who can classify developers, evaluate and grade them. He also said a real estate regulator would be concerned about home loan products in which a borrower pays 8% or 8.25% for the first two years and the rates are revised subsequently. If interest rates go up substantially after two years, it will create problems for individual home-owners. “To some extent, we are playing with fire,” he said. Edited excerpts:
The euphoria of 2007 seems to be coming back to the real estate sector. Do you see any bubble being formed?
I don’t see (that). I think the foreign investors have learnt a lesson. Today there is universal acceptability, and even developers agree that the demand for IT (information technology), commercial real estate, retail and shopping malls, SEZs (special economic zones) and industrial parks is a thing of the past.
At HDFC, we have taken a decision that we will not fund any developer who is building any of these because there is a huge amount of surplus space.
I know readymade, state-of the-art buildings across cities in India (that) have no tenants. The new owner of Satyam Computer Services Ltd (now branded Mahindra Satyam) has moved out of Bangalore and Chennai and gone to Hyderabad because there is a lot of surplus space (in Hyderabad). So all the space that Satyam was occupying in Bangalore and Chennai—a few lakh sq. ft—is now vacant.
At the national level, in Gurgaon, Mumbai...everywhere, offices are ready but vacant and unleased.
What about residential property?
The action is in this space. There is a huge shortage. In India, every family wants to own a house and every family wants to upgrade over a period of time. There is huge demand in this segment and, according to me, this will continue for the next 10 years.
The prices will continue to increase, depending on demand and supply. If more land is given in the city and more developers start constructing, then prices won’t go up.
Can there be a huge price rise?
There will be resistance. The builders will try, but if they want to sell their stock, they should not go for a hike as they won’t get the buyers.
Why aren’t the foreign investors coming in large numbers now?
Three years ago, the Reserve Bank of India (RBI), knowing well that a bubble was being created, prohibited banks and housing finance companies to lend for land.
We could not fund any land. The guidelines were very clear that we had to get the commencement certificate before we could lend money. The commencement certificate is the last document a developer gets before he starts digging. At that stage, real estate was hot. Foreigners had no exposure in real estate in India and they showed huge, huge amount of interest, as if there was no tomorrow.
My estimate is at that stage, around $20-25 billion (Rs93,600 crore-Rs1.17 trillion) came into the country through private equity, QIPs (qualified institutional placements), AIM (Alternative Investment Market, an offshoot of the London Stock Exchange that allows smaller companies to float shares with a more flexible regulatory system) listing, foreign currency convertible bonds, structured finance, debt in the garb of equity—whichever way you look at it.
The money has come for land (buying) and land prices have come down. The foreign investors have learnt the hard way. They have lost money. I would say that those who funded land have lost nothing less than 30%.
But even now some of the real estate firms are raising money from QIPs.
Very few of them. Look at Godrej (Properties Ltd). One of the best names in India. Every one expected their equity issue to be 30 times subscribed, but it has been subscribed only four times. So, there is hesitancy among investors. I was surprised; I thought it would be minimum 10 times subscribed.
There is caution; people are concerned about real estate. The confidence is not yet back and people feel that prices will keep going up.
How do you bring back the confidence? Will the creation of a real estate regulator help?
I have been always advocating that we need a regulator in real estate. It’s the largest purchase any family makes. You try to buy a house in any part of India and see the problems and the sleepless nights you would need to spend.
It’s a very complex subject—you can lose money very easily; you can get gypped very easily; your money can get stuck for a long period as the developers may take two, three, four years extra to complete the project. Then, there are other issues: the specifications, quality may differ. All kinds of things can happen.
Why can’t we have a regulator who classifies developers, evaluates them, grades them? We need to bring in some code of ethics.
You advise the government on many policy issues. Why isn’t this happening?
It’s a state subject. It’s very difficult to introduce something at the Centre and then get it to filter down to the state level. We need to do something on the lines of the power sector, which is a state subject. The Central government recommended the splitting of transmission, generation and distribution of power. Many states have complied and many haven’t.
More and more states are complying with it, but it takes a long time. Most of the states now have got regulatory body for the sector at the state level—the state electricity regulatory commission. The tariff cannot be increased unless the regulator agrees.
Low-cost housing is the buzzword now.
Affordable housing is the buzzword. We need affordable housing in India because the demand is in that category. In Mumbai, the demand is not for flats that cost Rs10 crore but those that cost Rs25-30 lakh.
Our land policies are wrong; They have not been changed. Land is the biggest hindrance—it’s the largest component when it comes to the cost of a house. The land laws will have to be amended. Either you allow the developers to go for higher FSI (floor space index, the ratio of total floor space to plot size). You have to make the cost of land more affordable.
Many home loan lenders are now offering loans cheap for the first two years, enticing borrowers. But if the rates go up substantially after two years, won’t there be a problem as many borrowers may not have the capacity to service loans at higher rates?
It’s not a very healthy way of lending. It can create problem, as you said, in future, particularly if the rates shoot up.
Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners.
To some extent, we are playing with fire, but it’s a marketing gimmick. It’s a tool—I always say it’s a teaser rate—to get a customer attracted towards you. Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.
Now most banks have this product.
If a regulator were there, he would have been concerned about it.
You see seeds of a problem in such loans?
Yes, if interest rates go up in the future.
But aren’t you also offering this?
We are appraising these cases today as if the borrowers need to pay more than 9% and not 8.25%. Because that’s where the rates will be after two years. A borrower’s affordability or repaying capacity is gauged today at a higher interest rate. We are building that buffer today, but if 9% or so becomes 12.5%, then there is no buffer.
Your plan has all along been to position HDFC as the GE Capital of India. Any plan to merge the bank with the parent or any different structure for the group?
We have taken cognizance of whatever opportunities existed in the financial sector in the last few years. Rather than remaining a purely housing finance company, we expanded into practically all areas of finance—banking, mortgages, asset management, insurance, property fund, stock-broking… everywhere. We are the only conglomerate in India where the housing finance company is the holding company of the group. In most cases, the bank is the holding company.
RBI was going to come out with some norms for holding companies, but that has been delayed. When it comes out with the norms, we will explore opportunities.
Today we feel that the two large firms of the group, the parent and the bank, are both growing well. Both have good top-line and bottom-line growth and very low non-performing assets—probably among the lowest in the industry. We don’t have excessive stuff and there is no problem whatsoever. At this stage, I think, it’s better for us to continue the way we have been growing in the past.
I think consolidation has to happen in Indian banking sector. We have a large number of small banks and we need a small number of large banks. We need to see how it impacts us. I am still around as chairman.
You can go for a reverse merger and make the bank the holding company.
We can do any type of things but we would prefer to wait and see what the regulator has in mind. I am simply making a point that we do not see the need for it.
When do you plan to take your insurance firms and the asset management company to market?
Sometime in early 2011.
How critical is banking consolidation?
The global financial crisis was caused by banks. We should not be in a desperate hurry to reform the banking sector.
We have been reasonably unscathed by the subprime crisis and credit has to be given to the regulatory bodies for their conservative approach all these years, which has helped all of us.
There is no urgent need for consolidation. In its own time, RBI will come out with something. We don’t need to be in a hurry.
Should foreign banks be allowed a larger play in India?
I feel foreign banks play an important role. We are part of the global community. If we follow the reciprocity method—if I give you one branch, you must give me one branch—I don’t see enough Indian banks wanting to open a large number of branches overseas.
It’s not easy to open 100 branches in US and make money. You may use it as an argument but which Indian bank has that kind of reserves, capital, manpower to go and open many branches in the US, even if they get permission?
Don’t forget that some of the foreign banks have been in India for more than 100 years. They have been playing an important role in India and I don’t see any harm in allowing them to expand their role in India in a proper format.
Now that you will guide HDFC as a non-executive chairman, is there anything you plan to do differently?
No. I wish I can detach myself a little bit. It’s difficult when you’re in the driver’s seat for so many years.
Anything different on the personal front?
I want to take it easy for a few months. I have a large amount of paper work which I would need to do in the office. I have stored these papers all these years. I will need to go through all my old files and destroy some of them. It will take me a few months to do all that. I have not yet made up my mind about life after that.
Anything else you would like to mention that I should have asked you?
No, bahut ho gaya.
Mint, December 29, 2009, Page 1
The confidence in the real estate sector is not yet back, people feel that prices will keep going up
Tamal Bandyopadhyay
Mumbai: Deepak Parekh, chairman of India’s oldest and biggest mortgage firm Housing Development Finance Corp. Ltd, or HDFC, does not see demand picking up for commercial real estate in the near future, with the action continuing to be in the residential space where there is a huge shortage. The prices of residential property in some parts of the country have almost returned to the 2007 levels after a slump and may go up further, depending on the demand-supply gap in a particular market, but cannot rise hugely from the current level as there will be resistance from buyers. “The builders will try (to raise prices) but...they won’t get the buyers if they do it,” Parekh said.
Consumer first: HDFC’s Deepak Parekh says India should have a regulator for the real estate sector. Abhijit Bhatlekar/MintAccording to him, consumer confidence has not yet returned. One way of restoring this could be the creation of a real estate regulator.
In an interview on Monday, Parekh, 65, who will step down from the executive chairman’s post later this week, said India should have a regulator for the real estate sector who can classify developers, evaluate and grade them. He also said a real estate regulator would be concerned about home loan products in which a borrower pays 8% or 8.25% for the first two years and the rates are revised subsequently. If interest rates go up substantially after two years, it will create problems for individual home-owners. “To some extent, we are playing with fire,” he said. Edited excerpts:
The euphoria of 2007 seems to be coming back to the real estate sector. Do you see any bubble being formed?
I don’t see (that). I think the foreign investors have learnt a lesson. Today there is universal acceptability, and even developers agree that the demand for IT (information technology), commercial real estate, retail and shopping malls, SEZs (special economic zones) and industrial parks is a thing of the past.
At HDFC, we have taken a decision that we will not fund any developer who is building any of these because there is a huge amount of surplus space.
I know readymade, state-of the-art buildings across cities in India (that) have no tenants. The new owner of Satyam Computer Services Ltd (now branded Mahindra Satyam) has moved out of Bangalore and Chennai and gone to Hyderabad because there is a lot of surplus space (in Hyderabad). So all the space that Satyam was occupying in Bangalore and Chennai—a few lakh sq. ft—is now vacant.
At the national level, in Gurgaon, Mumbai...everywhere, offices are ready but vacant and unleased.
What about residential property?
The action is in this space. There is a huge shortage. In India, every family wants to own a house and every family wants to upgrade over a period of time. There is huge demand in this segment and, according to me, this will continue for the next 10 years.
The prices will continue to increase, depending on demand and supply. If more land is given in the city and more developers start constructing, then prices won’t go up.
Can there be a huge price rise?
There will be resistance. The builders will try, but if they want to sell their stock, they should not go for a hike as they won’t get the buyers.
Why aren’t the foreign investors coming in large numbers now?
Three years ago, the Reserve Bank of India (RBI), knowing well that a bubble was being created, prohibited banks and housing finance companies to lend for land.
We could not fund any land. The guidelines were very clear that we had to get the commencement certificate before we could lend money. The commencement certificate is the last document a developer gets before he starts digging. At that stage, real estate was hot. Foreigners had no exposure in real estate in India and they showed huge, huge amount of interest, as if there was no tomorrow.
My estimate is at that stage, around $20-25 billion (Rs93,600 crore-Rs1.17 trillion) came into the country through private equity, QIPs (qualified institutional placements), AIM (Alternative Investment Market, an offshoot of the London Stock Exchange that allows smaller companies to float shares with a more flexible regulatory system) listing, foreign currency convertible bonds, structured finance, debt in the garb of equity—whichever way you look at it.
The money has come for land (buying) and land prices have come down. The foreign investors have learnt the hard way. They have lost money. I would say that those who funded land have lost nothing less than 30%.
But even now some of the real estate firms are raising money from QIPs.
Very few of them. Look at Godrej (Properties Ltd). One of the best names in India. Every one expected their equity issue to be 30 times subscribed, but it has been subscribed only four times. So, there is hesitancy among investors. I was surprised; I thought it would be minimum 10 times subscribed.
There is caution; people are concerned about real estate. The confidence is not yet back and people feel that prices will keep going up.
How do you bring back the confidence? Will the creation of a real estate regulator help?
I have been always advocating that we need a regulator in real estate. It’s the largest purchase any family makes. You try to buy a house in any part of India and see the problems and the sleepless nights you would need to spend.
It’s a very complex subject—you can lose money very easily; you can get gypped very easily; your money can get stuck for a long period as the developers may take two, three, four years extra to complete the project. Then, there are other issues: the specifications, quality may differ. All kinds of things can happen.
Why can’t we have a regulator who classifies developers, evaluates them, grades them? We need to bring in some code of ethics.
You advise the government on many policy issues. Why isn’t this happening?
It’s a state subject. It’s very difficult to introduce something at the Centre and then get it to filter down to the state level. We need to do something on the lines of the power sector, which is a state subject. The Central government recommended the splitting of transmission, generation and distribution of power. Many states have complied and many haven’t.
More and more states are complying with it, but it takes a long time. Most of the states now have got regulatory body for the sector at the state level—the state electricity regulatory commission. The tariff cannot be increased unless the regulator agrees.
Low-cost housing is the buzzword now.
Affordable housing is the buzzword. We need affordable housing in India because the demand is in that category. In Mumbai, the demand is not for flats that cost Rs10 crore but those that cost Rs25-30 lakh.
Our land policies are wrong; They have not been changed. Land is the biggest hindrance—it’s the largest component when it comes to the cost of a house. The land laws will have to be amended. Either you allow the developers to go for higher FSI (floor space index, the ratio of total floor space to plot size). You have to make the cost of land more affordable.
Many home loan lenders are now offering loans cheap for the first two years, enticing borrowers. But if the rates go up substantially after two years, won’t there be a problem as many borrowers may not have the capacity to service loans at higher rates?
It’s not a very healthy way of lending. It can create problem, as you said, in future, particularly if the rates shoot up.
Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners.
To some extent, we are playing with fire, but it’s a marketing gimmick. It’s a tool—I always say it’s a teaser rate—to get a customer attracted towards you. Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.
Now most banks have this product.
If a regulator were there, he would have been concerned about it.
You see seeds of a problem in such loans?
Yes, if interest rates go up in the future.
But aren’t you also offering this?
We are appraising these cases today as if the borrowers need to pay more than 9% and not 8.25%. Because that’s where the rates will be after two years. A borrower’s affordability or repaying capacity is gauged today at a higher interest rate. We are building that buffer today, but if 9% or so becomes 12.5%, then there is no buffer.
Your plan has all along been to position HDFC as the GE Capital of India. Any plan to merge the bank with the parent or any different structure for the group?
We have taken cognizance of whatever opportunities existed in the financial sector in the last few years. Rather than remaining a purely housing finance company, we expanded into practically all areas of finance—banking, mortgages, asset management, insurance, property fund, stock-broking… everywhere. We are the only conglomerate in India where the housing finance company is the holding company of the group. In most cases, the bank is the holding company.
RBI was going to come out with some norms for holding companies, but that has been delayed. When it comes out with the norms, we will explore opportunities.
Today we feel that the two large firms of the group, the parent and the bank, are both growing well. Both have good top-line and bottom-line growth and very low non-performing assets—probably among the lowest in the industry. We don’t have excessive stuff and there is no problem whatsoever. At this stage, I think, it’s better for us to continue the way we have been growing in the past.
I think consolidation has to happen in Indian banking sector. We have a large number of small banks and we need a small number of large banks. We need to see how it impacts us. I am still around as chairman.
You can go for a reverse merger and make the bank the holding company.
We can do any type of things but we would prefer to wait and see what the regulator has in mind. I am simply making a point that we do not see the need for it.
When do you plan to take your insurance firms and the asset management company to market?
Sometime in early 2011.
How critical is banking consolidation?
The global financial crisis was caused by banks. We should not be in a desperate hurry to reform the banking sector.
We have been reasonably unscathed by the subprime crisis and credit has to be given to the regulatory bodies for their conservative approach all these years, which has helped all of us.
There is no urgent need for consolidation. In its own time, RBI will come out with something. We don’t need to be in a hurry.
Should foreign banks be allowed a larger play in India?
I feel foreign banks play an important role. We are part of the global community. If we follow the reciprocity method—if I give you one branch, you must give me one branch—I don’t see enough Indian banks wanting to open a large number of branches overseas.
It’s not easy to open 100 branches in US and make money. You may use it as an argument but which Indian bank has that kind of reserves, capital, manpower to go and open many branches in the US, even if they get permission?
Don’t forget that some of the foreign banks have been in India for more than 100 years. They have been playing an important role in India and I don’t see any harm in allowing them to expand their role in India in a proper format.
Now that you will guide HDFC as a non-executive chairman, is there anything you plan to do differently?
No. I wish I can detach myself a little bit. It’s difficult when you’re in the driver’s seat for so many years.
Anything different on the personal front?
I want to take it easy for a few months. I have a large amount of paper work which I would need to do in the office. I have stored these papers all these years. I will need to go through all my old files and destroy some of them. It will take me a few months to do all that. I have not yet made up my mind about life after that.
Anything else you would like to mention that I should have asked you?
No, bahut ho gaya.
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