Perception vs Reality
Kumar Gera, chairman, Confederation of Real Estate Developers’ Associations’ of India (CREDAI) and CMD of Pune-based Gera Developments Pvt Ltd, shares his insights on key emerging trends in real estate and why it is critical to recognise the importance of the players in the real estate sector other than the listed companies
One of the most far reaching developments in the real estate sector has been the public listing of real estate companies via IPOs in recent years. There are just over 20 publicly listed companies in the real estate sector in India. The media, government policy makers and the public at large too believe that the health of these companies is a barometer for the state of the real estate industry in the country.
Not true. Very few people are aware that the combined total market share of all the publically listed real estate companies put together is less than 4% of the total real estate market in India. At the same time the exposure in terms of debt to these publically listed companies is more than 55% of the total debt exposure to the entire real estate sector.
Therein lies a major mismatch. What the consequences of this will be is yet to be seen. But the important point is that policy makers and the media must realise that it is the unlisted real estate developers as proprietors, partnerships, HUFs, associations of persons & private companies that have 96% of the market share in our Tier I,II & III cities.
This sector needs to be recognised by the government considering the importance of housing and its impact on the economy. Recognition needs to be provided by granting industry status to the activity of real estate development. If this is done many benefits will flow to the activity in the sector that will lead to better regulation, cheaper finance & employment laws.
Of late there has been a lot of planning & thinking in government circles about Public-Private Partnership (PPP) in the real estate space. Participation in any manner or form in a PPP project of real estate requires the highest levels of transparency. If we head in this direction without total transparency in the procedures and processes we will be laying the foundations for inviting a plethora of scams.
Secondly, the partnership should be based on a ‘not for profit’ model by the ‘Public’ part of the PPP. The ‘public partners’ objective should be to recover actual costs and offer the needed development to the public. The role of the government should be a facilitator to the project in terms of speedy clearances and making available enabled land with required infrastructure. The role of the ‘private partner’ will be execution and profit. Unless this approach is followed we can expect many a PPP project to start with corruption and end in a scam.
Affordable housing has now become the buzz word in the real estate domain currently. It is however necessary to have clarity in defining ‘affordable’. We need to cater to all segments in need of housing that they can afford.
It should be noted that: ‘Affordability’ varies in different ‘income segments’. Housing needs for a family are linked to the combined family income, number of family members and therefore the size of the unit, location & social status of the buyer.
A family ideally can afford 35-45% of its annual income to meet its housing needs by way of EMIs (the lesser the income the lower this percentage). There is a need to cater to different segments of family incomes such as: Rs2-4L, Rs4-8L, Rs8-16L and so on (the spread can, of course vary).
Affordable housing is in existence in the markets when a range of options of housing are available in plenty and are affordable by the different segments of income levels of people. Affordable housing is also those housing schemes which cater to the needs of the poor who cannot afford housing unless supported/subsidised by the government.
To give affordable housing a boost we need to take the following steps:
• Declare real estate development as a part and parcel of infrastructure and accord industry status to the activity. This will lead to increased activity and take care of the supply side.
• Ensure that home buyers can access home loans at 7-8% pa.
• Ensure that the maximum margin money required to be invested by the buyer does not exceed 15% of the total cost of the home including transaction costs.
• Ensure speedy sanctions by local authorities sans speed money.
• a) Reduce ‘transaction costs’ such as stamp duty, registration for all primary (first) transactions.
b) Reduce other charges levied by the local authorities (ULBs), state & central governments. As an example it should be noted that from Rs2,700 psf amount that is paid by a buyer for a house (where Rs2,700 includes the land cost) about Rs700 is the share of the local, state & central governments plus ‘other’ costs. It is too high. This needs a complete review.
Real estate development is generally linked to housing and the terms are synonyms in the mind of many. However there is a need to realise that real estate is a larger canvass and in addition to housing includes the development of offices, IT Parks, malls, schools, hospitals, hotels & service apartments, sports facilities and warehouses.
In turn all these are indeed interwoven with and to the infrastructure of a city. How can we say that our buildings are not a part and parcel of our infrastructure?
To look at infrastructure only as airports, ports, roads, connectivity, power and water and to exclude the real estate developments from being seen as an integral part and parcel infrastructure is a mistake that needs urgent rectification.
The debate continues in the media everyday – Is this the time to buy? Will prices fall further? Will interest rates come down?
More often than not the views expressed are by those who have either little or a complete lack of knowledge. Those with adequate knowledge tend to have a vested interest (as one may say I have) nevertheless let me pen some thoughts on this.
We are currently in what is known as a ‘buyers’ market’. A buyers’ market can be defined as one where the conditions are in favour of a ‘buyer’ and not the ‘seller’. This only means that there exists a situation (a market) in which the buyer can get good deals. Many a buyer thinks that in such a market you can get a BMW for the price of a Suzuki or at least for the price of a Honda.
No, this will just not happen. With slower sales some part of the unsold inventory is sold at some discount (read 10-25% from peak prices in the real estate sector across India). This also varies from micro market to micro market and from developer to developer depending on his fund position at that point of time. A big discount can often be a sign of shaky financials of a developer.
It is also necessary to realise that real estate is a cyclical business and there will be highs and lows in terms of the pricing and availability. Further investors in real estate also need to realise that it is an asset class where appreciation needs to be looked at over a long term horizon (say 10 years).
Considering this there is no doubt that currently there are great deals available for the actual user and long term investor. Having said that, it’s time to start the search and close out on the right property.