Slash Prices: Arun Jaitley’s Advice To Real Estate Companies Is Spot-On

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The Associated Chambers of Commerce and Industry of India (Assocham), a business lobby, recently released a study titled Real estate investment: State-level analysis.

In this study, it estimated that 75% of the 3,540 real estate projects in India remained non-starter as of the end of March 2015. The business lobby estimated that the projects had total outstanding investments worth over Rs 14 lakh crore. This means that the average size of a project is around Rs 395.5 crore.

Assocham further said that a total of 2,300 projects in the real estate sector remained non-starter. Further, 1000 projects are facing a significant delay in completion.

Why is this happening? Real estate companies have two major sources of finance: banks and investors. The monthly sectoral deployment of credit data released by the Reserve Bank of India (RBI) points out that the total bank lending to commercial real estate grew by a minuscule 2% between September 19, 2014 and September 18, 2015. This, when the overall lending by banks grew by 8.4%.

Now compare this to how things were in September 2014. Bank lending to commercial real estate between September 20, 2013 and September 19, 2014, had grown by a massive 20%. The overall bank lending by banks had grown by a similar 8.6%.

This clearly shows that the lending by banks to real estate companies has slowed down dramatically. Between September 2013 and September 2014 banks lent Rs 26,958 crore to real estate companies. This has crashed to Rs 3,157 crore between September 2014 and September 2015.
What this clearly shows is that banks are not interested in lending money to real estate companies anymore. And in this scenario real estate companies do not have enough money to start or complete projects. 

Other than banks a major source of finance for real estate companies are investors looking to deploy money in under-construction properties. It seems they are staying away from the sector as well.

The returns from the real estate sector have been very low over the last few years. Further, many projects are massively delayed. As the Assocham study points out: “On an average, real estate projects in India are facing a delay of 33 months in completion… Realty projects in Andhra Pradesh are facing maximum delay of about 45 months followed by Madhya Pradesh (41 months), Telangana (40 months) and Punjab (38 months).”

Given this, it is not surprising that the investor interest in real estate seems to have come down dramatically, leading to major fund crunch for real estate companies. This also becomes clear from the spate of goodies and discounts that real estate companies are willing to offer to anyone who is willing to invest in a fresh project.

Commenting on the real estate sector, the finance minister Arun Jaitley said on October 31: “The essence of your industry can’t be that I will only survive on subsidies. You will have to survive on the strength of the market economy itself [italics are mine] and you will have to survive on the strength of our banking system to finance you.”

The phrase to mark in the above paragraph is “You will have to survive on the strength of the market economy itself”. What did Jaitley mean by this? What this meant was that the real estate companies will have to allow the market economy to operate. Up until now, despite a major fall in demand for real estate, prices haven’t fallen at the same pace.

In this scenario, the real estate companies are stuck with a massive amount of unsold homes. Even a fall in interest rates hasn’t helped given that most of the real estate in India’s bigger cities, where the bulk of the market is, is way too expensive and beyond what most people can afford. This anomaly needs to be set right. Real estate companies need to cut prices at a much faster rate than they currently are. For once, Jaitley’s comment on real estate is spot-on.

The RBI governor Raghuram Rajan said something similar sometime back: “I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up.”

It is important to understand here that real estate is a very important cog in the wheel of the Indian economy. It employs a large number of unskilled and semi-skilled labour. It has major backward linkages into sectors like cement and steel. The point being no home can be built without cement and steel. A revival of real estate sector will lead to a definite pick up in cement and steel sectors as well.

To conclude, if real estate demand has to pick up, prices need to fall much more than they have up until now. The question is how soon will the real estate companies come around to cutting prices at a much faster rate than they currently are? On that your guess is as good as mine.
Stay tuned!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on Nov 2, 2015

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

One Response to Slash Prices: Arun Jaitley’s Advice To Real Estate Companies Is Spot-On

  1. amitanam says:

    Sir, now black money is being routed thru P.E route, hence no chance of prices coming down.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: