Economy Feb 9, 2013
Going by past trends, Union Budgets have not really provided any relief to the real estate sector. Yet this time around, the cry for infrastructure status seems to be getting louder with not only the builders' lobby but also politicians. Housing and Urban Poverty Alleviation Minister Ajay Maken has proposed giving infra status to mass housing projects.
However, a mere change in status without improved corporate governance, faster regulatory approvals , creation of better infrastructure and increased land availability will do nothing for affordable housing, said Pankaj Kapoor, MD at real estate research firm Liases Foras in a pre-budget interview with Firstpost.
"Just bringing status to the industry won't solve the problem. The biggest problem of affordable housing is that it is being created in places that are not habitable."
The land cost at a convenient distance is the biggest challenge in providing affordable housing, he adds. Instead of financing the infrastructure projects through land (by selling overpriced lands), state agencies should make land more productive through infrastructure and connectivity. "They need to correct their vision. The land values are unproductive," said Kapoor.
He also noted that government policies, be it FDI in real estate or the land acquisition act, work against affordable housing. This is because foreign capital was not used for acquiring land for affordable but luxury projects.
"Too much capital (flow) into land created an unproductive value due to speculation. Costly capital in turn outplaces the consumer and makes homes unaffordable. Only by creating more infrastructure and by freeing up land in close-by areas can the government make affordable housing a reality," said Kapoor.
According to Kapoor, the biggest problem is the free availability of capital in real estate. He says, apart from private equity (PE) money, 90 percent of the ECB proceeds, which by law is only allowed for development of low-cost affordable houses and not for acquisition of land, goes into speculation on land rather than assets. And it is this speculation that allows developers to command such high prices, because speculation changes the market to an investor-driven one from one driven by the end user.
" Investors are only looking for profits, and not housing. Ninety percent of the flats are bought by fourth time, fifth time buyers. The government needs to to dissuade such buyers by making loans for investors very difficult. This can be done by way of higher interest rates for third-time home buys and lower interest rates for first-time buyers."
He also wants the government to raise the income tax rebate for interest paid on housing loans from the current Rs 1.5 lakh for first-time home buyers, and bring about moderation in pricing by way of differential provisioning for investors and end users.
Another way to check prices from escalating is to link loan restructuring with sale receipts where developers keep a check on prices and maintain certain cash flows required for economic balance, rather than using bank loans to buy more land and increase prices by way of speculation. "It is all speculative because there are fraudulent valuers. If valuation is also linked to sales velocity, prices will be moderate," added Kapoor.
On curbing black money in realty, Kapoor feels that bringing more laws will only create inefficiency. Rather the government should just compare registered values with the market rate of properties. In case of undervaluation, he suggests the government should scrutinse and pull up the tax evaders.
Kapoor also feels that the market is at tipping point and will see a correction in the next one-and-a half years as there is no liquidity available. "Sales are down, private equity money is mostly towards exits and no fresh stocks are coming in".
A look at the below chart shows that realty firms raised about $424 million from PE funds between January and June 2012, compared with $638 million in the same period last year, a 33.5% drop, according to estimates by VCC Edge.
But having said that, the correction could also take longer due to structural issues. Developers have sold stock to investors at very high prices who will, in turn, not allow builders to lower prices so easily, said Kapoor.
If there is a sharp correction investors who are helping builders hold on to prices will exit at the first inkling of any correction. In such circumstances, both builders and financial institutions will be stuck very badly.
And let's not forget the politicians whose close links with real estate ensure that inefficiencies in the system remain and excess land is not freed up so that they can all profit and make a quick buck.
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