Deepak Parekh, the Chairman of HDFC said that there is an improvement in the economic condition and therefore, developers have started charging premiums. Due to the land prices touching sky, the realty prices also shot up.

As per the report, there was a downfall of 25% in residential real estate prices in October 2009, but now it’s steeping upwards again.

Parekh observe this change in the most active markets of India, for instance, suburbs of Mumbai, NOIDA in the NCR, a Bangalore suburb etc which all are experiencing price hike.

Also, he plans for having a real estate regulator in place.

April 21, 2010

A really interesting question rising up these days is that is affordable housing taken seriously by our policy planners and key stakeholders? Now-a-days, talking and discussing affordable homes has become a fashion, including those who were not as such associated with realty sector.

But when enters the term ‘affordable homes’, one must put up a question that affordable for whom?  Around 44% of our population comprises of people earning Rs 8,500 to Rs 40,000 as their monthly income and fall both in the formal and the informal sectors.  Are these flats for these 44% people?  Also, the benks are now backing out from providing home loans. Arun Mohan, a senior advocate and writer answered all these questions in his latest offering “Affordable Housing: How Law and Policy can make it possible” .

According to Arun Mohan, there are three areas that need urgent attention to provide affordable homes: One, availability of flats which are affordable; two, availability of bank finance; and, three, availability of land for housing. Also, crisis of confidence is one of the major problem due to which prices are so high and the market is restricted. He gave answers to these questions too.  After a keen analysis, he came to the conclusion that “certifying-cum-performance guaranteeing company” [or a regulator] is required, which would control the builders and issues a “wideguarantee certificate” to the flat buyer in order to ensure him that he will be delivered the flat he pays for. This guarantee will prove beneficial since both the flat buyer will be willing to part with his money and bank will also be willing to finance it.

The local accommodation laws in countries like Dubai have compelled thousands of expatriate Indians to send their families back home due to soaring housing costs.

This is why it makes sense for expatriate Indians abroad to invest in Indian real estate to meet any contingencies. Barring Dubai, West Asia does not encourage expatriate investments in housing.

Anyway, not all NRIs can afford to invest in local housing. There are different kinds of NRI investors looking for investments in real estate back home.

What is ideal for one group may or may not fit in to the investment category for others. However, a cursory glance at the options will enable them to take a pragmatic approach to the investment exercise.

The government regulations prohibit investments in categories like agricultural land, farmland/farmhouse and plantation properties. Those who have inherited such property from relatives can retain them.

But to dispose them off, one needs to follow certain ground rules laid down by the authorities. For NRI end users who are planning to eventually return home, investments in residential property would be the best option.

As NRIs have been accustomed to living in places with good infrastructure facilities, investments in housing should be in cities which have educational, health and reemployment opportunities.

NRIs could plan well to invest in greenfield projects which will reduce upfront payment liability. Home loans are available and banks have branched out to several countries to extend facilities to NRIs.

Public sector banks announced that home loans up to Rs 5 lakh would be given at a maximum interest rate of 8.5%, while those between Rs 5 lakh and Rs 20 lakh would be offered at 9.25%.

“The Mumbai market will not be affected by this decision as no flat in the city is below Rs 20 lakh. For larger metros, the limit should have been set at Rs 50 lakh,” said Boman Irani, chairman of the Rustomjee Group, which is setting up middle-income housing projects in Virar and Thane.

According to him, more than 50% loans given out by banks are for homes less than Rs 20 lakh. “This decision is for the entire country. But it would have given a bigger boost if housing projects in the metros had benefited,” he added.

Said Anshuman Magazine, chairman & managing director, CB Richard Ellis, South Asia: “This shows some effort by the government to support the housing market. Although this is expected to have some impact on the market, it won’t be a significant one as the overall confidence level of consumers to invest has to improve.”

However, he added that this reduction won’t have a significant impact on the real estate market. “It would have made a larger impact if the limit had been increased to Rs 40 lakh. Besides, confidence levels are lacking and consumers are waiting for prices to correct. The overall sentiment is down,” he added.

Mumbai-based developer Pujit Agarwal said over the past four years when the market was booming, most developers had stopped catering to the lower income group and were only concentrating on high value products. “The interest cut will lead to a flurry of developers catering to this segment now. Developers are already going back to the drawing board to make smaller flats.”

Chairman of Maharashtra Chamber of Housing Industry (MCHI) Pravin Doshi said EMI were becoming unaffordable because of high interest rates and this decision will help ease the burden. “It will benefit consumers in Dahisar, Mira Road and Virar. But in Mumbai it will not make any difference,” he said.

Pravin Banavalikar, CEO of Tanaji Malusare City, which is setting up a low-cost housing project in Karjat, said the reduced interest rates have come as a big boost. “We are constructing flats costing between Rs 2 lakh and Rs 7.5 lakh. This comes as a big relief for clients in the lower income group,” he said.

But, there are fundamental differences, both in the economic situation and the customer segment that constituted “sub-prime” in the US and the segment that needs affordable housing in India.

In US, the housing market was booming and moving only one way — up. With easy and plenty of cheap money available, lenders were increasingly tempted to offer home loans to persons with poor and tarnished credit histories.

They could charge these customers higher interest rates and fees than they would have been able to charge other consumers. Given the rising prices of property, a tidy profit was in store anyway. The idea became popular and large numbers of loans were made to customers who were likely to have problems servicing regular loans even at low rates. While the sun shone, everyone was happy. Then, things changed.

These customers had no way of meeting their repayments and started defaulting on the loans, which led to foreclosures and home sales. As the numbers snowballed, property prices also gave way. Creatively-packaged debt, that was sold as good credit risk, started turning bad. The crisis had begun.

The Indian scenario is not really comparable. True, we’ve had a real estate boom too; but that boom has been limited to the middle and upper income residential and the commercial property market. If we were to use the standard banking benchmark of home loan entitlements being equal to 3.5 times annual salary, this effectively means that over 80% of the Indian population that earns less than Rs 11,000 per month cannot even dream of owning a house, since there has been no supply at all.

The segment earning between Rs 7,000-Rs 15,000 has never been considered significant for home loan offerings. While the prospects of getting a home loan for the formal sector employee do exist, chances for informal sector employees and the self-employed like drivers, NGO staff, small caterers and others are bleak. This is despite the fact that they have marketable skills, steady jobs/incomes and employer/customer recommendations.

These people have the capability and willingness to make a 20%-25% down payment on houses costing between Rs 4 lakh-5 lakh and are happy and able to take on a 15-year loan obligation, at market rates, in order to realize their dream home. Given that in these small-sized homes, the land cost represents a small percentage of the overall cost, the speculative risk is low, with a very low probability of a drop in these property prices.

Thus, labeling the entire segment as sub-prime would be a misnomer. The higher- and middle-income market has already been tapped and it may now be a good time to take a fresh look at the lower middle class. It could represent a new horizon for growth, diversification and de-risking. Some rough arithmetic suggests that the housing market for the Rs 7,000-Rs 15,000 segment translates into a market size of over Rs 5,00,000 crore!

And then there is the huge multiplier benefit — a strong growth in this market will yield a positive spin-off effect on employment generation (the residential housing sector hires a relatively high percentage of low-skilled daily wage workers as opposed to infrastructure projects) and uptake in consumption of commodities, including cement and steel. Needless to add, lives of millions of Indians and our urban landscapes will be transformed.

The handful of niche players that currently service this customer group, are clearly not enough. The question is will the financial sector rise to the challenge and develop this market quickly enough. The real estate players are already sniffing at the opportunity and a positive signal from banks may be just the trigger they need to take off. And, therefore, ironically, the housing segment which was the cause of all ills in the US may just be the answer to all our problems in India.

Chidambaram on Tuesday said the real estate sector affects 50% of GDP, considering dependence of sectors like steel, cement and other small scale industries. He asked banks to enhance credit flow to realty.

The bankers also demanded change in the provisioning norms for other NPAs (non-performing assets). While RBI has tightened norms in the last couple of years, projects are getting delayed because of non-availability of funds, In some cases, corporates are asking for rescheduling of loans.

According to the existing norms, such accounts should be treated as bad loans and capital provisioning has to be made, which affects banks’ profitability. Besides, it reduces capital base of a bank and capacity to give loan.

Therefore, banks said if they are asked to reschedule loans or to give credit to vulnerable sectors, the provisioning norms should be relaxed and be made more practical. It is learnt that finance minister has given them the assurance that RBI will look into the matter soon. After the global financial crisis, central banks world over have relaxed the provisioning norms to enable banks to increase their exposures to companies.

However, keeping in mind the safety factor, Chidambaram asked banks to increase their capital bases to ensure that their total loan portfolio should not be more than 8.33 times of the capital base or in banking terms their capital adequacy ratio (CAR) should not be less than 12%.

According to a most recent study by Ernst & Young and FICCI on the country’s real estate scenario, about 62% of the respondent developers expected the industry to grow in the long term despite a correction in prices by about 10-15% in the previous year.

Giving highlights of the report, ‘Realty Pulse’ to be released on September 10, Ernst & Young Partner and Leader Ganesh Raj said, “There has been a slowdown in demand and some correction also happened by about 15-20%. But this is momentary, the market will surely bounce back.”

Healthcare infrastructure, logistics and warehousing and affordable housing would hold significant growth potential in the Indian real estate sector, he added.

“The temporal slowdown in the market will be followed by sustained activity as a result of innovative formats, new geographies and flexible pricing and delivery mechanisms. Given the growth in residential housing, organised retail and hospitality industries, the sector is likely to see increased investment activity,” Raj said.

The report pointed out that respondents believe genuine end-users had ‘taken over’ from the investors and account for about 80-90% of sales in their current projects.

“Respondents expressed mixed reactions with regards to land valuations. Most of them seem to be reaching a consensus that land values are likely to see stability over the short to mid-term and may not witness any appreciation over the next 12 months,” it said.

SBI had increased its PLR by 50 basis points to 12.75% last week. Following the hike in lending rates, the bank also increased deposits rates for various maturities.

The bank expects net interest margin in the range of 3% as compared to 3.09% in the previous year.

Bhatt said credit growth this year would moderate by 2-3% and aims advances to grow at 20-21%.

Speaking about profitability, he said less business would mean less profitability. Impact on volume would have some impact on profitability.

Many real estate consultants and brokers provide valuable information regarding the availability of rental based houses in every particular corner of the city. People from outstation are consulting these firms for seek of rental houses. Generally, settlers from rural areas and students pursuing various educational courses prefer flats or apartments. But people who belong to corporate sectors would rather opt for luxurious villas and lavishly furnished flats as they can afford it and other reason which is normally asked for is the distance from the work place.

Many banks are coming forward to give home loans but the number of people who are in search for rental house are increasing every year. This encourages the rental market which is already thriving. India is presently the new hot spot for IT sector activities which happen to be taking place in the city of Bangalore predominantly. As a result the real estate firms have hiked the prices of properties which would make the option of renting a house look better as it is very cheap compared to real estate properties. The same phenomenon is now being implemented in other IT industry dominant cities.