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Future imperfect

The real estate prices are not sustainable at these levels in the long term.

The real estate prices are not sustainable at these levels in the long term. In some cities the amount of construction is 10 times more than last year. Builders who have built just 50 lakh sq ft in the last 20 years are looking at three crore sq ft in the next three years. Now if all that supply hits the market in the next few years, property prices will definitely not be sustainable. If you look at countries like the UK, the US and Japan the trends are the same and will be reflected in the Indian context too.

malls. There is a limit to how many of these can be viable. So when the downturn happens it will first be the shopping centres, malls and the commercial sector and the last to be affected would be the housing sector. Residential prices in some traditional pockets will continue to rise like in South Mumbai where there is hardly any construction taking place despite the pressure of demand.

Interest rates on housing loans will be on the upward trajectory over the next year but it won't go up to the 14-15% levels. If the economy continues to do well, there may be just two 50 basis point hikes in the whole year—interest rates are likely to go up by 1%. This will be the result of cash reserve ratio increase by Reserve Bank of India (because of the fear of inflation), increased advance tax payments by corporates and growing tax collections by the government—all this will suck out money from the market putting an upward pressure on interest rates.

RBI took a positive step to restrict funds to the real estate market by increasing the risk weightage on individual mortgages to 75% and commercial mortgages to 150%. This is the first time in the last 30 years since we have been lending that the regulator has had to step in to restrict this kind of flow of funds. After RBI guidelines, banks can no longer lend to developers for buying land but only for construction and that too only when the developer has got the commencement certificate. But developers have got a way around this by tapping the foreign markets or getting access to foreign funds.
Foreign funds are pumping dollars into the realty sector because they don't want to lose out on the India opportunity. But this is speculative and risky investment. Many of these foreign funds that are picking up equity in Indian real estate companies are doing so on the promise of a minimum guaranteed return of anywhere between 12% and 24%.

Now, you would say what is wrong with foreign capital coming in? It is not the capital but the terms under which it is coming. What happens if there is an oversupply in the market? Prices will come down. So the developer will not be able to give the guaranteed returns to his foreign "partner" . Developers may initially be able to get away with giving that kind of returns by compromising on their overall margins but this won't be possible when prices start crashing. Most of the developers are betting on malls. But if you take into account the retail market there will be a lot of oversupply. All these retail chains will be multiproduct outlets and they will be selling everything that malls sell. So overall the space being created is huge but getting buyers for it will be tough.

(By Deepak Parekh, Chairman, HDFC)