Realty crashed against hard reality in March, but Cap’n RBI is at hand
No one willingly enters choppy seas, at least not the average seafarer. The real estate industry is like that average person who likes calm waters, but has been forced to navigate through rough weather for a few years owing to policy missteps, a slowing economy and broader inimical factors globally.
Help has been forthcoming in fits and starts, but it took a pandemic to get the right kind of attention. The Reserve Bank of India (RBI) has taken it upon itself to steer the real estate ship—its hull damaged beyond repair—towards calm waters. It relaxed rules on risk weightage for new housing loans by linking them to the Loan-To-Value (LTV) ratio alone. It waived the ticket size rule, which allows banks and financial institutions to extend bigger loans at a risk weight of 35 per cent, down from the previous 50 per cent. That should galvanise the sector, which has so far seen only measures to spur demand in the affordable housing segment.
Just scan the findings of our latest ‘Real Insight’ residential report. A ticket-wise split of sales shows houses costing under Rs 45 lakh accounted for the bulk of the 35,132 transactions in July-September; those in the Rs 75 lakh to Rs 1 crore bracket made up just 10 per cent of all deals. With the LTV rule eased, demand will receive a boost across segments, not just in the affordable category, which has previously benefited from programs such as Credit Linked Subsidy Scheme (CLSS) and Affordable Rental Housing Complexes Scheme (ARHCS)—CLSS, for instance, offered a maximum subsidy of Rs 2.67 lakh, depending on loan amount, size of house and the borrower’s income category. Now, the tweak to LTV rules gives a gentle nudge to the premium segment. That’s where the margins are for developers—though the volumes are clearly in the affordable segment—and this ultra-luxury segment has started seeing traction of late, albeit mostly in ready-to-move-in units.
Commercial Instinct
Pre-pandemic, the office space market was having a dream run. Net leasing had touched an all-time high in calendar year 2019 at around 47 million sq ft; the segment attracted huge global as well as domestic investors. But fate intervened. The freeze started in March: corporates deferred expansion plans, investors became cautious, the WFH mode added to the woes. Still, August saw the successful launch and listing of India’s second Real Estate Investment Trust (REIT) by Mindspace Business Parks, with an issue size of Rs 4,500 crore—demonstrating the inherent strength of our office market. The REIT enables developers to monetise their rent-yielding commercial assets, and also offers an opportunity to retail investors to earn rental income along with capital appreciation by subscribing to REIT units. Buoyed by the success of REIT-II, Brookfield has recently filed a document to launch India’s third REIT, with an issue size of over Rs 4,000 crore. Going by the performance of the two listed REITs and their strong rental collections even during the pandemic, I have no doubt Brookfield’s public issue will easily sail through.
I’m in no way suggesting things are all hunky-dory. While July-September sales of residential properties rose by 85 per cent from the previous quarter, they still represent a 57 per cent decline from the year-ago period. So there’s a lot of work to be done. One has to wait and watch to see how RBI’s direction to lenders on loan recast and moratorium pans out. The banking system, already battling one of the world’s worst bad-debt ratios, is bracing for another wave of defaults post- pandemic. Hence, RBI is bound to dither when it comes to extending the moratorium beyond August, even if the borrower’s loan was deemed current as per its suggested cutoff date. The administration’s moves to kickstart credit growth and revive the economy are yet to yield desired results. The challenges are linked to the broader economic recovery, which can’t happen until there is a revival in demand. For that, consumption, investment and job creation are crucial. While the finance minister did announce additional measures to boost consumption by diverting leave travel concession allowance for goods purchase, it might be too little. The support announced in May too may have fallen short. The economy is expected to post its worst full-year contraction on record at around 10 per cent, according to the IMF. While it’s likely to expand by around 9 per cent in the next fiscal, that would be owing to the base effect rather than any real revival. The government has little fiscal space to boost spending, so it’s up to RBI to continue doing much of the heavy lifting on stimulus measures. The central bank will stay the captain, steering the ship across these turbulent waters.
The author is the Group CEO of Housing.com, Makaan.com and PropTiger.com