Fix real estate mess to house growth

real estate, realty

On July 23, the Supreme Court of India directed government-owned National Building Construction Company to take over 42,000 unfinished projects of realtors Amrapali Group in the National Capital Region. A week after the SC ruling, the relevant questions popped up.

Does NBCC have the money required to complete the projects? As of March 31, 2019, NBCC had Rs 1,384 crore as reserves and surplus and current liabilities of Rs 6,637 crore.

The cost of completing the unfinished units of the Amrapali Group is estimated at over Rs 7,700 crore. Also queuing up at the Supreme Court are those who invested in nearly 85,000 stalled projects of Jaypee and Unitech.

The queue at the Supreme Court is one sign of a malaise which has left homebuyers in the lurch and has dragged down the economy. There are multiple factoids on stress and distress.

Realty consultants Anarock estimate that around 220 projects with 1.74 lakh homes valued at Rs 1.77 lakh crore are completely stalled in just seven cities—the coinage of “completely stalled” in itself presents a vista of the landscape.

And according to consultants JLL India, around 2.2 lakh units valued at Rs 1.5 lakh crore are stalled since 2011.

The spectre represents an economic and systemic risk—the buyer without an asset and the builder with an unfinished project. Debt and defaults are dragging down the sector and banks.

The exposure of banks is around Rs 1.8 lakh crore, and that of NBFCs is Rs 1.7 lakh crore. Cumulatively, over Rs 3.5 lakh crore of public money is exposed to a sector in a crisis heading towards a meltdown.

This week Moody’s downgraded the rating of India Bulls Housing Finance to negative. The downgrades in the rating of deep-pocket players such as India Bulls, Lodha , PNB Housing Finance represents a crisis born out of the sequence of policy and lending.

As rising NPAs pushed banks into the ‘no-lending-zone’ under the RBI’s prompt corrective action regime, NBFCs emerged as lenders. Post the IL&FS crisis, credit flow to NBFCs got crippled. The sector is stranded between liquidity and solvency and the cost of delay in interest costs is piling up.

To appreciate the mess, consider this. Homebuyers have made part payments. Builders have borrowed from banks and NBFCs.

As projects are incomplete, the buyer is without a home, housing finance companies are stuck with a borrower with only a piece of paper, and banks and NBFCs are staring at bad loans. Banks make provisions and join the queue at NCLT as buyers mull queueing up at the Supreme Court.

There is a moral imperative and a strong political and an economic case for intervention and resolution. The fact that lakhs of homebuyers are stranded hapless and helpless between payment and promise is indefensible.

The buyers are hard-working middle class folks who keep the ECG of the government ticking with savings and taxes. The fact that they have been let down by systemic apathy is worsening the sentiments.

The economic rationale stems from the systemic risk that this crisis represents. It is estimated that roughly Rs 1.5 lakh crore of the Rs 3.5 lakh crore worth of exposure to the sector is in danger of turning into bad loans. A blowout in the sector puts public savings at risk.

The pile-up of bad loans could bring the credit system to a grinding halt. Revival of the real estate sector is critical for triggering the virtuous cycle.

Real estate is at the intersection of the agrarian and industrial economies hosting over 40 million jobs. It affords seasonal employment to lakhs of circular migrants from rural areas. Income opportunities at the low-skills level for rural and peri-urban workers drive consumption.

At a broader level, studies in India, China and elsewhere have revealed and validated the simultaneity of real-estate sector and economic growth. Real estate growth is known to have direct and indirect impact on over 200 sectors at multiple levels of consumption, whether it is cement, steel, bricks, tiles, commercial vehicles and services—segments which drive mass employment and consumption.

There is no shortage of suggestions and a menu card is with Finance Minister Nirmala Sitharaman—from personal tax breaks to a mechanism for enabling access to credit to restructuring of loans. The crux is availability and affordability of credit.

Last month an RBI study revealed that an average house costs 74 monthly salaries in Mumbai! It is not enough to bring down EMI by basis points—policy must enable availability of buildable space through auction of idle land as also smarter FSI rules, and define housing as a priority and bring down the cost of capital to priority sector levels.

There is strategic rationale for urgently attending to the crisis. There is the political promise of Housing for All by 2022 and then the aspirational idea of Smart Cities.

But beyond the politics there is a profound economic logic for why developed and developing economies pay special attention to the construction and real estate sector. That urbanisation has a multiplier effect on GDP growth is known.

And urbanisation needs a thriving construction and housing sector.The economic slowdown is both a consequence and cause of the state of the real estate and construction sector and its revival requires redressal of the realty [email protected]