Thursday, March 10, 2016

REAL ESTATE SECTOR NEEDS ADDED INCENTIVE

REAL ESTATE SECTOR NEEDS ADDED INCENTIVE

Amongst the measures taken by the Reserve Bank of India in recent weeks, a special importance has been placed on the real estate sector as an engine of economic recovery. Concessions have been given on the interest charged on home loans below Rs 20lakh and repayment terms made more liberal for developers who had borrowed from banks. The price initiatives and regulatory forbearance have evoked a market response; some banks have recently lowered its interest rates on new home loans. This should be welcome news to policymakers, who will be keenly watching for signs that the stimulus measures are translating into lower costs for borrowers and, consequently, greater incentives to spend.
On the evidence so far, however, these steps have not improved the scale of transactions in the real estate market. Most buyers continue to hold back in the hope of further drops in prices, while developers find that financial succors give them the power to withhold price cuts. The result may, therefore, prove to be the opposite of what was intended, by delaying the price adjustment that is essential if demand and supply are to balance once again. The continuing uncertainties in the job market would also be holding back potential buyers, who would not like to make substantial long-term payment commitments.
A revival in the real estate market is, therefore, linked to confidence spreading that the worst of the downturn is over. Also, new homes are bought on trust; the buyer pays the seller for a promise of future delivery. The market depends heavily, therefore, on the credibility of the seller.
Even with low borrowing costs, buyers will be wary of making commitments to sellers who show signs of not being able to live up to their commitments. Unitech, a prominent Delhi-based developer, has been trying to raise large amounts of cash to keep its operations going, even as its share price tumbles. And IFCI, to whom Unitech had pledged shares against a loan, decided to sell the shares because falling prices were eroding their collateral value.
As the uncertainty about its ability to complete projects due to funding constraints increases, people will be even less willing to either buy from it or lend to it. Similar stories are being played out across the sector with small and large developers. The prospects of the market reviving in these conditions are grim.
There is a clear need for further selective intervention. Projects that are close to completion should be encouraged with funding. Some of the funds being raised through special purpose vehicles like IIFC could be made available to developers who qualify on this basis. Simultaneously, moves to consolidate fragmented projects to increase their viability should be explored, once again with strict conditions on the rationalization of prices.
From the macro economic perspective, construction is far too important a sector to be left unattended in today's difficult environment. Targeted action is needed to get buying and selling back on track.
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Whitefield    
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