Real estate market has shrunk, but big players are selling well: Kotak Realty CEO
There is pain in the luxury as well as the premium segment at this point of time, though some people are doing well, say Vikas Chimakurthy, chief executive officer, Kotak Realty Fund, and Mohit Soni associate director of corporate ratings for Fitch Ratings. Edited excerpts of an interview:
Deepak Parekh made this comment where he said that there is still a lot of demand for premium luxury players, but the rest of the market is still in doldrums. What are your thoughts on what has transpired in the real estate space so far?
Chimakurthy: It is known that the demand has fallen. Volumes were in 2012 in the top six cities somewhere around 420 million square feet per annum.
One trend that we are seeing is that the big boys are selling well. The market has shrunk but the market share of the big boys is actually increasing. We still believe that there is pain in the luxury as well as the premium segment at this point of time, though some people are doing well.
I do not know if DLF was an isolated case and whether it was because this is the peak of the festive season and, therefore, there was a great demand or would you read more into it than that? Is there improvement in the premium market at least in the NCR region? Do you see that being replicated anywhere else in the country?
As far as DLF sales is concerned, while as a credit rating analyst I do not particularly track that name, but I would say to the extent that it is a completed project from a fairly large reputable developer, that kind of a project doing well is not really a surprise because under-construction properties have anyway been out of favour given the kind of delays and the number of projects which have been stuck over the last many years. So, to that extent, it is not really a surprise.
However, I would say on a pan India basis if you see, the real estate sales have been around 2.5 lakh units plus or minus over the last four to five years. So we would really need to see at least a couple of quarters more of sustainable improvement in sales before it can really be extrapolated into the end market and demand improving.
Liquidity had almost dried up after non-banking financial companies (NBFCs) disproportionately reduced their share of funding and funding from banks also dried up. Do, you think that the liquidity risk for Indian developers has gone up compared to at least what we have seen about six to eight months back or have things improved?
If you compare the last six to eight months, then definitely there have been certain steps which have been taken by the government. For example the partial credit guarantee scheme, which have contributed to some improvement, but I think the issue has not been addressed adequately enough. If you see, basically for real estate, the biggest challenge that has surfaced in the last one year is the credit availability from your conventional sources of funding, both banks and NBFCs, has completely dried up.
What we see is that at least those developers who have a strong financial profile, which basically means a low leverage or a maturity profile which lenders are comfortable with, they will continue to get incremental credit and that too probably in the affordable segment much more where the demand outlook is better as compared to the premium segment.
So, I think there is more which probably needs to be done. If the tight liquidity sort of continues for another six to nine months, then there are chances that the situation could even worsen.
What we have seen in the last 12 months is that while commercial real estate has really started picking up and there is so much interest from private equity giants, this morning there was another news report talking about the possibility of the largest small company being created between Blackstone and Prestige. So, commercial is one story and residential is completely separate story. In commercial, what do you see going forward? Do you see rentals actually improving, increasing? What should we expect in commercial realty over the next let us say 6-12 months?
As far as commercial is concerned, as opposed to residential where we had seen a significant oversupply over the last four to five years, and that too probably at unaffordable prices in many cases, commercial, the demand and supply has broadly kept pace with each other. In some cases, the demand has actually even been higher.
The good thing is that this demand has been driven by a variety of sectors, it is not just concentrated in any one particular sector.
Especially after the recent corporate tax rate reduction by the government which basically increases India’s attractiveness as an foreign direct investment (FDI) destination over the longer-term, I do not think commercial real estate investments would take any hit in the near-term even though the economic slowdown is there in the near-term because of most of these commercial investments are anyway made with a longer-term time horizon in mind of at least 5-10 years if not more.
So currently the view is that the policy measures which the government is taking, either through corporate tax reduction or certain specific sector measures in NBFCs, in real estate etc. and more which has been promised in the coming months, they should help revive the overall economic activity from FY21 to FY22 onwards and as a result commercial should remain steady.
Yes, if one was to make a case that gross domestic product (GDP) would remain at the current low levels of around 5-5.5 percent for a longer period of time, then probably it could be a slightly different story.
Vikas I wanted your thoughts on this residential market. Do you see a pickup anytime soon, not in the premium segment, I am talking about the rest of the market, how long would it take and how are prices panning out in general? Have they fallen especially in markets like Mumbai, how is the situation at the moment?
At present, the total value of projects which are stuck in the top six cities is around $40 billion. Approximately 80% of those stuck projects are in Mumbai and NCR. So, basically you are talking about around $32 billion worth of value of projects stuck in these two cities.
I think the issue is very resolvable if certain things can be done. I think the demand is there across the segments as long as customers are confident that the projects will get delivered.
I think the government and the regulators have to just look at two things. How to revive the demand and improve the liquidity for the developers. Both the things are addressable and if you just address these two markets, you are resolving 80% of the so called real estate problem and significant portion of the book of the existing NBFCs who are there.
There is enough amount of capital which is available to come in to the country for doing last mile financing and as long as government comes up or the Reserve Bank of India (RBI) comes up and gives a onetime restructuring is allowed subject to last mile funding being raised by the developers.
If that is done and some tweaking on the Insolvency and Bankruptcy Code (IBC) where the inter-creditor agreement (ICA) between last mile capital provider and the existing capital provider is honoured by the IRP, as long as those things are done, there is enough amount of liquidity which is available which can come to developers and complete most of the projects and most of them are more like last mile funding which can be completed in 12-24 months. That will give confidence to
About this $40 billion of stuck projects, is it under construction projects that are stuck or is it completed projects that are not seeing any demand; can you just throw some more light on that?
Chimakurthy: This would be more under construction projects. On completed projects across the country, the demand is good. There are developers who are selling completed inventories, but the problem is lack of confidence with customers. They do not know if they buy a project, whether that will get completed, because current capital providers are not in a position to give liquidity.
As long as these things are done, and confidence is given to the last mile capital providers to complete the project, there is enough capital to come in and their capital be protected as long as the RBI and the IBC tweaking can be done.
On the demand side, you need to create a herd mentality. You are just talking about two cities where you need to create because that is where 80% of the problem is. If incentives can be given by saying that people who will buy in next 12 months, the entire interest which you are paying on home loans is completely tax deductible.
In terms of pricing, do you expect any improvement both on residential side and the commercial side, just general pan India sense?
Credit availability from conventional
sources of funding—both
banks and NBFCs—have completely dried up, says Fitch Ratings’ Soni
Govt, regulators should focus on reviving demand, boosting liquidity for developers. That will resolve 80% of the issues, says Kotak’s Chimakurthy
Soni: I think from a pricing perspective, I think the recovery will need to be driven by a volume pickup.
In addition, if the government can take certain steps to revive demand particularly in the non-affordable kind of segment where pricing probably needs to in the near term first come down from the developers perspective and also from a taxation perspective if the government can certainly give in certain benefits either a temporary goods and services tax benefit or work with the states to see if certain stamp duty or registration benefits can be given in the near term which would revive demand in the under construction segment particularly because I think that is where the largest amount of trust deficit exists with regards to customers because of the delays seen in the past.
Mohit Soni (left), associate director of corporate ratings for Fitch Ratings; and Vikas Chimakurthy, CEO of Kotak Realty Fund.