Real es­tate mar­ket has shrunk, but big play­ers are sell­ing well: Ko­tak Realty CEO

Mint ST - - LIFE - So­nia Shenoy & Surabhi Upad­hayay feed­[email protected]

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.

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