The Hindu Business Line : Seeking sanity in the real estate market

"Today, though the real estate sector is growing at a blistering 30 per cent annually, our cities are crumbling with little or non-existent infrastructure — all a result of haphazard or no urban planning." — MR DEEPAK S. PAREKH, CHAIRMAN, HDFC

The Indian housing sector is reaping the benefits of the upswing in its growth cycle. However, can we take a look at the current picture and say that we are moving towards affordable housing? I think not.

The increased Foreign Direct Investment inflow and easy access to bank credit has led to a greater demand for developed properties. However, vast portions of India are undeveloped, leading to a shortage in supply of unencumbered properties in growing towns and cities.

Furthermore, while a portion of the current demand is real, at least a quarter of this is being driven by speculation (in some pockets of the country, as high as three-fourths of the sales are effected by pure investors). These buyers are unlikely to be the end-users and, hence, real estate is fast becoming a speculative commodity. This is an unhealthy trend and has led to unaffordable price levels in many cities.

Downtrend inevitable

We need to exercise caution. As in every cyclical environment, a downtrend is inevitable. Availability of easy credit leads to speculative buying. When the dream run comes to an end and prices fall, it leads to a decline in housing equity, borrowing and spending; also widespread defaults could generate a contraction in economic growth.

There will be a correction in home prices, but a more urgent and bigger correction must happen in the commercial space and land prices in particular. In India, we cannot hide behind the argument that the need for over twenty million dwelling units will sustain housing demand in the years to come.

Exceptionally high prices have locked out the majority of the population that needs homes and are today forced to live with their families in small apartments. Add to this divergent regulations and lack of guidelines for the builder community and you have a situation where housing for all may remain a distant dream.

The Indian Realities

We also have additional causes for concern since our real estate markets are not as transparent as international practices. In the building industry, standards are not uniform or enforced. Property transactions, ownership records as well as land titles are unclear and the legal system is fraught with loopholes. It would be unwise to ignore these realities and live under the premise that the real estate market will continue to remain immune to them.

Regulators have taken steps in this regard by instructing lenders to increase the risk weight on their real estate lending. Additionally, in a bid to safeguard against the perceived real estate bubble, it has directed lenders against disbursing loans if requisite government clearances are not in place.

While such initiatives are welcome, I strongly believe that self-regulation and information dissemination is critical in the current environment. Reckless lending and over-exposure to the builder community can hurt lenders badly. `To be forewarned is to be forearmed' — the dynamics of this industry need to be understood and respected. We need to realise that growth in the sector will be sustained only if certain basic issues are dealt with effectively and efficiently. Of these, the issue of housing in the urban scenario is, for me, one of the urgent challenges that we need to tackle.

Housing in the urban scenario

Over the past decade, with more people living in homes that they own, housing stock has improved in terms of quality and amenities. But can we use this statistic as a measure of success? What percentage of the population is actually reaping the benefits of growth in the housing sector? Are we moving forward in terms of the quality of life that our citizens should have? These are questions that cannot be answered in isolation, but need to take into consideration the overall aspect of housing in our country.

Today, though the real estate sector is growing at a blistering 30 per cent annually, our cities are crumbling with little or non-existent infrastructure, traffic snarls and increasing pollution — all a result of haphazard or no urban planning. This is apparent in Tier II and Tier III cities that are seeing so much real estate action for the first time. Delhi and Mumbai may have initiated demolition drives, but where are the blueprints that indicate the next step?

While urban planning is no doubt essential, our cities need individual attention to become attractive investment destinations. Cities around the globe have been through major transformations in the past decade in order to remain magnets for business and growth. While some have undertaken impressive redevelopment programmes, others are creating new models such as multi-core urban zones to reduce congestion. Dubai, Beijing, Hong Kong, Bangkok, Tokyo and Singapore are key examples.

Mumbai, the financial powerhouse of India, houses the headquarters of some of India's and the world's most respected corporations and institutions. There is no dearth of visions for Mumbai city, but what we lack is effective implementation. Public investments with Central help and State facilitation need to leverage private investments. I think it is time that Mumbai was declared a `national economic cluster' in order to tap the cluster economies around Mumbai and to realise its huge potential as an international business and economic centre.

Builders' Responsibility

In an urban scenario, developers have a responsible role to play if we have to succeed. They need to instil a sense of accountability and transparency in their operations so as to ensure that their customers receive value for the money they invest in their homes. They need to support sales on the basis of carpet area, or at least have a limit set for the carpet to super-built-up-area ratio.

It is time developers made efforts to participate and understand the needs of their customers, prioritising services and living up to promises made. Even the `exclusive amenities' provided are not from the customer's perspective. In fact, for the kind of investment involved, developers should define defect liability periods, offer warranties and set up cells to cater to after-sales service on flats they sell.

Urban Land Ceiling Act

According to experts, repealing the ULCRA in all States will help the real estate business to grow at 14 per cent by 2011-12 and substantially increase its contribution to national GDP from the current 4 per cent. It will not only create an additional 4 million jobs but also curtail property prices by at least 40 per cent in the next 5-6 years. The Central government abolished the Act four years ago, recognising its failure to achieve the objectives it was created for. While many States, including Karnataka, Gujarat and Punjab, have repealed the Act, such others as Andhra Pradesh and Maharashtra still have to act upon it.

The role of government is to provide the right incentives for the most appropriate use of land and lay clear guidelines on how it should be used. Locking land renders it useless to everyone; releasing it will definitely lower its price. This is crucial since land accounts for about 50 per cent of the price of real estate property in India, unlike developed countries, where it is lower.

Floor Space Index

Cities with topographical constraints on the supply of land, as in Mumbai, typically compensate for this by increasing the Floor Space Index (FSI). However, the average FSI available for Mumbai is the lowest in the world for a city of its size and potential. The result has been an expansion on a northern axis, which continues to add pressure on the city's strained infrastructure network. Seoul, with a population similar to Mumbai, manages in a much more concentrated space by applying higher FSI norms — making it easier and cheaper to create adequate infrastructure.

Another problem is the lack of variation in FSI across the city, which is in contrast to the situation in most other large cities of the world. For instance, the highest FSI in residential areas in New York is 15 while it is 0.5 in the suburbs, a ratio of 30. However, the FSI for Mumbai is 1.33 in the island city and 1 in the suburbs. The choice is not whether the FSI should be brought in line with other large cities of the world, but how much and where it should be increased and what measures need to be taken to support this increase.

First, FSI for both business and housing in areas of high accessibility, i.e. areas around public transport nodes, which are currently under-utilised, need to be increased.

Over the medium term, a higher FSI will also trigger a general redevelopment of the area, making it easier to realign streets and utilities in the area. For the last two years the Central government has made environmental clearances compulsory for real estate projects. The process is inconsistent and disorganised.

Why should a residential project or an IT-Park be subject to environmental clearance, that too from the Central government? Rental laws are obsolete and rent control laws keep a large part of the urban property off the market. There is an urgent need to introduce regulatory changes on these issues to prevent confusion and misuse.

The Road Ahead

The siren of caution in the real estate market is now ringing loud and clear. Tom Barrack, arguably the world's greatest real estate investor, likens the current real estate market to a game of polo. "I feel totally safe playing polo on a field full of pros, but when amateurs are all over the field, someone can get killed. They have more guts than brains and charge after every ball and don't know when to hold back."

It is the same with the current Indian real estate market. If there is no clearing off the turf, the amateurs are going to get trampled, taking seasoned horsemen down with them.

Should the housing market in Mumbai look like a classic case of `irrational exuberance', how, then, does one explain the same in Delhi, Bangalore, Pune and many other cities? Home prices have spiralled in the last 15 months. The house price vertigo is more than a local or national condition — it is a worldwide phenomenon.

Southwards is where prices must go, but the correction has to be gradual. It is said that those who do not learn the lessons of history are condemned to repeat them. This is something we cannot afford to do — my fervent prayer is for an element of sanity to prevail in the real estate market, before it is too late.

(Edited excerpts of the `Chairman's Statement' in the HDFC Annual Report 2005-06.)

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