Top mortgage lender HDFC’s Chairman Deepak Parekh has said that developers are unrelenting on pricing despite a growing inventory of unsold housing units. The eminent banker also asked the developers to shift their focus away from high-end luxury housing and said the “real demand is in the affordable housing segment”.
Parekh, known for his frank views, said many construction companies were hamstrung with over-leveraged balance sheets, while he also flagged delays in completion of projects because of developers trying to “deviate from standard building norms by paying to flout rules”. “Such malpractices are hazardous for all,” Parekh said, while adding that the developers must ensure strict adherence to ethical building codes and standards.
“A regime that shuns ‘speed money’ and focuses only on ‘speed’ would go a long way in improving affordability in the housing sector,” the HDFC Chairman said in his annual letter to the shareholders.
Realtors’ apex body however, rejected the criticism that pricing was unrealistic and developers were focused on luxury projects. The reasons were – High-end housing is very small in volume and is being done only in some metros like Mumbai. In the rest of the country, price points are very realistic in the range of Rs 3500-5,500 per sq ft. There is no room for lowering this price range because input costs have gone up and there is also cost of interest. Moreover, there has been a slowdown in the economy in the last two years.
Reasearch says, about 7.6 lakh housing units are unsold in 14 major cities, out of which Mumbai Metropolitan Region, NCR and Bengaluru together account for more than two-thirds. The unsold inventory was estimated at 6-7 lakh housing units across the country. With regards to funding for land buying , the banks should give loan to genuine developers who will build homes on that land and such funding should not be to finance the speculators in the market.
Parekh, on the other hand, made a strong pitch for banks and housing finance companies to be allowed to fund the land transactions, at least for residential purposes. The RBI had prohibited banks and HFCs from funding land transactions in 2006 on fears of asset price bubbles. As the fears of any speculative bubble have abated, the regulators now need to relax this restriction, Parekh said.
He also sought immediate steps to fast-track numerous approvals required for such projects. “For the construction sector to revive, there is also an urgent need to reduce delays in claims settlement. Ironically, a majority of these claims are with government bodies,” he said.
Parekh stressed on an urgent need for a “credible and efficient arbitration and dispute resolution mechanism to safeguard against lengthy litigation processes”. “… the perennial question is how can housing be made more affordable,” Parekh said, while adding that there was a disconnect in the housing market.
“On one hand there is an acute shortage of housing, but on the other, in some of the large cities, there is a growing stock of unsold inventory. The answer lies in the pricing points not being right. The real demand is in the affordable housing segment, not of high-end luxury housing.
“Developers are not relenting on the pricing of existing stock, while the cost of launching new projects is only rising,” he said.
Suggesting solutions for the housing sector, Deepak Parekh said faster approval processes will reduce overall costs and online approvals can bring in the much needed transparency.
“Approvals take between 18-24 months. Needless to add, there are at least 50 approvals required across different authorities. If there is consensus that fewer approvals and interventions reduce overall costs, compresses timelines and ultimately benefit the home buyer, then fast-tracking of approvals is imperative,” he said.
“The other critical issue pertains to the high cost that developers incur while borrowing to fund the purchase of land. This initial high cost keeps getting multiplied and is the key reason why housing becomes more unaffordable for many,” Parekh said.
“The root of the problem is that banks and housing finance companies have been prohibited from funding land transactions by the regulators. “So at the initial stage, it is the private equity players, the NBFCs and informal private lenders that fund developers to acquire land. These are at prohibitive costs, ranging between 18-24 per cent per annum.
“It is only at the construction stage and after requisite approvals are obtained that bank and HFCs are allowed to fund the projects,” Parekh said. “This is a simple, doable solution. It will bring residential prices down, increase the stock of affordable housing and fulfill the aspirations of more Indians becoming homeowners,” he added.
Parekh said HDFC has so far cumulatively financed 5 million housing units and it remains committed in helping build a “property owning democracy for it guarantees a peaceful and prosperous society”.
Source : Financial Express