The recent comments by Mr. Deepak Parekh, requesting RBI and NBFC to fund land deals is met with skepticism. While the current practice of foreign PEs and NBFCs funding these transactions have resulted in home price increase, allowing banks to fund land deals may not be the right suggestion at this point, as this would leave the promoter with little options in the game. Land purchases should ideally be funded by the developer and this is his contribution in the project.
The unaffordable prices are due to the developers looking at earning big margins. The other reason is that in bigger cities the shortage of land pushes up land prices making housing costly. There are issues that the Government needs to address, on approval costs, and land costs. The developer would also factor in his interest costs to be paid to the customers if there is a delay in approvals, resulting in a project delay.
The foreign PE investors look at returns on investment and the builders are bound to give in to these demands, and hold on to their high prices. Lowering prices may also put off clients who have paid a higher value for their homes earlier in the project.
The core of the problem is that most developers are over-leveraged, and it is the banks and other lenders who are in trouble. The government bailed out real estate companies after the financial crisis in late-2008 by allowing banks to restructure their loans. That was a big mistake because, even today, some of these firms have large amounts of debt on their balance-sheets. Outstanding loans to commercial real estate stood at Rs 1.77 lakh crore on April 16, 2016, up 6.7% over April 2015. That may be less than 3% of outstanding loans, but some of it may never be returned to the lenders. Allowing banks to fund land deals will be another trouble in the making, at this point in time.
The best option is to wait for the RE Act to prove its worth, bringing in discipline in the sector. The Government must be made accountable for providing clearances and builders need to be accountable to customers. The Act also ensures that the specific project funds are not diverted by developers to purchase land, thus ensuring fund availability to complete projects.
The Act will make it difficult for unorganized developers and brokers to operate and eventually they will be weeded out. Perhaps, after some years, when it is proven that the Real Estate Regulator is able to discipline builders and the approvers, bank loans for land could be considered. At this point, it is simply too risky.