Outstanding real estate loans above Rs. 2 lakh Crore

Sudhir Vohra

Storm clouds are gathering over India’s real estate sector
By Mr. Sudhir Vohra

Storm clouds are gathering over India’s real estate sector yet again. March 2012 would mean that pressures for repayment of loans due only to banks shall mount on the sector.

Rs. 2 lakh crore, outstanding loans..!

Current estimates made by industry watchers suggest that the amount of outstanding loans due to banks are in excess of Rs. 2 lakh crore, with about . Rs. 35,000 crore alone being due from the 4 big pan Indian developers and promoters.

Last March (2011), many banks had managed to restructure loans and to defer repayment schedules. But the scenario now in 2012 for such large scale restructuring is dismal: there is a cash crunch, interest rates are still very high, and many banks have too large an exposure to the real estate sector. Perhaps a good time to analyse what went wrong, and to figure out which way this sector will swing.

Supply and Demand.!

Firstly, both the supply side (developers) and the demand side (buyers) have been borrowing at high interest rates during the last decade or so. Both thought they would get richer and the party would never end. Concepts such as second homes & weekend getaways were sold like hot cakes, and the needs of end-user customers were not addressed with care.

Coupled with this basic anomaly was the fact that developers lapped up every location offered by municipal & government bodies, without caring to check how liveable these locations would be; what facilities would be needed to populate them, and how communities would develop around these mini cities.

The result is that now we have a large surplus stock of dwelling units built without any basic infrastructure in place - these are the ghost towns that might take decades to get populated, while pressure on the older parts of established cities increases manifold.

Such a situation was, perhaps, inevitable, given there is almost complete lack of research and analyses by developers on issues such as which locations would need the products being built, nor on data to determine which market segment to target, and where actual demand exists
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Developers/promoters have been blindly following town planning schemes released by municipal and planning bodies, always assuming that there is such a dearth of housing in the country that buyers would lap up whatever is offered to them and forgetting that urban growth needs a host of economic stimulants to spur it. This is, in many locations, the core of the mess that the sector is facing now - an almost complete lack of market studies that should have been done before land was released for conversion to create urban habitats. This is also the main reason for surplus housing and commercial stock having been created in locations that are decades away from occupation and habitation.

The lack of research & information on such urban issues is also compounded by the lack of a regulator for the sector. While the central government has been promising such a regulator for the past 5 years, political pressure has prevented the enactment of a much-needed law.

The result: Buyers have gone bust along with errant developers that have become non-paying assets on books of many banks.

Today, an interest of up to 15% is charged on housing loans. The figure is too high, especially when there is no guarantee that the property would be made available in the period it was promised in.

Developers, on the other hand, are borrowing at equally high rates of interest - sometimes 17%. This heavy cost of money, coupled with the uncertainties created by lack of infrastructure, municipality support or facilities needed for populating the ventures, is now showing signs of strain on their balance sheets.

The recessionary trends, coupled with the increasing lack of confidence that India is facing, also means that banks are shying away from loaning too much money to both developers and buyers.

Dark clouds for industry..!

These signs, plus other macro pointers - oil and energy costs going high, infrastructure spending coming down, the European economic slowdown, the US being in an election year and the uncertainties of a democracy with elections looming near - are all dark clouds for an industry that still refuses to allow itself to be regulated and works with archaic technologies and outsourced labour models. In such a stormy scenario, investors better tread cautiously, and buyers be wary of whom they are buying from.

About the author
Mr. Sudhir Vohra is an architect by training & education and runs his own 30 old consultancy company. He works in the urban planning space & was a member of the panel drafting the Real Estate Regulatory Bill. He has written & appeared on national TV addressing urban infrastructure & planning issues.