Will RBI Governor Raghuram Rajan’s advice to realtors to bring down the prices to help revive the sector do wonder for the economy?
Of late, the real estate sector of India has been much in public eye due to the floating negative sentiments caused by delay in possession of projects, coupled with sky rocketing prices especially in Tier 1 cities of the country. These reasons have dented the housing demand and is causing drastic fall in the interest of potential customers along with heavy inventory pile up for the developers. Being a case of land, big depreciation is pretty much off the cards and hence, can prices come down becomes the question. But in order to keep the market and sentiments stable, developers need to provide some extra cushion. In a recent speech, Raghuram Rajan, the RBI Governor, insisted upon developers to take the onus and bring down the prices to help revive the sector and provide much needed transparency. “I am hopeful that as interest rates come down, there will be more credit and buying. And I am also hopeful that prices adjust in a way that encourage people to buy”, Rajan said.
Standing in sync with the words of the Governor, Avneesh Sood, director of Eros Group also believes that price flexibility has become the need of the hour, as he explains “It is crucial to understand that real estate sector is an end user to almost 35 other industries and sectors, and if this sector is drowning, then it is not fruitful for the economy in general. RBI has played its part seemingly well over the last one year by bringing down the repo rate to 6.5 percent. Almost half of the rate cut benefit has been passed on by the banks. It is time now that developers also chip in to help this market get back on track.”
Rajan further said, “My sense is that there is a little bit of everything that needs to happen” for the revival in the real estate sector. “There is an issue of certainly how they see the housing market and how they see prices. There has to be an adjustment so that more people want to go and buy”, he added. Highlighting on the escalating pricing effect that has resulted towards lowering demand and high inventory levels, Ankit Aggarwal, CMD, Devika Group avers, “Real estate is an asset which is somewhere bound to appreciate with time. But the kind of appreciation that most Tier 1 regions across the country has witnessed, it has taken the buyers away from the market, especially investors, who were a prominent sight when the property prices were low. Housing demand is driven mostly by end users who again are looking at property prices. Thus, after RBI’s rate cut push and banks following the trend, if still the revival does not happen, then developers have to work towards decreasing the prices and increasing the transparency.”
High sale price is a result of high cost price that begins with the cost of land and the rates at which developers borrow funds. At present, developers across the country borrow at rates as high as 22-24 percent and with land being limited and infrastructural upgradation happening at a rapid pace, fresh land parcels have become much expensive, thus adding to the cost. Here comes the importance of being an industry. “Granting of industry status to the realty sector will directly help in the reduction of prices. The moment a developer is able to borrow at lower rates, something that industry status will allow, it will directly contribute towards lowering of prices. But at the same time, it is crucial for the borrower to maintain transparency and have a sound history. Industry status to the realty sector is on the wish list for long now and we expect a new face of this sector when it is attained”, elucidates Deepak Kapoor, president, CREDAI-Western U.P. and director, Gulshan Homz.
Rajan also emphasised on the fact that when it comes to financing to the developers, he pitched for more transparency on the borrower’s side. He said, “We need action on the real side (as) also on transparency on land acquisition, transparency on construction and on sales.” He further added that more transparency in such matters would enable financiers to better track flow of funds, which project was being funded by who and who all were the other financiers.
“RBI has lowered the repo rate by 150 basis points since last year January and now stands at 6.5 percent, which is the lowest in the last five years. Banks have also provided the benefit of this rate cut to a large extent to the customers. But still, the market is not picking up pace on the grounds of high prices and lack of transparency. It is high time that the developers take the market sentiments into consideration and allow flexible pricing for the customers along with increased transparency, so that this sector gains back the lost momentum,” states Kushagr Ansal, director, Ansal Housing.
Projecting India’s growth few years down the line and acknowledging real estate sector’s future contribution towards economic development, Rajan commented that “construction of every kind, including houses and roads, is a big source of growth especially for a developing economy like ours.” It is true that India is on a development spree on various construction fronts. Construction sector’s housing aspect cannot be left as it is and rather, needs to be taken up seriously in order to keep this sector contributing towards Indian GDP.
“Construction sector is one of the largest contributors towards the Indian GDP with almost 6 percent contribution each year. This momentum has to be maintained. The demand is taking a toll due to the absence of proper transparency and high prices. Real estate bill is moments away from becoming an act which will promote fair play and transparency, but what about the pricing factor? State governments need to provide fresh land banks at reduced prices and the centre must grant industry status. The sector will then gradually see momentum shifting towards better demand and growth,” concludes Ashok Gupta, CMD, Ajnara India Ltd.
While there is no denying that there are cost pressures for the sector, but at the end of the day, if there is no buyer and inventory remains unsold for years, the cost keeps on building to no one’s benefit. As such, a price correction is a definite tool to bring back the customer back in market. Rajan has referred to this critical reality.