Imitating the boom of the technology sectors, the Indian realty mart has seen an unprecedented growth over the past few years to become one of the leading industries in the country today. Attracting considerable interest from investors the industry is also considered a priority sector  for  banks to lend. But with RBI’s policy changes, including the hike in the Cash Reserve Ratio (CRR), the liquidity could be tightened in the economy, in turn lowering the credit offerings. To understand the real estate industry’s stand on this matter and the path ahead for the sector, Chanda P Kumar of Deccan Herald, caught up with Irfan Razack, Vice President of Confederation of Real Estate Developers’ Association of India, (CREDAI). Excerpts:

Would RBI’s hike in CRR, which is up by 0.5 per cent at 7 per cent, be a dampener on banks’ lending capacity to the real estate market?
Firstly, if you take the interest rate for housing loan, for the last one year, we’ve seen a pretty steep northward trend. Sometime back for every Rs 100,000 you borrow, the EMI rate was at Rs 800, but now the same figure would be between Rs 1200-1300 per month. So this has a direct effect on the borrowing capacity.

Secondly, the pricing has gone up, due to higher land cost, increasing cost of construction material like steel, cement and the contractor cost. So totally the selling price has gone up which has resulted in higher cost of borrowing.

Thirdly, the RBI has stopped developers from availing loan to buy land, as the apex bank saw it becoming a speculative trend. Along with this construction loans are delayed, as the same is not cleared unless all verification and plans are approved.

Therefore the turnaround time to launch, which would normally take 3-4 months, is now 12-15 months.
So the overall trend in the next 6-8 months could be a squeeze in the market, resulting in a liquidity crunch, which may result in desperate sales, developers reviving their stand on expanding and prices may get a little lower. I anticipate that there will be a slowdown, there might not be a crash in prices but they will definitely not rise. It can certainly become a buyers market rather than a sellers market.

The exposure of banks to the real estate sector was very high last year, where all major banks in the country increased their home loans and loans to commercial property sharply. How do you reckon this to be during the current fiscal?
Whether Indian or foreign banks, the real estate market has been preferred as the safest sector to lend. With all the restrictions that are there now, I don’t think banks have enough opportunities to lend as much as they had earlier. Firstly, there are no loans for purchasing lands.

Secondly, due to all these restrictions and approvals, the demand from the industry itself will be lesser. So while getting loans is not the issue, getting the necessary paperwork done is the issue.

Are real estate developers finding it hard to avail domestic debt?
Getting domestic debt is easy when you have all the necessary approvals and paperwork done. But again with the tightening in the CRR, there could be less money with the banks, but this is a long-term issue which cannot be predicted right now.

Real estate prices have shot up considerably over the years. Do you see this upward trend receding?
I have seen the pricing gone so high, where a few years ago Rs 25-30 lakh was a good amount for an apartment, but it went up drastically and now Rs 50-60 lakh seems to be a normal number. So the challenge is for the developer to build property with less land cost, less input cost in construction and offer the product at reasonable rates. Developers must realise that this is where the market is.

While slowdown is inevitable, correction is too, so that things cool off. So definitely the upward trend will end, as it has reached the peak.

Again the only way that it will catch up is if inflation goes up. It took 8-10 years to reach that peak, where inflation shot up and we could accept a Rs 10 lakh apartment for Rs 25 lakh, as our salaries and the power to purchase rose.

Which segments in the Indian realty mart are the foreign investments pouring into?
Foreign investment is certainly coming in, however the expectation from them is certainly very high. The Internal Rate of Returns they expect is much higher than local developers.

So I see them coming into hospitality, retail, mall developments, tech parks, where it is a long-term play and opportunity of returns is high. However, I don’t see them looking into housing.

Integrated townships is one more segment they are looking at, as there would be office space, malls and other commercial establishments besides the residential part which is only one component. So these areas are where huge foreign investors will look at, which is very necessary as a local developer cannot afford such huge capital expenditure without foreign investments.

How important is the housing segment for the real estate developers at present? How do you see this segment grow?
Housing is a priority segment for all developers. Housing is a need, and there will always be a shortage of housing in a country like ours with its huge population.

The challenge that rests with the developer is to offer quality housing at an affordable price. With the population growing, developers must focus on catering to the lower middle class.

What are the major concerns in the real estate space that CREDAI is undertaking at present?  
The main issues that CREDAI is tackling now is the taxation policy that the government has in place right now. The government is taxing us three times i.e. VAT, service tax and stamp duty. VAT is about 8 per cent, service tax is 12.5 per cent and stamp duty varies with each state which is anywhere between 8-15 per cent.

 Taking this into account around 30 per cent of the price of an apartment/ house goes into tax, which is huge. We are trying to tell the government to rationalise this either by doing away with VAT or service tax. This is a major challenge for us.

Other issues that we have taken up are means in getting speedier approvals and of course, motivate the government to have something substantial done about infrastructure.

According to a report from FICCI and Ernst & Young, the real estate market throughout India had grown 30 per cent annually. Do you still see room for the industry to grow at this rate?

No way, the industry cannot grow at this rate now. Every industry has a cycle and now since the industry has reached its peak, a slowdown will set in.