Policy perils keeping India's realty industry static

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Vinod Behl | 09 Oct, 2013
Amid the economic downturn, it's crisis time once again for India's realty sector. Policy glitches are once again creating roadblocks for the revival of the sector.

Today, the biggest challenge faced by the capital-intensive real estate sector is shortage of funds. Banks, which are the largest and cheapest source of finance, are shying away from lending to real estate companies.

Moreover, bank funding is restricted to project financing (excluding land) and is available to select developers with healthy balance sheets. While non-banking finance companies have exposure to only debt funding, that too at a much higher interest rate, the expensive private equity players are either not deploying their funds or exiting the scene. Even on the foreign direct investment front, there's a dismal scenario, with its share plummeting from eight percent three years ago to three percent now.

The government allows 100 percent foreign direct investment in construction development - such as townships, housing and built-up infrastructure -- through the automatic route.

But some restrictive conditions are proving to be a dampener. These include minimum capitalisation of USD 10 million in the case of wholly-owned foreign venture, minimum built-up area of 50,000 sq mts, minimum 50 percent project development in five years and lock-in period of three years.

There is a clear case for relaxing the lock-in period to facilitate early exit, as also a reduction in the minimum capitalisation and threshold built-up area. The Ministry of Housing and Urban Poverty Alleviation has already recommended a reduction in the minimum area requirement from 50,000 sq mtrs to 20,000 sq mtrs. The delay in launching real estate investment trusts is further adding to the woes of the fund-starved sector.

On one hand, funds to the real estate sector have been drying up. On the other, interest cost as a percentage of sales has grown from 12 percent two years ago to 18 percent now, making debt repayment difficult for developers. To make matters worse, debt restructuring, or loan re-casting, has been made difficult by banks on the directives of the Ministry of Finance .

One fails to understand why the government is fighting shy of granting infrastructure status to real estate to help it access cheaper capital, especially when the ministry concerned has already recommended it.

Now, the Reserve Bank of India's recent directive to ban the subvention scheme has closed the option of raising cheaper finance, despite the fact that there have been hardly any defaults. The long and cumbersome approval process is further adding to the prevailing real estate crisis.

There's an urgent need to lay down guidelines that prescribe simple, transparent and time-bound procedures to fast-track building approvals. Unfortunately, the Real Estate Regulatory Bill has overlooked this important aspect. But an expert committee set up by the ministry recently has come up with a reform blueprint in this regard. One hopes it gets implemented to check large-scale delivery delays that not just add to the cost of the property but also shake the confidence of the property buyers and investors.

A recent study by global property advisor CB Richard Ellis has said the real estate sector can double its share in the country's gross domestic product (GDP) to 13 percent, provided the cost of borrowing is reduced, approval process is fast-tracked and bottlenecks in infrastructure are removed. It's time the government pro-actively took initiatives on the policy front to not just revive real estate but also to put it on fast track.

(Vinod Behl is editor of Realty Plus, a real estate monthly. He can be reached at vbehl2008@gmail.com)