A real estate regulator should be in place as quickly as possible for sustained growth of the sector, says K. Sukumaran

Globalisation has made the world small and everything has become borderless! Just an announcement by Standard and Poor's reducing the rating given to the U.S. from AAA to AA+on the basis of rising debt index has taken the world financial markets by storm. Markets tumbled like nine pins and economies of almost all developed countries are in panic. Developing nations too fear a roller coaster effect and all industrial segments fear about the after-effects.

Focus is again on the core sectors. Real estate is at the centre of it all because it contributes to job creation and more jobs mean vitality to any economy. Real estate is a major contributor to GDPs of all countries. The latest report says that the housing market in the U.S. is on a spin, with a fall in sales of both new and secondary homes. Close on the heels of the just turned round 2008-09 mini recession, the present shock may not be tolerance proof. What can be the state of Indian real estate sector this time?

Real estate and GDP

Morgan Stanley, investment banking major, has brought down the global GDP growth for the year 2011 from 4.2 per cent to 3.9 per cent. It has also forecast similar figures for 2012, down from 4.5 to 3.8 per cent. The downward growth is predicted to be high in developed economies.

According to Morgan Stanly, the U.S. and European Economic Community countries will face sloggy asset markets. As against this India is planning for a GDP growth of 7 to 7.5 per cent, though not 9 per cent as earlier targeted. Indian real estate contributes over 4 per cent of GDP growth, which need to be reckoned with. Almost every day we come across ads relating to new projects coming up in major centres.

Luxury segment

In Bangalore alone, many developers have announced a series of projects. Gurgaon, Pune, Navi Mumbai, Chennai, Coimbatore and Kochi have also come forth with announcements of new projects. It is another matter that these projects are going to be outside the central locations, around the periphery. Again, a good number of them are high-end luxury apartments or villas.

This is at a time when the affordable housing projects have received stability. This segment is quoted at around Rs. 20/25 lakh to Rs. 40/45 lakh per unit, whereas the luxury segment is quoted at Rs. 60/70 lakh to Rs. 1crore plus.

It is relevant to recapitulate the events of the last minor recession during the 2007-09 period. One may well remember that the demand recession was followed by sops for sustenance through concessional interest rates, postponement/ rescheduling of repayment programme, refixing of EMIs etc.

It took more than two years for the property sector to turn around and even after this the earlier gusto has not been established. Meantime, the prices have gone up for reasons such as increase in cost of construction, interest rates, guidance value hike etc. Coupled with this the irregularities in sanction of some large loans to developers by some banks have come up for CBI investigations.

The Reserve Bank has also hardened its approach to large real estate loaning by banks. Thus, the present scenario is not similar to that of 2007.

Many things in tandem may prevent a total repeat of 2007-09. First and foremost is a campaign for good governance in the property market. Indiscriminate growth of new projects may need to be checked.

A stock of available built area and the demand projected need to be matched. Mere registration by new buyers should not be the guideline for expansion and new construction. A real estate regulator should be in place as quickly as possible by implementing the provisions of the Real Estate Regulatory Authority Act formulated by the Ministry of Housing and Urban Poverty Alleviation.

Industry status

CREDAI has been urging the Government to give industry status to the real estate sector to ensure streamlined and organised credit flow to the sector. To secure the position, developers should follow and uphold healthy practices by avoiding irregularities alleged against certain developers. It is necessary to remove the RBI perception that the real estate sector is fraught with high risk on the basis of which lending to commercial real estate has been kept under the scanner. Bankers and financial institutions too should come clean about allegations of illegal gratification and impaired asset quality.

If everything goes well, despite possible hiccups, the real estate sector can be relied on for substantial contribution to GDP growth, which can help in achieving a reasonable 8 per cent GDP, as real estate growth will be stable and longstanding as compared to other sub-segments of the economy.

Keywords: real estate