TORBIT TALK
Deepak Parekh who spearheads India’s premier housing finance company HDFC Limited as its chairman, has turned the dream of owning a home into a reality for millions across the country. A hugely respected business leader, Parekh has deep insight into real estate and housing sector. In a recent industry interaction, he talks at length about the present dynamics of real estate market and the future of real estate, particularly the housing sector.
As per IMF’s Global House Price Index in 2020, only 3 major countries – UAE, Philippines and India did not witness increases in home prices. In India, we are very, very fortunate that we don’t presently have housing bubble troubles. We shouldn’t be thumping our chest for this. But the fact is that the inherent demand for housing remains immense and concerted efforts have been made to ensure supply at the right price points to meet the needs of various income groups. Due credit should be given to central and state governments for focusing on enabling policies for the housing sector – be it continued fiscal incentives, the Pradhan Mantri Awas Yojana, Credit Linked Subsidy Scheme, concessional stamp duties, premium reductions, amongst several other measures. In equal measure, the RBI’s accommodative monetary policy and comfortable liquidity conditions has also helped tremendously.
While the upfront subsidy for the economically weaker sections and low-income group runs till March 31, 2022, the subsidy for the middle-income groups who also need a helping hand whilst purchasing their first home is no longer available. It is important that both, financiers and developers continue to keep their foot on the accelerator as far as affordable homes are concerned because this is where the greatest demand lies.
Earlier, there were a lot of potential homebuyers who were fence sitters, as they were uncertain on how property prices would move. Stable property prices converted many of these fence sitters into actual home buyers. Those that had jobs that could be seamlessly done online thrived during the pandemic and they are the ones that have seen their incomes rise and have higher accumulated savings as well. Work and study from home created demand for larger homes and those not financially impacted by the pandemic were able to either shift from rental homes to homes they own or move up the property ladder to larger homes or homes in other locations.
The trio of developers, financiers and home buyers are all closely linked and hugely inter-dependent on each other. What we need to be most mindful of is trust. When trust gets violated amongst this trio, everything else spirals out of control because confidence is lost.
For many developers, the pandemic also provided a leeway to be able to recalibrate, monetize assets, offload existing inventories and deleverage. The divide now is very clear. The common man today is not willing to place a bet on any developer other than select Grade A developers. These developers are defined not by the scale of their operations or balance sheet size, but whether they have upheld their track record of timely delivery and whether they have been able to tie up their funding requirements at the start of the project, rather than being dependent only on sale proceeds and subsequently getting strapped for cash. In short, a developer’s reputation is everything in this business.
We need many more responsible developers to be able to execute infrastructure projects, build more houses and cater to the changing needs of commercial spaces such as office premises, warehousing, fulfillment centers, data centers industrial parks etc. But in the key metro cities where bulk of the large-scale projects are, there are not enough of true Grade A developers. Developers need to focus on 2 Rs- reputation and resolution. Both these go hand in hand. Choose a resolution path that bails you out the fastest, not necessarily the path that maximizes your returns. This will hold you in good stead for the future. It is estimated that close to Rs 1.3 lakh crore or about 18% of overall lending to the real estate sector is under stress. This includes old legacy cases as well. Fortunately, there are more resolutions falling in place, especially where cashflow mismatches have occurred on projects.
The real estate sector is going to see radical changes as demand for more smart and green buildings gain traction. India’s stock of new, grade A commercial buildings are impressive as most of these are green certified buildings. The demand for affordable, smart and green buildings is percolating towards the residential sector as well. Currently, under 5% of India’s buildings are certified as green, but this will rapidly change due to both push and pull factors.
One significant change that I foresee in the housing sector in India is that it will be increasingly driven by India’s millennials and Gen Zers who are armed with higher incomes and increasing aspirations. This cohort comprises a growing number who have well-paying jobs across IT, e-commerce, professional services amongst others. This present generation that is embracing sustainability more than any other generation before, will demand to live in green buildings. It will increasingly want facilities for electric vehicles, access to renewable energy sources, will want homes that are completely tech enabled with AI and IoT and designed to enable futuristic retrofitting’s.
I believe the Indian mortgage finance sector too will change significantly with younger home borrowers compared to what India has experienced in the past. This will mean the average age of home buyers which currently ranges between 35 to 38 years is likely to shift closer to those in their late 20s and early 30s. This is the new group that developers will need to cater to. This customer segment comprises of digital natives and so developers too will need to constantly reorient their ways of interacting with them.
On Investment Prospects in Real Estate
Global investors, including otherwise conservative pension funds and sovereign wealth funds are seeing immense opportunities in investing in Indian real estate to counter low or negative yields in their home countries. More alternate investment funds focused on real estate and dedicated real estate asset reconstruction companies are knocking on the doors of regulators for approvals. For instance, Brookfield and HDFC are keen to launch a real estate dedicated ARC and this partnership is important because Brookfield is one of the largest alternative asset management firms in the world. We need such investors with deep pockets and who have long-term, patient capital.
Developers will get greater access to last mile funding, existing financiers having already provided for such loans will have more options to sell bad loans seamlessly and focus on incremental lending, rather than be consumed with legalities and technicalities of resolutions and it will also facilitate a new cadre of much needed professionals with real estate expertise to resolve such loans.
A key lesson to hold is consciously guarding against excessive construction at price points that are out of reach of those who are keen to get a foothold in the property market. The most fatal financial mistakes always happen in good times – simply because as I never tire of saying, leverage is a double-edged sword. Leverage amplifies profits in good times, but it kills during a downturn.
Right now, the assessment is that the higher inflation is more transitory in nature. But if this stays over a longer period of time and energy prices continue to escalate, it would then mean that the higher inflation is entrenched and not transitory. This would then be a trigger for a change in the monetary policy as far as interest rates are concerned.
The uncertainty right now is that input prices, especially commodity prices have moved up, but this is still being attributed to supply and pandemic related bottlenecks. If these supply bottlenecks are not unwound soon, it could be a dampener. A calibrated increase in property prices can be easily absorbed, the sharp shocks can’t.
The housing and real estate sector is heading into the best of times. I have not seen housing affordability better than where it is today in India. I have not seen such easy liquidity conditions and interest rates at such record low levels. Most importantly, I have not seen such a burning desire to be a homeowner than in these current times. Home sales are rising. The real shot in the arm has been the recent pipeline of new launches. This is the greatest mark of confidence for the future. Moreover, with 65 percent of India’s population being under the age of 35 years, there is a huge population that will be looking for homes to live in.
Considering the unpredictability of the virus, all of us have learnt that survival is adaptability to the present circumstances. Right now, there is a lot of optimism in the air on the potential of the housing and real estate sector. This is real. Housing markets move in cycles and research suggests that for India, the peak and trough of each housing market cycle typically entail a duration of 6 to 8 years. The last peak for the housing sector in India was 2012-13. The point to remember is that it takes a long 7 to 8 years to get back into an upward cycle. And right now, right here, we have the means to catapult into an upward growth cycle. Yet on this upward cycle of the housing market, we need to be extra watchful so as to not repeat the mistakes of the past.
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