PE players, NBFCs and informal private lenders provide funds to developers at initial states. The initial high cost only keeps getting multiplied and is the key reason why housing is becoming more unaffordable for many, says the HDFC Chairman
The regulators need to allow banks and housing finance companies (HFCs) to fund land transactions, which will bring residential prices down, increase the stock of affordable housing and fulfil the aspirations of more Indians becoming homeowners, says HDFC chairman Deepak Parekh.
“The regulators should, within limits, permit banks and HFCs to fund land transactions -- or at least land transactions that are acquired specifically for residential purposes. This is a simple, doable solution. It will bring residential prices down, increase the stock of affordable housing and fulfil the aspirations of more Indians becoming homeowners. So the key question remains -- will the regulators oblige?” Mr Parekh told shareholders during HDFC’s annual general meeting.
Here are excerpts from Mr Parekh's speech at the AGM...
‘Housing for All’ by 2022 features prominently in the Narendra Modi government. Some may dismiss this as rhetoric with little action while others who truly understand that housing is a unique asset will work relentlessly towards this goal. Needless to add, we at HDFC belong to the latter, though we recognised this 38 years ago. We have remained steadfast in our goal of increasing home ownership in India. Five million housing units have been cumulatively financed by HDFC – a number that gives us immense pride and satisfaction. Yet we recognise our efforts need to intensify manifold if a majority of our citizens are ever to get humane, decent and affordable housing.
The path to any grand vision is rarely smooth, but some roadblocks can be overcome. One of my greatest concerns today is who will physically build in India on the scale required? Urbanisation is an irreversible trend. By 2030, about 600 million Indians will be living in urban India. Rejuvenation of existing urban areas and creation of new cities will require smart real estate and urban infrastructure related solutions. It is the construction sector that has to deliver most of this.
The construction sector contributes around 8% to India’s GDP and has a two-fold multiplier effect on other industries with backward and forward linkages. Almost 10% of India’s workforce which translates into 45 million jobs is directly or indirectly created by the construction industry. By 2022, the largest incremental growth in jobs is expected to come from this sector -- an estimated 77 million new jobs. India needs growth, physical infrastructure and jobs – all of which can be delivered by the construction sector, provided a conducive policy framework supports it.
Many construction companies are hamstrung with over leveraged balance sheets, though this is only one aspect of the problem. For the construction sector to revive, there is an urgent need to reduce delays in claims settlements. Ironically, a majority of these claims are with government bodies. There is also a need for a credible and efficient arbitration and dispute resolution mechanism to safeguard against lengthy litigation processes. Further, standardisation of contracts (which would also facilitate standardisation of taxation) and ensuring strict adherence to contractual terms will go a long way in boosting the sector.
Where there is a will, there is affordable housing
The perennial question is how can housing be made more affordable? There currently is a disconnect in the housing market. On one hand there is an acute shortage of housing, but on the other, in some of the larger cities, there is a growing stock of unsold inventory. The answer lies in the pricing points not being right. The real demand is in the affordable housing segment, not high-end luxury housing. Developers are not relenting on the pricing of existing stock, while the cost of launching new projects is only rising.
Solutions to these problems have been elucidated several times. Faster approval processes will reduce overall costs and on-line approvals will bring in the much needed transparency. Approvals take between 18 to 24 months. Needless to add, there are at least 50 approvals required across different authorities. If there is consensus that fewer approvals and interventions reduces overall costs, compresses timelines and ultimately benefits the homebuyer, then fast-tracking of approvals is imperative. Equal onus must lie with developers as well to ensure strict adherence to ethical building codes and standards. Projects often get delayed as certain developers try to deviate from standard building norms by paying to flout rules. Such malpractices are hazardous for all. A regime that shuns ‘speed money’ and focuses only on ‘speed’ would go a long way in improving affordability in the housing sector.
The other critical issue pertains to the high cost that developers incur while borrowing to fund the purchase of land. This initial high cost keeps getting multiplied and is the key reason why housing becomes more unaffordable for many. The root of the problem is that banks and housing finance companies (HFCs) have been prohibited from funding land transactions by the regulators. So at the initial stage, it is the private equity players, the non-banking finance companies and informal private lenders that fund developers to acquire land. These are at prohibitive costs, ranging between 18 to 24% per annum. It is only at the construction stage and after requisite approvals are obtained that banks and HFCs are allowed to fund projects. By this time, developers are already saddled with high cost debt to service.
In 2006, the regulators prohibited banks and HFCs from funding land transactions. Such actions may be justifiable when there are fears of asset price bubbles. Over two years ago, the regulators reduced risk weights on exposures to commercial real estate - residential housing. This signalled that there were no fears of any speculative bubble. Then logically, the regulators now need to relax this near decade old restriction. The regulators should, within limits, permit banks and HFCs to fund land transactions -- or at least land transactions that are acquired specifically for residential purposes.
This is a simple, doable solution. It will bring residential prices down, increase the stock of affordable housing and fulfil the aspirations of more Indians becoming homeowners. So the key question remains -- will the regulators oblige?
Meanwhile, HDFC finished another year of steady growth. As from the day we started business, we remain committed in helping build a property owning democracy for it guarantees a peaceful and prosperous society. We are excited about the prospects of India’s future and hope the vision of 100 smart cities and a rejuvenated urban India turn into reality.
The challenges are immense, yet I remain optimistic to reiterate that India has never had a better chance than today to make the ‘big change’ for generations to come.