Companies & Sectors
Big realty firms say housing prices will not come down

Piramal, Godrej, Hiranandani chiefs say supply shortage, increasing development costs and delay in getting approvals are keeping real estate prices high. They insist that developers will not sell piled up inventory at a loss

Despite the stagnation in the realty sector and talks about a necessary price correction doing the rounds, the big city developers don't see a chance of prices coming down. At the CII real estate summit on Friday, Ajay Piramal, chairman, Piramal group, Adi Godrej, chairman, Godrej group, and Niranjan Hiranandani, managing director, Hiranandani group, suggested that prices could go up even further.

"I don't see any correction happening, because the government is not giving any approvals and supply is getting delayed," Mr Piramal said. "No builder wants to lose money and the costs have significantly gone up."

Mr Hiranandani said, "Whether it is real estate or any other industry, the prices go down when surpluses are created. Though demand is rising, no surplus is being created because of a delay in getting government approvals and archaic land laws, which make acquisition a difficult and lengthy process. Add to that the rising prices of items like steel, and we have inflated costs."

This view was reiterated by Mr Godrej, who said that prices will go up because the sector was facing a capital crisis and that developers would hold prices up to ensure profits.

However, there is no talk about meeting the huge housing demand with the present price structure. Mumbai may need some two million houses to accommodate its growing migrant population and people from slums, according to Liases Foras. Despite the staggering demand, as many as 92,000 units remain unsold in the city because prices are way past the affordability level.

"I will not comment on the piling up of unsold inventory," Mr Godrej said. "But I can say that with no new approvals, there is still a huge gap between demand and supply, especially in the metros. So it is unlikely that prices will go down. But people will not get rid of inventory at a loss."

However, many reports have been coming in about impending corrections. Crisil reported at the beginning of the year that by 2012 there is a chance of a 10-15% price correction. Other experts, too, believe that prices must come down or else the sector is in for a debacle.

"The ideal market velocity (rate of property off-take) must be 3-3.5% per month for Mumbai. But it is only 1.57% now, because sales have suffered due to price rise," said Pankaj Kapoor, managing director, Liases Foras. "This means that only 1.57% of a project is being sold in a month. At this rate, it will take 63 months to sell a project. The time taken will affect valuation, and the delay will result in further imbalance."

Mr Godrej said that he did not expect a slowdown like that in 2008. "In 2008, the costs were very low, which was reflected in the recession. That time, we saw a drop in property prices. The situation is not the same this time," he said. Godrej Properties was among the few developers who managed not to suffer massive losses, or incur debt as did some other giants like DLF or Unitech. Mr Godrej said that rising input costs have not affected margins because this has been passed on to the customer.

The developers will continue to hold back, to ensure that they don't have to sell their inventory at a loss. But if the customers are put off, the situation will only worsen for them, as the chances of softening the crisis through increased sales will be minimised further.

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COMMENTS

citizenindia

5 years ago

and 5-10years means your current principal outstanding to banks wil get doubed at 15%p.a interest rate which is the least. developers are paying today! scan the market to know the real state of real estate developers! they are offering anywhere between 16% and 25% for loans through bonds and other such instruments. that shows the kind if stress these fellows are going through. a sure sign of bust.

citizenindia

5 years ago

'developers' wont sell at a loss! seems they are one category of businessmen who arent allowed to incur losses. your costs are high because you have allowed the sector to become structurally flawed . chicken and egg story. how should it concern a real estate buyer why developers costs are goong up? he has to pay to the state machinery, thats not by lookout, he has to pay bhai, thats not the consumer lookout, the sector has to pay high rates to borrow money because of the obivious low credit worthiness and poor track record of the sector at large. you have outpriced things to such an extent that you are reaching prices of cities like london and new york! you may have all the holding power thanks to psu banks obliging you or dirty money backing you, but whats not in your control is consumer affordability . at current rates , you cannot have a scalable real estate model for the city of mumbai. and the figures are doing the talking. if you still want to be stubborn, keep holding the prices , you may probably sell your inventory in next 5-10 years!

Chris

5 years ago

Currently the banks are controlling the RE prices not the buyers as you claim.
The only people buying are rich investors.

Banks still have a ton of property to liquidate, but they don't want to sell it off fast since it would lower housing costs and cost them money.

This is the problem. In a recession the banks are supposed to raise interest rates so the money is goes back into the banks and is being loaned out. This is not happening due to the fact that the banks are controlling home sales like water out of a dam. The job problem could be over if the banks started to act like banks and raise the interest rates and make loans!!!!
Home prices WOULD come down to sane 1999-2000 levels if they had a chance.
I would stay out of the RE market until the banks get out of RE foreclosure sales. You will get brunt badly when the banks unload all their RE portfolios.

Sachin Purohit

5 years ago

The developers are complaining of the construction costs going up. Yet they continue constructing activity despite there being no buyers at prices they are selling. If it is such a low-margin business where a small decrease in selling price would mean selling at a loss, why are there so many in that line of business at all?!

Mediclaim for domestic workers—will it really take-off or remain grounded on paper?

The concept of offering mediclaim to domestic workers is good on paper. The fulfilment, right from submission of identification certificates to securing the mediclaim smartcard and all the way to getting cashless benefit, will be a bumpy ride

At a time when the cashless benefit for mediclaim from government insurers has been marred by controversy, will it work for domestic workers? Working through a third party administrator (TPA) is often a hassle, and the rejection of claims by some insurers, if intimation is not made to them within 24 hours of hospitalisation, is a reality. Domestic workers getting cashless mediclaim by using smartcard after submission of not-so-simple identification proof may well remain grounded on paper unless the fulfilment process is done correctly.

What’s in it for domestic workers?

The government intends to pay an annual premium of Rs750 for a sum insured mediclaim of Rs30,000 under the Rashtriya Swasthya Bima Yojana (RSBY). There are specific limits for procedures, like cataract which will get only Rs3,500.

What identification certificate is needed?

Any two from four eligible institutions–employer certificate, residents welfare association, registered trade union and the local police. It will be a challenge even to get a certificate from an employer, but domestic workers should do whatever it takes to get on the scheme as there is nothing to loose, even with the flawed system.

With the government paying the annual premium, it may be difficult to control leakages at different levels. If the domestic worker quits and takes up employment with a private company, will he surrender the smartcard and opt out of the system? Will there be a system in place to check ‘active’ domestic workers?

We spoke to a couple of agents who do not even entertain underprivileged customers for individual mediclaim. Generally, the low sum insured (Rs50,000 or less, in most cases), which earns them low commission is a disincentive for agents, besides the hassles to help people with their paperwork for filing claims.

But, RSBY offered by government is a good option.

What’s in it for insurance companies?

There will be a huge premium collection of Rs300 crore in four years. The government will begin with a target to cover 10% of 47.5 lakh domestic workers in the first year and scale this up.

What is the risk for insurance companies?

According to some insurance companies whom we spoke to, the Rs750 annual premium is a decent amount for the Rs30,000 sum insured. RSBY, which is already in force for some other segments, has been found to be profitable in initial years when the awareness is low. The claims increase after a few years as the insured start taking benefits by undergoing surgeries or hospitalisation due to illness. It can lead to a claims ratio of over 100%, along with abetment from system fraud which is always a challenge in the insurance industry.

Dr Damien Marmion, chief executive officer, Max Bupa Health Insurance, told Moneylife recently, “RSBY is not very profitable. Star Health has shown that if done in a large enough way, it can be profitable.”

There are political risks with the change in state government. Star Health was successfully running the Kalaignar Health Insurance Scheme in Tamil Nadu. With the recent change in the state government, the Scheme has been scrapped and the plan is to adopt RSBY. Star Health had invested in enrolment and infrastructure to run the Scheme. The discontinuation will be an exit for Star Health with just a break-even in finances.

ICICI Lombard had to cancel its agreement with 24 hospitals in Uttar Pradesh, which were empanelled under the RSBY scheme after complaints of anomalies against the hospitals were found to be true. It can work the other way round too. Taking note of the large-scale complaints from hospitals in the implementation of RSBY, the Maharashtra government ended the monopoly of ICICI Lombard in providing insurance to the economically deprived sections. The reputation of an insurance company can take a hit due to complaints and claims denial.

Does RSBY really work?

It can work if properly implemented. There is a need for proper infrastructure and technology to run the scheme successfully. Star Health is running RSBY in Andhra Pradesh, while the Kalaignar scheme in Tamil Nadu is being wound up. The empanelled hospitals had biometric fingerprint readers to identify policyholders. Each hospital had doctors employed by Star Health to check the policyholder and medical needs. The doctors would take online approval from the in-house claims department, for hospitalisation for surgery or sickness. The policyholder was given cashless treatment. The hospitals benefitted with volumes of business and hence offered low-cost surgery packages. The entire system has to be streamlined with the hospitals. The in-house claims department can work better than having TPA whose image has taken a hit in recent times, with the TPAs unable to live up to the service standards that had been expected from them when they were introduced. 

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COMMENTS

Health Insurance

5 years ago

Apollo Munich Health Insurance has also participated in the RSBY Meghalaya and Maharashtra project.

Joe

5 years ago

I live in an apartment with around 300 flats. We have over 25 housemaids/cooks who work in multiple flats in our apartment. There is a system of photo-id cards for all such workers. Is it possible to get the benefit for such workers? Apartment associations are welfare associations and would be happy to carry out the required paperwork to enable the benefits to the workers. Can we have the Government organization that can help us with this information? I am sure many Apartment associations will be willing to do the same as long as the information is available.

Meenal Mamdani

5 years ago

I have MediClaim from United India for my maid and her family as well as for my driver and his family for the last 4 years.
The premium is not onerous, about Rs 3500 per year per family.
So far my maid got a hysterectomy at a local charitable hospital and the driver's wife had a fracture taken care of similarly.
The key is the insurance agent who told the beneficiaries to call him as soon as the illness happened and he took care of the paper work.
At first, my employees thought I was nuts to spend so much and not get anything in return every year. Now they are wiser.
I hope the govt institutes the scheme with in-house verification and approval as all agents may not be so helpful.

Govt under fire from ally, rivals on fuel price hike

West Bengal chief minister and Trinamool Congress chief Mamata Banerjee opposed the hike in fuel prices, saying it will put the common man in great difficulty. The AIADMK has demanded an immediate rollback of the increase

New Delhi: The fuel price hike saw the government coming under fire from ally Trinamool Congress and political rivals BJP and Left parties which decided to hit the streets on the issue while AIADMK demanded an immediate rollback of the increase, reports PTI.

West Bengal chief minister and Trinamool Congress chief Mamata Banerjee opposed the hike in fuel prices, saying it will put the common man in great difficulty.

“We do not support the repeated rise in fuel prices. This will put the common man in great difficulty. We have conveyed our view where it needs to be conveyed,” Ms Banerjee, whose Trinamool Congress is a key UPA ally, said in Kolkata.

Pointing out that fuel prices were already high, she said, “Kerosene and domestic gas are used by common people.

The price of petrol was also recently hiked.”

Describing the hike in diesel and LPG prices as an “inhuman step”, BJP spokesperson Nirmala Sitharaman said “the increase will also affect India's growth story” the party would hold protest demonstrations tomorrow across the country.

“BJP President Nitin Gadkari has announced that the party will hold protests from the district to the national level across the country against the hike,” BJP vice-president Mukhtar Abbas Naqvi told PTI.

He said the hike has been announced by the government to “serve the interest of the oil mafia”.

“In the last one year, the government has increased petroleum prices ten times. While the common man is bearing the brunt of price rise, the government has now added fuel to fire,” Mr Naqvi said.

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COMMENTS

Shibaji Dash

5 years ago

The State Chief Ministers many of whom have not been proactive in
giving a smooth passage to the formulation of the GST Bill first must cut down on the state levies on the petro trade in their respective states.They are well informed and aware that the Central Givt, even after the latest hike, is confronted with an aggregate loss of Rs. 1crore 20 lakh thousandin the books of the oil PSUs. Incidentally, for the PSUs subsidy is a receivable from the Central Govt to be credited on payment by the Govt. But for FY 2010-11, the Govt's order transformed the receivables to debit item in the books of the oil PSUs including Gail. Consequently, the oil/gas PSUs charged to their profits the subsidy burden of the Govt. So much for socalled disbanding of the administered price mechanism of the petro and petro products.But that's an academic issue. The transfer of the Govt's burden to the oil/gas PSUs ordering the latter to convert the incoming credits into debits in their books raises alarming question about the finances of the Central Govt. Unfortunately no expert/opinion makers has so far thrown any light on the implications of debiting the receivables in the books of the companies. What will this method of book writing called in accounting parlance?

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