In a strange coincidence, worried about high real estate loans, the banking regulator in China and the Indian finance minister both have asked bankers to put pressure on developers to lower home prices and increase sales and cash flows
Both India and China seems to be facing the same problems, especially in the real estate segment. Both countries are worried about the high inventory levels, low offtake and high bad loans of banks that have lent money to builders. The banking regulator in China has asked bankers to put pressure on developers in order to cut exposure to real estate segment. India’s newly appointed finance minister P Chidambaram has ordered exactly the same. China is also trying to curb the stubbornly high real estate prices by imposing a property tax for the first time.
According to a Bloomberg report, China Banking Regulatory Commission (CBRC) has told lenders they should also demand more collateral, or tell developers to sell projects or stakes, if the banks predict they will have difficulty repaying loans due within 12 months. The CBRC additionally warned that risks may be obscured because some real estate companies obtained funding through personal loans or borrowing by affiliated businesses after bank credit tightened, the report said.
Back home, terming the issues in housing segment as ‘complex’, newly re-appointed Mr Chidambaram has asked banks to put pressure on developers to lower property prices. “I was told five lakh housing units remained vacant in Mumbai, I don’t know it’s right or wrong, it may be wrong by a factor of 10% or so. But you know that is capital which is blocked, cement, steel, labour...” he said after meeting with chiefs of state-owned banks in Mumbai last week.
According to data from the Reserve Bank of India (RBI), banks have lent close to Rs1.2 lakh crore to builders while their home loan portfolio stood at Rs2.5 lakh crore in March 2012.
In May, Moody’s Investors Service estimated that 29 Chinese developers on its rating list, including Hopson Development Holdings, Greentown China Holdings and Shanghai Zendai Property need to repay 159 billion yuan ($25 billion) of short-term debt this year, the most in data going back to 2008.
Chinese banks’ bad loans increased for a third straight quarter in the three months ended 30th June, rising by 18.2 billion yuan, the CBRC has said.
Meanwhile Fitch Ratings, in a research report, said real estate companies in India will continue to face margin compression from high construction costs for both building materials and labour. From December 2011 to April 2012 the price of steel increased 13% and that of cement by 12%. Notwithstanding the trend of deleveraging since Q311, slowing demand, high costs and thus declining profits will keep leverage high for most real estate companies, it added.
Pankaj Kapoor, founder, Liases Foras, pointed out that the market is generating 38% less money than that is required to deliver the projects on time and delays are on the rise. The flow of money is reducing and non-performing assets of the sector are increasing, according to RBI data. This puts further pressure on the asset quality in the near term.
Surprisingly, despite sluggish sales, realty prices have been going up as well which is due to speculation. The pace of construction pace is coming down which will have an impact on the whole economy. Cement and steel industries, which are dependent on the construction sector, would be badly hit as well and this would hamper the GDP growth of the country, Mr Kapoor said. The construction pace in the Mumbai Metropolitan Region has fallen by nearly 52% from the second half of 2009 to the first half of 2012.
China is also trying to dampen rising property prices. According to a Bloomberg report, China’s two-year effort to curb a real-estate bubble included imposing a property tax for the first time in Shanghai and Chongqing, raising down-payment and mortgage requirements, increasing building of low-cost social housing and placing home purchase restrictions in about 40 cities.
Chinese policymakers cut interest rates in June and July after two reductions in reserve requirement ratios for lenders this year as the economy expanded at the slowest pace since 2009. China’s prices of new homes rose in the largest number of cities in 14 months in July, the report said.
In India, interest costs have increased significantly in the past couple of years, as the RBI has cut policy rates just once in April 2012 after as many as 13 hikes since March 2010 to contain inflation. High interest rate regime has hit the industry hard and slowed down the demand.
Realty giant DLF’s chairman KP Singh had recently said that RBI’s monetary policy should not stunt the growth of the real estate sector and uninterrupted access to affordable finance is vital for this business, said a report from PTI.
The government has been looking to create affordable housing but has failed to do it and prices have gone up further. A lot of money in the sector was brought in on the pretext of creating affordable housing. But a lot of this money has increased speculation due to which the land prices have gone up and have created an asset bubble. Developers do not want to cut down on their profits, investors want their own share of the cake and at the end of it the consumer has to bear the brunt by paying higher prices, Mr Kapoor pointed out.
“The way the prices are going up, people are unable to afford homes,” he added. Even if interest rates come down the prices would have to undergo a 32% correction to reach parity and create an economic balance for the real estate sector and this looks very difficult, Mr Kapoor added.
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