Pankaj Kapoor, managing director, Liases Foras, explains what is wrong with increased capital inflow in the realty business
Despite abysmal property sales, prices have been increasing. While the Reserve Bank of India (RBI) has made borrowing more difficult, developers have been turning to other players for money, and in most cases, they have succeeded. However, whether the capital has come in through private equity or any other means, it is only making the market more inefficient, said Pankaj Kapoor, managing director, Liases Foras. He was speaking at a seminar organised by the Moneylife Foundation last weekend.
Data put together by Liases Foras shows that though private equity deals have gone up both in value and volume, sales have gone down. Inventory has been piling up as equity inflow has increased, but there is hardly any offtake.
Mr Kapoor explained how builders get finance through private equity. "We had an interesting insight while studying y-o-y increase in floor space construction in the main cities. Except Pune, where construction has gone up by almost 60%, all other cities have recorded a decrease. It means that apart from Pune, realty projects in other cities have failed to take off and there has been no construction," Mr Kapoor said.
Even when the builders declare that the whole project has been 'sold out', there is no construction. So after some days, many customers sell their property to another buyer, and demand their deposit from the developer after deducting transfer charges. With no construction underway, the builder has not received any other payment from the customer apart from the amount deposited at the time of booking.
"So the cycle goes on. Developers are not receiving any money-they only get the deeds and certificates for sales. Then they go for IPOs to raise money and approach private equity players," said Mr Kapoor.
The builders convince the private equity financers that that area is a good market, showing him the multiple deeds of property sales. "But the truth is, there is no actual sale, nobody has made money out of it. Everything is only in trading. Still, the private equity flows in," he said. But since there are no sales, neither the builder nor the PE players make any money. In most cases, the PE players exit after seeing losses over time. The builder, meanwhile, has seen no sales, and is about to go bankrupt.
"Lot of people say that private equity is the solution. How come then some developers have almost Rs38,000 crore in debt? This is exactly how in many investments in NCR, money has gone down the drain," said Mr Kapoor.
There are other dubious sources of capital too. "Money also comes in through various other opaque means, and this prevents the prices from coming down. The people involved hold back. But there are no sales, and the areas where these buildings come up are uninhabited. Other buyers then shy away from such locations," he said.
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