Restore sanity to real estate, pass regulation

Last Updated: Fri, Sep 20, 2013 11:44 hrs

Real estate developers in most cities are sitting on huge piles of inventories, real estate consultancy Jones Lang LaSalle has said. Thus, Mumbai has an inventory of 48 months, Bangalore of 25 months and Delhi (the National Capital Region) of 23 months. This is way beyond the comfortable levels of 14 to 15 months. This could be yet another indication that there is a bubble in real estate. The National Housing Bank, based on a study of transaction data from banks and housing finance companies, has said that prices fell in 22 of the 26 cities surveyed in the quarter that ended in June this year compared to the previous quarter. Investment analysts at Edelweiss Securities expect developers to cut prices by 15 per cent in Mumbai and the National Capital Region and by 10 per cent in Bangalore because of liquidity concerns and the inventory build-up.

There has been a pile-up of inventory because the supply at the high end of the market has been way ahead of the demand from actual users. For a whole lot of buyers, a house was an investment - just like shares, bank deposits or gold. What really boosted the demand from this segment of buyers was the "20-80" scheme offered by most builders: they were required to pay only 20 per cent up front, and the equated monthly instalments, or EMIs, would start only after two years.

During this period, the builder would pay the EMIs to the bank or the housing finance company. Most buyers bought houses in the hope that they would sell before two years. Now that the Reserve Bank of India has cracked down on this scheme, a whole lot of investors are likely to stay away from real estate. In the past, when appreciation was 15 per cent per annum and rents were three per cent of capital value, real estate made a good investment option. In the last one year, capital appreciation has been, at best, flat or marginal across markets and rents are down to two per cent of capital value. This could see investors moving their money to other asset classes, which will only worsen the inventory situation.

Some of the problems on the supply side will be rectified by the Real Estate (Regulation and Development) Bill, which was introduced in the Rajya Sabha and has been referred to the standing committee of Parliament. The Bill proposes to forbid builders from launching projects before they get all clearances, bring transparency into sale-purchase agreements, regulate brokers and bring consistency in the definitions of built-up area, super area, carpet area, and so on. It also proposes to check indiscriminate expansion by mandating builders to keep 70 per cent of the money collected from sale in an escrow account, so that the money is used for developing the project and does not get diverted elsewhere. Obviously, the builders haven't taken kindly to it. To bring sanity to the sector, it is essential for the Bill to become law as quickly as possible.

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