Banks fear triple whammy from India’s housing woes

In 2013, Waqar Ahmed of Ahmed Realty had joined his father’s business of real estate business. At the peak of the business, Ahmed, who mostly deals in luxury real estate projects in the Central Business District of Bengaluru, used to conclude four to five deals every month.

Fast forward to 2019, Ahmed considers himself lucky if he concludes one or two deals. His monthly income has dipped by at least 50% as India’s real estate sector stares at a huge crisis. He knows at least six small-time brokers, who have ended up driving Ola and Uber after their businesses went bust.

Similarly, a non-resident Indian (NRI) woman, who did not wish to be named, sold her property in national capital region’s (NCR) Gurugram area after six-intensive years of trying -- for what she claimed was ‘peanuts’.

A large chunk of NCR’s yet another development -- Noida -- seems to have turned into a ghost town, as newly constructed units remain unsold.

In Bengaluru alone, DH spoke to many home-owners who have been struggling to sell their properties, owing to lower prices -- many times even below the guidance value.

But the upcoming consequences of this housing slump go beyond India’s real estate sector. The banking system is expecting a triple whammy from India’s housing woes -- defaults from shadow banks which have lent to home-buyers, defaults by realtors, and default on direct exposure to home-owners, according to banking sources.

Three different senior bankers confessed to this – though one of them, from the private sector, suggested that retail homebuyers’ defaults won’t impact them, as that segment is mostly covered by the shadow banks. The banks, on their part, are staring at fresh bad loans to the tune of Rs 1.2 lakh crore – many of whom are related to the retail housing business.

Shadow-banks, as of date, remain the single largest exposure of Indian banks towards the services sector, making up 29% of the gross bank credit to services. On the other hand, despite the decrease in the overall deployment of credit, housing has seen credit growth of 7%, and the segment comprises of 52.7% of the total retail exposure of Indian banks.

So what has crippled India’s realty, especially the residential segment? “There are no buyers at high prices right now. Inventory hasn’t been moving, so there is no business,” said Ahmed.

According to data provided by residential real-estate advisory firm ANAROCK Property Consultants, the magnitude of the crisis is huge. As of date, the unsold inventory build-up in India’s housing sector is massive. In the top seven cities alone -- NCR, Mumbai Metropolitan Region (MMR), Bengaluru, Chennai, Kolkata, Hyderabad, and Pune -- the unsold stock stand at 6.6 lakh units. The value of this stock is estimated at Rs 3.7 lakh crore (at an average size of 1,000 sq ft), according to industry analysts.

Industry insiders, who say that the build-up in the Tier-II has been matching with that of the top cities, suggest that total unsold inventory in the country would be in excess of 1 million units.

The demand, on the other hand, has been on the slide in India’s housing market. The sale of new units has seen a compounded annual decline of 10.6% since it has peaked at 3.43 lakh units in 2014. Till the end of September, only 2.02 lakh new housing units were sold in 2019 across Tier-I cities, and the year-end tally is expected to fall short of last year’s, as per the industry watchers.

In the past couple of years, after the unsold inventory in the top Dunits in 2016, the realtors went slow on the new launches. As a result of this, the sales outnumbered the launches by 1.44 times in 2017 and 1.27 times in 2018.

However, as the spread of the dip in unsold inventory over the dip in sales is just 70 basis points (bps), the clog in the inventory still continues. Amid all this, the new launches and sales during the current financial year have been even-stevens -- 1.85 lakh new launches and 2.02 lakh sales. This, in turn, reduces the chances of any major dip in the inventory.

Despite all these woes, there is one thing that realtors have managed to maintain every year -- growth in the housing prices. To put the things in perspective, despite a dip in demand and a pile-up of unsold inventory, the housing prices in the country haven’t gone down even for once in the past five years -- showing a compounded annual growth of 2.3% since 2013. The data makes it clear that the realtors have been artificially managing prices, despite it hitting their earnings. “Holding on to prices is extremely difficult but if we don’t hold on we are straight into losses. Today it’s a question of how much loss can be sustained. This differs from builder to builder. The longer one waits, the more the cost of holding,” says Koshy Varghese, Managing Director, Value Designbuild.

Realtors attribute it to the rise in their input cost after the implementation of goods and services tax. “The input costs for developers have gone up after GST, which do not allow deduction of the input tax credit. This leaves developers like us with no room to lower the prices,” a spokesperson from Sobha Limited told DH.

Many dealing with the real-estate properties are saying that they are worried about negative returns, in case the situation doesn’t improve and prices crash.

Swaroop Anish - Executive Director, Business Development, Prestige Group, doesn’t believe that this correction is on cards. “In my opinion, there is no expected price correction imminent or otherwise,” he said.

But there is a rider: homeowners have to bear the brunt, in case the prices crash. “There is no way anyone can be safeguarded on this. However, some developers have offered to buy back in two years at a minimum price of what it was bought. These are tricky though,” says Varghese.

However, there are some developers who are increasing their prices despite negative headwinds. For example, Aparna Constructions & Estates Pvt. Ltd, which has been operating in Hyderabad, has effected upward revision in the prices of their properties for the second time this fiscal.