The coronavirus outbreak and the lockdown that has now been extended till May 3 is expected to hit the economy hard. For housing developers who were already struggling from a slowdown in demand for higher-end homes, this will only add to pressures. Deepak Parekh, the chairman of the country’s largest mortgage lender HDFC, says developers must cut prices of finished apartments, which will, on the one hand, encourage sales post lockdown, while also ensuring liquidity for developers to ride through tough times.
“Prices of real estate have to come down. One must be prepared for even 20 per cent (fall). For those potential future home buyers, who have job security or cash flows, this will be an excellent buying opportunity as prices come down,” Parekh said during a video conference with real estate developers on Tuesday.
According to real estate consultancy JLL, sales of residential units declined 29 per cent in the January-March quarter, while new launches rose 3 per cent.
With launches outpacing sales, the unsold inventory increased to 455,351 units in the first quarter of 2020, compared with 442,228 units in the fourth quarter of 2019, JLL said, adding developers have locked-in capital of Rs 370,000 crore. As demand is expected to further get impacted given the nationwide lockdown extended till May 3, Parekh says developers need to ensure they are not over-leveraged and must also have enough liquidity.
“Be willing to offload some of the unsold inventory at whatever price. You need liquidity, you need money. Prices have come down. You have unfortunately purchased land at higher prices, now you have to take hits in some projects. During good times, you people have made large sums of money, in certain projects you can lose, but get rid of your inventory,” Parekh told the developer community, comprising some of the top developers from across India.
Parekh also told developers that they should reduce their leverage in the current uncertain times and focus on completing projects rather than starting new ones now. “Leveraged borrowing is a double-edged sword. In boom times, it amplifies your profits. In bad times, it destroys you. So be careful of the perils of leverage,” he said.
Developers today were facing problems due to huge loans and more short-term borrowing to meet long-term commitments, Parekh noted and urged real estate companies to tap into investors, be it foreign investors, private equity or sovereign wealth funds or high-networth individuals, to build a higher equity cushion.
Over the last one year, amid troubles in the non-banking financial services sector and higher non-performing assets of banks, developers found it tough to get new loans.
Parekh called on the fraternity to look at more joint developments, or development management contracts with stronger companies, which were still able to raise finance even in the current uncertainties. “You have to get into these arrangements, because there are still a number of developers who have top credibility and are able to finance themselves in the market. This is a time for partnerships, for working together,” said Parekh.
He also felt that developers must become more transparent, and cut down expenses, even if it meant developer families taking home less money and leaving more money on the company’s books.
As the government announced a nationwide-lockdown last month, thousands of labourers returned to their villages; many were seen travelling hundreds of kilometers on foot. Parekh called upon the states to encourage migrant labourers to come back.
“The government, in consultation and partnership with the developer community, must ensure easier travel and enhanced insurance cost of the migrant labour back to construction sites,” he said.
Developers too, may have to be prepared to increase their wages and incentivise workers to come back, he added. “Don’t forget the pain and torture they have gone through while going home.”
The Reserve Bank of India (RBI) should also allow one-time restructuring of loans given to real estate companies, he felt. The delinquency period for the classification of bank NPAs could be increased to 180 days from the current 90 days for a short period of time, for three-six months, he added.
“This is absolutely necessary, otherwise all lending institutions shall have massive NPAs, massive provisions to be made, they will start making losses and ratings agencies will downgrade everyone. It will be a real disaster as businesses will collapse,” Parekh warned.
Parekh also feels the state government should be pushed to give a waiver on stamp duty and registration charge on housing for a limited period of time before the festive season, while also permitting staggered payment schedule on various levies pertaining to land transactions of developers for a short period to kickstart the process.
