A series of steps announced by the Reserve Bank of India (RBI) gives the impression that there is a deliberate move to bring downreal estate prices, especially residential ones. Despite poor sales, residential real estate prices have been on the rise though commercial real estate prices have been declining. The divergence in trend between the two has been seen since the 2008 Lehman crisis.
Though volume off-take slowed down post the lehman crisis, residential real estate prices refuse to fall as they were artificially propped up by builders. As a result of this, the country is sitting on nearly 700 million square feet of unsold real estate. Though real estate sales are region and price specific, annual sales are in the region of 250 million square feet. In other words we are sitting on nearly three years of inventory, assuming there are no new launches coming in.
Sitting on unsold and ready stock, builders had turned creative in the sales, devising either new financing schemes or offering freebies and discounts to push sales. One such scheme which had gained popularity was the 20-80 scheme where a buyer pays only 20% upfront and the remaining 80% on possession. Banks however, would disburse the remaining amount to the developer who would take care of the interest payment for the client.
This was a win-win scheme as far as the customer and developer was concerned. Developer was ensured of a lower cost of fund as well as he was given the entire amount at the beginning of the project. However, some developers started to misuse these funds and utilize the liquidity to either pay-off their earlier debts or purchase new parcels of land.
Similarly on the other end the buyer, who was mostly an investor, was able to lock in a property at construction stage (low price) by paying only 20%. By the time the property was ready in 3-4 years and prices would appreciate, his return on amounted invested was huge. This scheme gave him the benefit of leverage without the incremental cost of funding.
For banks, the biggest risk was the developer. In case of delays or defaults, they would have to chase the developer, who is generally a tougher nut to crack than the individual buyer.
RBI saw through this game and decided to stop the music before the party spreads and loans become toxic. The scheme was largely operational in metro cities in around 200 projects. However, abruptly stopping the scheme would further squeeze liquidity out of the system.
Real estate prices are already correcting and such measures will only speed up the fall as developers turn desperate to sell their inventory.
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