Most lenders in the country are unwilling to give fresh money to real estate developers as there is a massive amount of unsold inventory, says Housing Development Finance Corp (HDFC) Chairman Deepak Parekh.
The regulators have to look at the real estate sector in a different way as it is not a factory; the land is always there with the developer, which has a value, the veteran banker told CNVBC-TV18 in an exclusive interview.
"Commercial real estate is booming ... particularly for the IT back-office sector, one never sees a slowdown," Parekh said, adding that the increase in urbanisation, rapid migration and the rise in youth population in metros have lifted the demand for the commercial realty.
“There is a need to support realty developers as without them there would be no supply,” he pointed out.
Excerpts from the interview: What do you think about the current economic slowdown?
In our core business of housing, affordable housing is the name of the game. We see massive growth in affordable housing. We have a large fund (HDFC Capital Affordable Real Estate-2 or H-CARE 2), National Investment and Infrastructure Fund has also put in $100 million, so it is a $1.1 billion fund. We have launched half a dozen projects in the last three months across India -- Noida, Gurgaon, Pune, Mumbai and Bangalore. Reliable developers, right-sized apartments, right-priced apartments and fits in with the Prime Minister’s Awas Yojana (PMAY) scheme and they are selling like hot cakes. Trust me – on the day of the launch, 70-80 percent goes.
The prime minister has been speaking about this PMAY for a few years now. You are saying that now it is kind of an inflection point.
First of all there are two things. Recently, they have also increased the eligibility of a developer, which is tax-free income. For four metros, it has been increased to 60 square metres and in other locations, it is 90 square metres, this is carpet area. So developers on the outskirts of the four metros are building 400-500 sq. ft. homes, their total income is tax-free and that is the incentive they get and there is demand.
Some of the individuals who buy flats in this may qualify for the PMAY, some may not qualify because it depends on whether you own a house, it is a second house or new house, etc. So we see housing at the right price.
The other good news in the real estate sector is commercial real estate. Commercial real estate is booming. Particularly for the IT back-office sector, there is no slowdown. I have visited places like Hyderabad, Bangalore and Chennai recently and lakhs and lakhs of square feet are under construction.
The other good news is that builders want to build themselves, but there are buyers, there are buyers like sovereign wealth funds, there are buyers like private equity funds, there are buyers like the Blackstone, the Brookfield of the world who are buying and there are many more buyers who are coming in. They are buying it for yield.
So far, the story sold to us is that real estate is in a funk. Then what is in a funk?
Real estate is in a funk for larger homes, for homes which are unaffordable. In the centre of the city, close by suburbs, the real estate developers are in a bit of a bind; after demonetisation the spiral has come down and we have to help the developers, we have to support the developers because without the developers there is no supply.
The government and the regulatory agencies are trying to figure out the problem. There is some massive amounts of unsold inventory and no one is willing to lend fresh money to them.
My personal view is that even the way the non-performing assets is calculated, the regulators have to be a little different in looking at the real estate; it is not a factory. The land is always there with the developer, the land always has a value. If the developer is not able to build a phase because there is no demand, he cannot pay you back from the first phase, and you qualify his account as NPA. But he is sitting on land, which has value. When the demand picks up, when the economy picks up or he redoes his planning to make smaller apartments, you are going to get value. So real estate is something different. My personal view is the regulators have to look at it differently.
That is what the power guys also said, that we have to be looked at differently. I don’t think they have a choice to not implement Basel rules or 90-day rules but that apart, since we have directly jumped into the issue of real estate and housing, the expectation is that the government in this several tranche of announcements is going to perhaps announce something for real estate. According to you how can that be designed?
No, basically out of the unfinished flats, let us look at incomplete apartments, flats. I would say 50 percent of them need last-mile funding. We have to arrange that funding for these developers across the country where 80-90 percent of the building is complete. Let us finish it first. Today, the man on the street prefers to buy a finished product rather than an under-construction flat because many people have booked and are still waiting. So we have to help these people who are almost complete and not yet there.
How should the scheme be designed?
The scheme should be that you can have a stressed asset fund, which can be initiated by the National Housing Bank (NHB). All of us could put in some money, an independent group can look at it and decide which project deserves this kind of money to complete. There are various ways to handle this but this is an urgent need today, complete the unfinished houses.
Has anyone approached you, NHB or someone?
All the time we talk with NHB, our regulator.
No, the government?
Yes, we talk all the time and there is some movement, there is some recognition that we have to do something about it because there are a large number of projects, you can only do it where the developer has a reputation, where the developer is genuine. There are a large number of frauds that have taken place, developers have run away, you have seen the cases of Amrapali and Jaypee, I think the government or the Supreme Court has stepped in and asked the NBCCs to do it. So now those two projects will be taken over by NBCC.
My idea is that a similar thing we can do with private developers also or contractors. Why can’t we ask Larsen and Toubro or Shapoorji Pallonji Group or other engineering, procurement, construction contractors to do some unfinished projects?
What is your sense about non-banking financial companies and housing finance companies? There was a bit of a fear that one big one which is already being negotiated, DHFL, if that falls there will be more trust deficit and it could have a domino effect. What is the sense you are getting now? At this level of the discussions, do you think we will get by, the DHFL problem will be resolved?
Whether it is resolved or not, my firm view is that when IL&FS went down, it did not impact the financial system in India. That shows the resilience of the Indian financial system. That shows you have to give credit to the regulators, not to panic when something like this happens and the market and the lenders and the investors in the bonds and all are taking care of it by every quarter, writing off whatever is due. This is part of the game. So I think India has a strong financial base, the system is strong, one or two or three players collapsing by the wayside is not going to impact us. Our economy is not going to impact our financial system.
For the non-financial companies we have an insolvency and bankruptcy code. Despite the delays and one Essar or something at least in the case of Bhushan Steel it has delivered. We don’t have a resolution mechanism for finance companies. The Financial Resolution and Deposit Insurance (FRDI) Bill was supposed to do that but because of the bail-in of deposits it failed. Do you think it is time to reopen the FRDI for NBFCs? Do you think a mechanism is needed or do you think inter-creditor agreements are working?
No, I think some effort is needed, some collaborative effort is needed but again in real estate, like in corporate loans, there is always a consortium of lenders. So if that consortium of lenders can work closely together in a stressed project, solutions can be found. But if the consortium of lenders in a particular project fight and each one wants to get their pound of flesh or their money out first, the problem comes.
So there has to be some legal mechanism where for instance, if there is a building, a project which is incomplete and it needs 20 percent funding and these three lenders are there, they should give equal amount. Something like that must be there. It can be done while discussing with each other but it is always difficult. When a project gets into difficulty, everyone gets scared and you stop lending.
Investigation culture is there.
That is also there.
Let me come back to the slowdown theme. While it is good to hear that affordable housing is going ahead, what is your general sense about the economy? Look at our own profession, we have lost one business channel and look at the auto sales numbers. Even some of the fast moving consumer goods companies, not all of them, some of them have reported good numbers but every now and then there is a fear that biscuit packets are not selling, Britannia numbers proved that – what is your sense about this slowdown, does it go away only with interest rates because that is the big thing that is underway?
Interest rate helps but it is not the ultimate reason. Self-confidence must be there, there must be confidence in the buyers, in the people and don’t forget, I am convinced India is a consumption-oriented economy. Domestic consumption is the strongest engine that drives the Indian economy. One quarter slowdown or two quarters slowdown should not upset me at all. I think it is part of the game, we have had phenomenal sales in auto for so many years quarter after quarter and so a couple of quarters is not going to impact. Again the government has given some incentives to the auto sector, so I think that things will come back slowly.
You have seen slowdown before, you probably have a vague memory of the mid-sixties stagnation which was the long one and then you must remember the 1997 to 2002 perhaps very vividly and then of course the Lehman thing. What does it look to you? Does this look as bad as 1997? That went on, real estate prices fell rather sharply at the end of 2002 before we took off?
I personally feel that this is going to be short-lived and this is the right time because the festive season is coming, the last quarter is always – when there is good weather, there is good mood. When there is good mood, there is mood to spend and credit is available easily, penetration levels in India is very low whether you look at any item particularly here we are talking of consumption. Consumption as a percentage of gross domestic product is extremely low, it is less than half of China. So we have to grow in this. There is no question about not seeing growth. Even there is a global slowdown, it is not in India.
IMF has brought down the projections on the global growth. If you see their latest report, it is self-inflicted. It talks about the US trade war, it talks about technology disruption because of global supply chain being removed, it talks about Brexit, it talks about a number of things.
There is conversation happening that companies are leaving China. Are you noticing any FIIs coming and booking land? Is India making its way in the chain?
I think we have to improve the ease of doing business even more and this is on top of the mind of different government officials who I met. There is fair amount of interest in investment in India. I know large funds of billions of dollars who have not yet invested long-term money in India. India-specific funds have come in but global funds, sovereign wealth funds, they have just started looking at India. The amount of money we can expect from viable investments from Australia, Canada and Japan is still massive.
What is their mood? I spoke to Mark Mobius of Mobius Capital Partners a few days back and he thought that the tax on foreign portfolio investor is registered as trust created dissonance and even before that the Long Term Capital Gains Tax increase. He was a little shaken…
But he is a fund manager. You have to talk to the pension funds and the sovereign wealth funds; they are all looking at it. The sovereign wealth funds are underinvested in India, very much underinvested in India but they are looking at viable companies, good promoters and good track record.
The expectation now after the GDP numbers is that the RBI can take 5.4 to 5 in one stroke. What is your sense about the way in which policy rates can go? Do you now see them going even below 5?
My view is that rates will fall. It’s a global phenomenon and it will fall in India also and look at the broad macro parameters which are in favour of India for further reduction in interest rates. One, inflation is at all-time low and falling which is the main reason. Our reserves are $430 billion, all-time high, oil is around $60 per barrel; manageable, affordable and viable for India. Food grain production is at an all-time high, warehouses are reasonably full with food grain. What more do we need. So the macro parameters are good, there is a slowdown but the broad macro parameters, commercial real estate is doing well, which makes me believe that jobs are being created because I visit and there are thousands and thousands of people working in the back office and the jobs are increasing in that. It may not be at a speed which we want but jobs are being created in the IT and IT-enabled sector. So I personally feel that interest rates globally are coming down.
Risk aversion is our only problem?
It’s not our problem. It’s a huge problem elsewhere. I have got an ad from a Danish mortgage company which says buy a house now and we will pay you.
You do think that even going below 5 percent is possible. Is there that much space?
I think there is space but if we think that this is the only reason, by going below 5 percent you are going to suddenly see a burst of consumer buying, I think that is a mistaken notion.
The government has been announcing some instalment steps; now this PSU merger, stock markets have not celebrated it.
It is just first day, give it some time, it makes huge amount of sense, it makes immense sense and the finance minister has assured that no job losses will be there. A stronger bank is much better than three banks where two are weak and one is strong.
There is no governance change, isn’t it? They cannot go out and recruit one risk officer, why cannot they go and recruit their CEOs and CFOs?
The attrition rate in public sector banks because everyone reaches that age and you have to retire, 10-15 percent of people retire every year, so that way you can bring more talent. Integration takes time, integration is painful but medium-term you will get good results. You don’t look at the stock market in one day. According to me, it makes utmost sense.
It makes sense but is it that big a reform, does it change the DNA of banks?
That we have to change, now we have to give more authority, more autonomy to the people and I think the FM did make a point that judgemental errors will be overlooked, she did make a strong point that judgemental errors will not go against the individuals, so they are trying their best.
People like PJ Nayak of the PJ Nayak Committee and YV Reddy when he was the governor, have argued that the time has come to sunset the Bank Nationalisation Act, the Banking Companies Act and move them to Companies Act?
The bigger issue here is should the government go down below 51 percent stake and here again my hunch is that government will again look at it selectively, go down to 26 percent because these banks need more capital and if we are a capital short country, we need to put money in infrastructure, in urban infrastructure. The urban infrastructure spend is a percent of GDP in India. It’s very low, we have to increase that.
When the move started for finding a successor to Aditya Puri, you are the big shareholder?
The board is looking at it, the Nomination and Remuneration Committee (NRC) is looking at it and at the right time we will form a committee. We have the NRC which will look at it and we are going to have a look at some of the head hunting agencies, the NRC will look at it, appoint one some time.
The process has not started?
The process is discussed, not yet started. I don’t think it will take that long. I think you guys are worried about Aditya’s successor than we are or the market is.
Of course they would, investor would be?
Investors are talking about it but it is still over a year more.
There are a lot of insurance companies still available, is HDFC Life a buyer?
We are always a buyer at the right price.
Should we see something, the performance of HDFC Life was very good, so now the currency of your share is very positive?
I am very bullish on both asset management company and life insurance company and these are long-term value creators. We have already created value, both the shares have doubled after the IPO and both are doing well. We are always on the lookout for good quality assets or insurance companies. You may hear something even.
You make us feel very positive, but when I go out – abhi Zee ka payment nahi aya aur 11 percent share abhi bika nahi hain?
Bik Jayega, hume patta hain bik jayega.
DHFL as well you think buyers are there?
The promoters have said if the banks take some haircut then it can be revived, so some decision of debt into equity, something like that will have to be done.
Are you somewhat certain that in the New Year on January 1, we will be less morose about growth?
I would think so, I would hope so.
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