Banks’ lending strategies for the Indian real estate sector during recessionary trend

Abstract

The importance of real estate sector in India cannot be over-stated. It is the largest employment generating sector, second only to agriculture. The housing sector alone contributes to 5% of the GDP directly and 30-40% indirectly. In addition, the real estate sector is also responsible for the development of over 250 ancillary industries such as cement, steel, paints etc. The Indian real estate growth has been driven primarily by the IT/ITeS industry, growing presence of foreign business in India, the globalization of Indian corporate and the rapidly increasing consumer class proving a huge market potential. However over the last 12 months the growth story of the Indian real estate sector has gone sour and the projected boom has given way to a slump. Activities in the real estate sector may broadly be classified into residential, commercial and the retail segment and hotels. The residential segment forms the major chunk with 90-95% of the market; commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. As of January 2008 the Indian real estate market was expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate. Over the last twelve months there have been considerable price corrections across the three segments. The commercial segment was the worst affected segment and it is expected to recover not before FY11, while the residential space is already showing signs of recovery. It is expected as the macro-economic indicators of the Indian economy start showing positive signs the overall health of the real estate sector will improve slowly but steadily. The large real estate developers having pan-India presence are expected to come out leaner and stronger from this structural slowdown. The RBI and the central Government, realizing the very important role played by the real estate sector in the growth of the economy, took proactive measures to arrest the slump in this market. Both demand pull and supply push measures were resorted to by the RBI to stimulate credit flow to the real estate sector. This ensured on one hand easing of the liquidity crunch for the developers and on the other hand augmenting the demand for real estate properties. Although the full effect of the policy measures are yet to be seen, the initial signs seem to be positive in nature. As a result of our analysis we have come up with certain recommendations for stimulating growth in the real estate sector. Some of the most important recommendations include granting industry status for the real estate sector, instituting a regulatory authority, formulating a uniform valuation mechanism, passing on the interest rate cuts to the real estate developers, allowing one-time debt restructuring and increasing the upper range of property values which qualifies for interest subsidy under affordable housing segment.