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Realty sector: Till the dust settles - Views on News from Equitymaster
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  • Dec 20, 2010

    Realty sector: Till the dust settles

    A recent study showed real estate being the most preferred investment avenue for 65% of urban Indians. This hardly comes as a surprise in a nation witnessing urbanization at a rapid pace. Ironically, the sector lacks transparency and is in dire need of reforms. For the common man looking to buy a house, there is no way to assess the real value of the property. In the West, there are agencies that track prices and affordability on a monthly and regional basis. Here, thanks to the black market, we do not have a practice in place to know the real transaction prices.

    The month gone by was a pretty eventful for Indian real estate. Most realty stocks lost 20% to 50% of their market cap with the bribe-for-loan scam breaking out. While it is unfortunate that even company CEOs were involved in the scam, the unraveling of the misdoing is welcome. Though the amount involved is relatively small, who knows what proportions it could have assumed had it gone untraced.

    The scam has come as a huge blow to the realty developers' plans to go public .Its highly likely that real estate IPOs worth US$ 2 bn will face a delay. As far as the value erosion in realty sector is concerned, we do not think that it deserves mourning since the value never existed in the first place. It has been a common practice among the developers to inflate property prices for smooth access to bank funds.

    Post the scam, banks will be nervous to lend funds to the sector. So it's really going to be tough for developers to meet huge working capital requirements, finance costs and debt repayments since roll over will be difficult this time. To keep a control, it is likely that the lending will be project based, thus putting a check on the diversion of the funds. Hopefully, this will push developers to adopt affordable pricing for real estate projects.

    So now, the options that developers have are to approach banks with rightly priced projects or sell inventory at affordable rates. The other way is to pitch for private equity funds. The latter will closely monitor the project execution and bring in more regulation and efficiency in the sector. Either ways it could be win-win for potential home buyers.

    As far as the probable delays in IPOs are concerned, this time gap should be used to bring reforms in the sector. The recent proposition to put all property transactions in the capital for public display is a welcome step. This, if put into practice and followed in other states as well, will limit tax evasion and restrict black money. Such regulations could also help curb speculation in sector and avert the danger of another asset bubble.



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