The capital market regulator SEBI has been on an overdrive in recent times. It has come out with a slew of proposals and reforms. All with the purpose of protecting the interest of shareholders and investors. In its latest such move, SEBI has told asset management companies (AMCs) to refrain from exposure to real estate debt in certain schemes. The regulator has further directed AMCs to maintain a list of 'negative sectors'. And give an undertaking that they will not invest in sectors appearing on that list.
In this regard, SEBI seems to be pushing AMCs to include real estate sector in the negative sector list. The reasons are not hard to find. Real estate in India has been treading murky waters. After all, most companies in this sector have poor disclosure norms. Not just that, many of them are saddled with considerable debt on their books. This makes them a risky proposition indeed. Other factors ailing the sector include the dubious quality of their balance sheets, valuation of landbanks, authenticity of titles, project standards and execution. Besides this, the nexus of this sector with politicians has also given rise to considerable corruption in this sector.
Real estate companies have failed to keep in touch with the reality in India. And they have continued to charge exorbitant rates for houses. This despite majority of the population not being able to afford such homes. Overall real demand for houses in India is very much palpable as many people do not still have their first home. However, unjustifiable prices have deterred them from clinching any deals. Not just that, many real estate companies in recent times have been focusing more on luxury homes rather than affordable homes which has also kept demand at bay. But problems are not present only on the demand front. There are supply side issues as well. While there has been no shortage of land per se, only limited land is being sold because of zoning rules.
What is really worrying SEBI is the debt repayment ability of real estate companies. For instance, a leading business daily reported that in October 2008, many real estate companies were unable to meet their repayment schedule. This forced mutual funds to borrow externally to meet redemptions. Whether mutual fund houses pay heed to these latest directives of SEBI remains to be seen. But given the poor visibility with respect to the fundamentals of real estate companies, this seems like a step in the right direction.