Realty players have not had it easy in 2010. Unaffordable pricing kept the sale of properties very slow during the year. Poor financials and lack of transparency in operations evaded investor interest in real estate stocks. Amidst all this, the regulators' crackdown on unacceptable practices restricted the growth of even large players.
Nevertheless greedy banks looked at making a killing from lending to the fund starved sector. While loans to infrastructure were tied down by execution and policy delays, realty seemed to very lucrative bet. So keen were the bankers to lend that they offered 100% of the property value as loans. This left them with no margin of safety in the event of decline in property prices. Some went to the extent of accepting bribes for lending to unviable projects.
The availability of funds from banks helped realty players keep projects unsold. The lure of selling them at a premium led to inventory of unsold projects stack up. Had it not been for the generosity on the part of the bankers, a long overdue correction in property prices would have struck in 2010. However, it seems that the party will not last through 2011.
The RBI had already tightened the noose on banks lending to housing projects. Not more than 80% of the value of the property can be lent. In addition, banks need to provide more for lending to developers than for individual houses.
Following up on this even the regulator for housing finance companies (NHB) has recently issued stricter guidelines. It has gone to the extent of mandating 0.4% provision on all outstanding loans. Further for every rupee lent to developers, lenders would have to keep aside Rs 1.25 as provisions. The steps are very important given that housing finance companies have 31% market share in lending to realty. We believe that these measures would help curtail the liquidity driven asset bubble in Indian realty.