Feature: Pricing the biggest hurdle in real estate revival

This is little doubt that the finance ministry has done more in the past three weeks in terms of policy announcement than what it has in the past three years. After a series of announcement in the insurance sector, the ministry is expected to look at a series of measures to prop up the real-estate sector.

A Business Standard report says that the finance ministry is identifying partially completed projects which can resume work after securing a fresh line of credit from banks. A total of 76 incomplete projects have been identified with a total investment of Rs 3.2 lakh crore. These projects are in the tier II and tier III cities.

The report says that in many of the projects, work could not be completed because builders ran out of funds and could not approach banks for fresh loans. Projects have also not been able to meet the deadline on account of delay in land acquisition, approvals or clearances. In order to avail of further loans, builders have agreed to bring down prices.

Though the government’s plan is to revive the sector by pushing sales data there are a number of hurdles that can shake the sector up. Firstly, the proposal will have to be approved by the Reserve Bank of India. Lending to real estate sector is virtually at a standstill. Non-food credit details show that disbursals to the real estate sector are flat, while housing sector personal loans too have flattened for the last three months.

The reason banks are not lending to the sector is because the central bank feels that there is little demand for real estate at current prices. The finance ministry is trying to take care of this concern by asking the players to reduce prices. But most of these markets already have unsold ready inventory. If real estate prices come down, there will be few takers for the incomplete projects.

Banks will clearly be wary of extending further loans, till there is a clarity on off-take, which would only come if the discounts are substantial to current prices. The average size of the partially completed project is around Rs 4,200 crore, which for a tier II and tier III city is big.

The woes of the sector ultimately boil down to affordable prices. Real estate prices have moved far ahead of purchasing power, and till these two are aligned providing good money after bad is nothing short of ever-greening a non-performing asset.