Tuesday, March 9, 2010

NEED CAUTIOUS REAL ESTATE


Recessions have affected mostly the real estate business. Slowing demand and sudden evaporation of liquidity position made the situation become so tough for the real estate sector that companies who were engaged in massive long term projects have to abandon the projects. In many cases they have to forgo SEZ projects too due to financial crisis.
The worst suffers were the ones who have dreamt of having their own roof over their heads. As liquidity crisis fragmented the real estate sector delay in construction became the night mare of the advance booked consumers. The consumers who made advance payments have too only wait for the revival of time and on the other hand they counted the expenses of the installment payments. Even the banks were compelled to go for loan rescheduling.

But after one year the situation have changed for the real estate sector. Not only constructions have began but completion of old projects have been completed on a war basis. Price benefits and other amenities were added up to complete the sales process of unsold projects. Demand started picking up slowly but not to the levels of pre recession.
The budget 2010-11 added more smile for the reeling sector.
• The pending housing projects have been granted a one year extension for completion. Earlier its was existing for 4 years and now its is for 5 years. This have been made for claiming a 100% deduction on their profits under section 80-IB of the Income Tax Act, 1961 (“Act”).
• The government also relaxed under section 80-IB of the Act to 3% of the aggregate built-up area of the housing project or 5000 square feet, whichever is less. Earlier it was the existing 5% of the aggregate built-up area or 2000 square feet, whichever was less.
• Investment linked incentives have been proposed for the business of building and operating new hotels of two-star or above category, anywhere in India, which start functioning after April 1, 2010.
• 1% interest subvention on housing loans up to Rs.10 lakh (where the cost of the house does not exceed Rs.20 lakh) has been extended till March 31, 2011.
• More over some commercial projects have been included among the category of deduction under income tax act.
• A 4 month extension has been provided for setting up and commencing operations of hotels and convention centers in National Capital Territory of Delhi and specified surrounding regions. Such hotels and convention centers would now be eligible to claim specified deductions, where such facilities are set up and commence business by July 31, 2010.

All these incentives and packages make the sector prospects for new financial year very much progressive. The sector needs to make judicious mix of the incentives to derive growth as compared to the tough phase of recession.
On the other hand the sector also faces some inbuilt economic factors which decided the direction of the growth paddle of the sector. In many areas of India where unemployment is still a factor of concern projects built in those areas finds hard to sell their projects. Since good employment opportunities makes the process of long term payments easier. Job security plays a big role for the real estate sector.
• Road infrastructure followed with water and sanitation infrastructures also decided the fate of the sector. Improper infrastructure makes it difficult for sale of projects.

• Even if the project is below the market rate or at reasonable rate it becomes difficult to find prospective buyer for these projects due to infrastructure issues.

• Speculative prices of real estate came to an end during recession.

• Cost of input also reduced the end price of the projects.

• But with Indian economy getting back on the wheel of 8% GDP growth the cost of materials and others are increasing.

• As a result the price of projects is increasing and speculations of prices are also back on the street

• The allocation of funds by the banks to the real estate sector is very much impressive.

• The total outstanding of banks to the real estate sector stood at Rs 88581 crore as on November 21, 2009.

• The banks exposure has gone down by a little over Rs 8,000 crore between June and November 2009.

• The flow of funds in to sector also spooks off the factor of speculation and return of over pricing of projects.

The sector should make a cautious move from now as global financial position is yet to develop. Massive project undertakings should be avoided followed with controlled speculative prices of projects. Intermediaries should be reduced so that speculation and over pricing of projects should not erupt. Since these might make the growth of the sector slow and difficult. The builders should try to capitalize optimum utilization of resources and timely completion of projects. The sector should avoid too much leverage on its working capital.
In many cases over supply of projects have eliminated the demand appetite for the sector. The builders should keep this factor in mind when new projects are being undertaken by them. Proper survey of the demand and supply position of the area should be made.
But despite of all these the sector enjoys the threat of job security and unstable demand. The governments of India have been very helpful to the sector but many of my readers might disagree and will demand for more sops. The only reply I have for them is that demands have no ending.

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