Be Cautious Real Estate

Mar 9, 2010

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 begun but
completions 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
concernprojects 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 ofprojects.

• 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 ofprojects.
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
ofprojects.
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.

Author: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst