Is Affordable housing a sham?

Unlike the old days, the realty sector sector today has metamorphosed into a completely new avatar. Developers are moving away from swanky high-end constructions to low and economically affordable low-cost housing. This paradigm shift has been forced upon them more as a contingency plan than a choice. Nearly all real estate developers, who got hit badly by the global real estate meltdown, are planning to get into this new segment – one that offers affordable houses. This move is more of a survival strategy than a market-grabbing strategy. Currently, most real-estate companies are either under huge debts or are losing clientele. Most of the projects, especially in urban India, are on a halt and stand suspended due to lack of funding and other similar bottlenecks.

In a typical scenario, a real estate builder relies on the booking amount for undertaking new projects (the initial payment of 20-30 per cent) and then uses the booking amount to get bank loans. However, in the current situation, bookings for premium properties have seen a southward trend. Builders are finding it tough to start off their projects as initial payments for high-end projects are hard to come by, drying up the funding needed to take projects off the ground. The situation is so dire that clients who have had made full or partial payment for their flats have to wait for a few more years for possession of their property. All this thanks to the real estate slowdown. According to various surveys, around 55 per cent (of more than 1000 million sq. ft) of available residential space in major markets is still lying idle and unsold. These unsold flats are eating away the monies of developers and have become white elephants for them as they are not able to find willing buyers for these properties.

In terms of hard statistics and numbers, most of the realtors have a high debt to equity ratio of 1:4. This state of affairs has been brought about because of bad cash flow. A quick glimpse through the leading dailies reveals the NPAs that banks are encumbered with because a majority of realty players are in no position to pay back their bank loans and are defaulting on their liabilities. In turn, real estate companies have been instructed by banks to repay loans via Qualified Institutional Placement (QIP) of securities. Companies like Unitech, HDIL, Parsvnath, Puravankara, Sobha Developers, HCC and GMR, are planning to follow the same path and raise money through QIPs. In February this year, DLF, India's largest real estate developer, raised around Rs 2,100 crore by selling shares to qualified institutional buyers also know as institutional placement programme (IPP). A week back after the Reserve Bank of India raised the repo rate by 25 basis points (bps) to 7.5% the value of shares of most big developers saw a fall. DLF was down by 6.46 per cent while IndiaBulls Real Estate and HDIL by more than 5 per cent, Prestige Estates Projects and Unitech by 4 per cent, Godrej Properties by 3 per cent and others like Peninsula Land, Phoenix Mills, Sunteck Realty, Oberoi Realty, D B Realty, Sobha Developers by 1 to 2 per cent.

In such a grim situation, the only ray of hope for real-estate developers is to burn a hole in the pocket of the lower middle class and the middling middle class. Developers, regardless of their size and age-old reputation, are now turning towards affordable homes. The latest survey shows a housing shortage of around 24.71 million. This gap comes as a blessing for real estate developers who are all willing to tap this opportunity and bridge this gap by flooding the market with the so-called low cost buildings. Companies like Puravankara Projects and DLF housing projects, whose forte has been high end apartments, have recently launched low-cost housing subsidiaries, promising homes in the Rs.20-40 lakh range.

But then, going by the last NSSO survey, even flats costing Rs.20-40 lakh are out of the budget for middle class Indians. Another study of the housing market conducted by the Monitor Group for the World Bank showed that “despite the high demand, builders did not find it attractive to enter the home segment in the price range below Rs.10 lakh.”

But in the absence of other revenue generating options, builders are taking to affordable housing with gusto. However, the catch is that while most developers are taking booking amounts from the middle class for their affordable housing projects, few are using that capital to fund and develop property for these mid-income group customers. Instead, reports say that the money is being channelized to fund their pending and stranded high-end projects. The RoI on high-end properties is more than what affordable housing begets, and in a high range property developers can churn out a margin of more than 30-35 per cent, while in the case of low cost apartments, the margin is below 10%. Furthermore, bank loans (even at cheaper interest rates) are easier and cheaper to come by for low cost housing, Thus after getting funds from various sources under the garb of low-cost housing, developers can use the same money for funding their pending high-end projects. Moreover, the late delivery or cancellation penalty charges for mid segment projects is less compared to the penalty that developers would have to pay for showing tardiness on their high-end projects – simply because the penalties correspond with the cost of flats. These back of the envelope calculation get swept under the carpet in developers’ books of accounts as they prefer preparing one single balance sheet rather than different balance sheet for high-end and affordable housing. Thus redirecting and siphoning funds become easier and untraceable. All expenses and costs are clubbed under one head and not under different heads of high-end and affordable housing.

In such a situation, market regulators like the SEBI and RBI need to come out and rein in the devious tactics of developers by forcing them to file different and separate balance sheets in their final statements.  But then the real estate sector is known for its corporate lobbying, and such actions by the regulators look like a distant dream.