Realty Sector – Government Sending Mixed Signals

The real estate sector has been buzzing aloud over the past one month or so. While on the macro front the prospects of a decline in inflation leading to expected decline in interest rate is one, the RBI opening a window of external commercial borrowing of up to USD 1 billion is another positive that has come the sectors’ way. On the micro front, we have seen some realty companies selling non-core assets to reduce their debt burdens. Over the past two years a few realty companies like Parsvnath Developers, Omaxe, DLF and Emaar MGF have sold land parcels to ease their financial burdens. Recently DLF sold its luxury hotel chain Amanresorts back to its founder Adrian Zecha for around USD 300 million (around Rs 1643 crore). The company has been selling its non-core businesses since the last couple of years to focus on its core real estate business. It had put on sale three big-ticket non-core assets like a large Mumbai-based plot, Amanresorts and its wind-energy business. These deals are in-line with the strategy to reduce its huge debt burden of around Rs 21,220 crore.  

Mixed Signals From Government  

On the macro front too there are certain factors that stand to be positive for the sector. First, is the expected cut in interest rates likely to happen in the March quarter of 2013 (As indicated by the RBI). Another is the ECB window which has recently been opened. However, the moot question is, why has the government changed its stance? If investors remember, In June 2012 the Finance Minister had asked banks not to lend more or restructure loans for realty players. Further, he had also asked them to liquidate the inventories of realty players if need be, for recovery purposes.

But suddenly, the stance has turned dovish and the RBI has announced the opening of an ECB loan window, to provide more liquidity to players in the sector. Why is there such a sudden change of stance?  Samantak Das (Director- Research & Advisory Services at Knight Frank) also agrees to this question of ours. “In relation to bank loans for the real estate sector, the finance minister has moved from an earlier hawkish stance in his message to banks about coaxing real estate developers for reducing prices, to a dovish stand of easing lending norms to the ailing housing sector” says he. He further added “Similarly, the central bank is easing its stance in a bid to salvage the economic growth”. According to him the change of stance is in sync with the overall reforms process being carried out. 

One leading realty player from Delhi, on the basis of anonymity stated that “Earlier the pressure to liquidate inventory was to help the end users get a helping hand and to improve on banks NPAs from the realty segment”. He further added that “Even now, though the government has turned dovish, it has addressed the issue by focusing on low cost housing”. Considering this, it is not a complete change of stance by the government as it is trying to take a midway to solve the larger issue. We expect the developments to be positive for the realty sector.