Property rates: Waiting for the drop

However,real estate companies are quick to point out that the scam was an isolated incident involving just a few players. While the debt market may become more restrictive and screening processes tightened,major developers say the incident has been blown out of proportion and will not impact the market. Still,smaller players in the real estate market who are not in a position to raise debt funds because of tightened lending norms and in addition who do not qualify for private equity funding may be forced to reduce their rates.

THE SCAM

On November 24,the Central Bureau of Investigation CBI arrested eight officials of public sector banks and financial institutions and alleged that officers in the top and middle level management in firms including Bank of India,Central Bank of India,Punjab National Bank,LIC and LIC Housing Finance Ltd were receiving illegal gratification read bribes from private financial services company Money Matters.

The gratification was doled out by Money Matters,which acted as a middleman for realty firms. Companies such as DB Realty,Emaar MGF,Lavasa,etc,continue to require money to fund their projects,but are never certain if their loans will be sanctioned. This is where financial service firms come in. Taking its cut,Money Matters would pass on the bribe to bank officials who in turn would ensure that real estate developers are handed over the loan sought. Simple enough.

A practice seen in almost every government office across the country. Who hasnt felt the temptation to slide a few notes under the table to a middle-level officer in order to get a licence or certificate. The real estate companies themselves,in essence,havent committed fraud.

The CBI recently said that the cross-country racket could not be construed as a case of fraud but rather a case of bribery and corruption. Special director in the CBI,Balwinder Singh,has said,It is not a fraud case as of today. Later,investigation may reveal that but8230; it is primarily a case of bribery and corruption.

The firms cannot be charged with accounting fraud as they did not fake numbers of fabricate their books. The loans received are duly noted as real estate loans received from banks. Therefore,analysts say,the outrage should not be directed at the developers but at the system of scrutiny financial institutions undertake in the sanctioning of loans.

THE IMPACT

Being an unorganised and unregulated industry,big as well as small real estate player in major cities try and value property rates to their advantage. Arguably the least transparent of large business sectors,analysts say developers are always keen to get huge finances on artificial valuations on their properties. It falls upon banking officials to carefully scrutinise applications so that the loans given by them arent against realistic valuations.

A property that is actually worth Rs 100 crore could be projected to have a value of as much as Rs 500 crore. There is a high amount of risk involved when a bank exposes itself by sanctioning such a loan.

Following the expose of the scam,realty and banking stocks went into a free fall,dampening market sentiment. In the days following the arrests of November 26,share prices of DB Realty and HDIL tumbled to 52-week lows. While DB Realtys share price hit Rs 190.55 on November 30,HDIL was at a years low of Rs 178.65 on November 26. On the same day,Indiabulls Real Estate also hit its 52-week low at Rs 118.15.

Santhosh Kumar,CEO operations at Jones Lang LaSalle India,says,The direct effect of the loan scam on the real estate and banking sectors is yet to be fully established. However,it has certainly dampened market sentiment,especially for real estate stocks,which have seen a drop in value because of the negative publicity of the loan and land scams. I think it is likely that some of the realty players who were gearing up for IPOs may put their plans on the back-burner and await a more conducive time.

As a fall-out of the scam,a Mumbai-based analyst said,there will be repercussions in terms of increased caution by lenders in extending funds to developers. Borrowing will become more expensive and the process involved in getting loans will get lengthier as banks increase their vigilance levels.

The scam could also result in the debt market becoming more restrictive. The screening process will also be tightened. In such a scenario,some realty players may feel a liquidity crunch. With the IPO route currently being a doubtful one in terms of meeting their expectations for raising capital,they may turn to private equity. In other words,we may see new PE investments,but these will be defined by great caution and selectiveness in terms of players, says Kumar.

EFFECT ON PRICING

Experts have been expecting a fall in property rates from their inflated levels since last year,when other industries were crippled in the recession. But there was no significant reduction in rates as real estate companies continued to receive funds from lenders as part of the governments stimulus programme aimed at an economic resurgence. Now,with banks expected to tighten loan sanctions and screening guidelines,and a subsequent liquidity crunch,analysts now predict a drop in rates by as much as 25-30 per cent. However,developers are quick to point out that the scam will not hit their cash position,nor the demand for housing. Hence,they say,prices will not move southwards.

In terms of a correction as a result of the scam,by and large,property prices are a function of demand,and we do not foresee any negative impact on demand. However,smaller developers who are unable to raise debt funds because of tightened lending norms and who do not qualify for private equity funding may be forced to reduce their rates in order to catalyze sales of their existing projects, says JLLs Kumar.

There is no systemic risk in the banking sector8230; it is a corruption scandal involving 4-5 individuals from the public sector. Some developers will bring prices down and sell8230; the unsold stock with developers is huge across the country. In this scenario,prices cannot go up definitely, HDFC chairman Deepak Parekh had said earlier.

However,a major-Delhi based realty player had a different opinion. If there is a freeze on lending for projects,then developers may just have to increase prices of existing projects to meet costs, said an official. While DLF refused to comment on the issue,a senior official of Ansal API said there was no question of reducing prices in the near future. The official added that it was wrong to interpret the incident as a housing scam,and that neither demand nor prices would be affected.

The Indian banking system has adequate checks and balances. This scam which has just come up will not at all impact the market since it is not related to individual retail home loans and is a one-off incident which has been blown out of proportion. It will not impact the market at all, said Harinder Dhillon,vice-president marketing with Raheja Developers.

While experts argue that there will be eventual correction of prices,and developers believe otherwise,it remains to be seen when the cost of residential spaces reaches affordable levels for the Indian middle-class. sanjeev.menonexpressindia.com