Housing Development Finance Corporation

Dear Shareholders,
 
 For Corporate India, wrapping up financial year 2009 was a relief. It
 was a year marked by a few highs and many more lows. Much of India Inc.
 was on its chartered growth trajectory in the first half of the
 financial year, despite the ongoing turbulence in the global financial
 markets. India’s immunity succumbed in the early part of the third
 quarter owing to a combination of factors that came to play. Monetary
 policy was tight to contain inflation fears. Equity and other
 alternative non-bank funding sources, which the commercial sector
 relied on, had dried up. To meet redemption pressures, foreign
 institutional investors began aggressively liquidating their
 investments in India. The biggest blow, however, came when banks in
 India too lost their nerve and went into credit freeze mode in October
 2008. Fortunately, action on the part of the government and regulators
 were swift and effective enough to have put India Inc. back on its
 feet, despite the world economy continuing its tailspin.
 
 While India has been better positioned to navigate through the
 financial crisis, there is a need for introspection and straight talk.
 The focus should not be short-term merely to tide over this period of
 exceptional instability.  The objective has to be to set the system in
 order for the future - even if it means pushing for some hard decisions
 now.
 
 Let me start with commercial real estate - a sector that has suffered
 immense pain worldwide and India stands as no exception.
 Euphemistically, the Indian commercial real estate sector got far too
 intoxicated on the excess liquidity that poured in from investors
 seeking quick fortunes. Land prices spiralled uncontrollably, yet
 developers continued their fast and furious pace of land acquisition.
 The focus was on commercial property without adequately considering
 demand absorption capacities. As funds from foreign direct investment
 and equity dried up, many developers were cash-strapped and began
 tapping the domestic market thereby over leveraging themselves.  The
 real bind came when liquidity in the domestic markets turned tight and
 lenders got increasingly risk averse.
 
 Developers for a variety of reasons were adamant and many were pushed
 to the brink before they relented on lowering property prices. But
 admittedly, developers have been resilient as well and many have been
 able to mobilise funds either through the sale of land banks – albeit
 at discounts, off-loading non-core assets or direct stake sales. With
 the market sentiment turning positive again post the outcome of the
 elections, developers are likely to take this opportunity to raise
 large amounts of funds once again. And here is the need for some
 caution.
 
 The ones who have been particularly hurt in this market have been
 certain investors who bought into the story of the invincible upward
 movement of the Indian property markets. Over the past two to three
 years, investors have pumped in over US$ 25 billion into the Indian
 real estate market through initial public offerings, qualified
 institutional placements, AIM listings and foreign direct investment. A
 large part of these funds were used for buying land at exorbitant
 prices. But with land values having come down, I could hazard a guess -
 my estimate is that investors could have lost close to a third of the
 value of their investments. Clearly, investors in real estate have to
 learn to be more discerning. The investment opportunities are there,
 but they need to be cherry-picked and few understand the nuances of the
 Indian real estate market. One also hopes that going forward, investors
 will be more realistic on valuation expectations and not throw caution
 to the wind.
 
 Let me now turn to the common man and his predicaments in an uncertain
 economic environment. World over, millions of people have been
 struggling with lost jobs, lost homes and lost confidence. For HDFC,
 the common man is the bread and butter of our business and his
 well-being justifies our existence. Our vision right from inception has
 been to do what is right for our customer. We may be considered
 conservative and perhaps a bit old- fashioned in the way we give
 housing loans, but irrespective of market conditions, we have not
 altered our credit discipline. We do not believe in over stretching our
 customers or inflicting pain on them. We offer loans to customers only
 if we are convinced they can repay the amount they borrow.
 
 The basic premise of home loan financing – something seemingly simple
 has gone so awry and morphed itself into the global financial meltdown.
 In hindsight, there are many financial issues that need to be fixed,
 but what was essentially violated was the trust of the customers who
 bought into financial products which they failed to understand or to
 see the implications of.
 
 In India we were fortunate not to have had such complex financial
 products.  The genesis of the US housing crisis lay in loans that
 offered artificially low interest rates in the initial years, but once
 the rate normalised, many found themselves unable to service the loan.
 These are lessons one should learn from, but what remains perplexing is
 that we are now seeing some variations of teaser type housing loans
 being offered in the market. The lure of low interest rates at the
 start of taking a housing loan is enticing. But are customers being
 made aware of future implications? Are lending institutions providing
 ‘what if ’ scenarios to their customers? If not, it is a clarion call
 for caveat emptor.
 
 Another aspect that homebuyers must take cognisance of is the growing
 trend of developers asking for full upfront payment on start up housing
 projects under the guise of offering a substantial discount. There are
 instances where homebuyers have made the entire payment despite the
 developer not having commenced construction at all. What may look
 outwardly attractive, could be embedded with high risk. For instance,
 certain developers have floated schemes wherein the customer makes a
 full upfront payment and the developer in turn agrees to pay the
 customer an assured return till the time of possession of the property.
 Instead of paying a high cost on a commercial loan, this scheme is a
 clever disguise for developers to get cheap funding without bearing any
 cost for the high risk involved. In this instance, the developer is
 neither offering any guarantee that the project will be completed on
 time nor is there any assurance that payments will actually be made to
 the customer. With no fall back security, what protection does a
 customer have if a developer defaults? Is this not encouraging a trend
 of building a ‘hawa mahal’ (castles in the air)?
 
 In the recent period, homebuyers are once again stirring out of the
 ‘wait and watch’ mode. Three key factors are working in their favour –
 a price correction, a size correction and lower interest rates.
 Developers have recognised that the real demand no longer lies in the
 premium segment and are therefore opting to build smaller, no-frill
 apartments. ‘Affordable housing’ is suddenly in vogue. But this is a
 bit of a misnomer. Some correction in prices has happened, developer
 margins have come off, but real estate prices are still high.
 Developers are now reintroducing one- bedroom apartments, which seemed
 to have disappeared from the market.  Further, with interest rate
 reductions, many who were earlier out-priced are now able to come back
 into the housing market. While these developments are positive, the
 real agenda for affordable housing has still not been brought to the
 table.
 
 Affordable housing is not about box-sized, budget homes in far-flung
 places where there is no connectivity to work places and little
 surrounding infrastructure. Affordable housing has to be able to cut
 across all income segments and has to make economic sense in terms of
 proximity to the work place. The agenda for affordable housing requires
 a combined public- private collaboration and a strong political will to
 enforce change.
 
 The inability to adjust land policy with the changes in demand and
 supply conditions has led to serious shortages of urban land at
 affordable prices, encroachments on public and private lands,
 irrational land use and absence of spatial plans in cities. The total
 urban land stock in India is only 2.3% of the country’s total
 geographical area, but houses 30% of the country’s population. At a
 policy level, there is a need to bring in additional urban lands on a
 regular basis. The process of land acquisition and conversion of
 agricultural lands for urban use needs to be simplified. Secondly, the
 Floor Space Index (FSI) should be increased – even if it means imposing
 an impact fee on those benefiting from the higher FSI. With the
 increased FSI, there needs to be a commensurate upgradation in urban
 infrastructure as well. Thirdly, it is imperative to give a huge
 impetus to in-situ development.
 
 The time has come for states to take a hard look at Üie role of Üieir
 housing boards. It would be incorrect to say Üiat state housing boards
 have become defunct given Üie immense demand for flats recently offered
 by Maharashtra Housing and Area Development AuÜiority (MHADA) and Delhi
 Development AuÜiority (DDA). The strong demand for such flats is
 direcüy linked wiüi Üie pricing, which is realistic and wiüiin Üie
 common mans reach. One hopes Üiat more housing boards will endeavour
 to increase scale and build more homes taster. One is also hopeful Üiat
 state housing boards will reassess Üieir role and performance. In Üie
 recent period, many housing boards have shifted Üieir focus to merely
 selling land for profit and sitting on cash surpluses. Such profits
 should be mandatorily ring fenced and deployed only for affordable
 housing.
 
 The housing agenda for Üie new government is a daunting task. This is
 because Üie challenges of rural housing are vastly different from urban
 housing and Üierefore different sets of solutions are required. For
 instance, key reforms such as permitting Üie mortgage of agricultural
 land for residential purposes and introducing tiüe insurance could give
 rural housing Üie much-needed Üirust.
 
 One is hopeful Üiat this government will be more sensitive to boüi, the
 rural and urban housing needs of the aam aadmi (the common man).  It
 would be a missed opportunity if the government were not able to lay
 out an institutional framework for a real estate regulator. There is
 such a compelling need for state level real estate regulators whose
 role would be to oversee and monitor the affordable housing agenda,
 promote real estate reforms, ensure transparency especially by
 mandating Üiat flats be sold only based on carpet area and most
 importanüy, act as a plaüorm to protect buyers from real estate fraud.
 So often have these pressing issues been raised, only to eventually
 fall on deaf ears. But we as a people need to keep pushing for change,
 for nothing is more beneficial to society Üian a property owning
 democracy.
 
 Finally, thank you for believing in our company and supporting our
 endeavours.
 
                                                         Yours sincerely
                                                        Deepak S. Parekh