India needs more asset reconstruction companies that will lead to increased focus on real estate financing , Deepak Parekh, a financial services veteran and Chairman of HDFC Ltd, said on October 29.
While speaking at a conference organised by the Confederation of Real Estate Developers' Associations of India (CREDAI) in Mumbai, Parekh said financial regulators are not willing to look at real estate financing.
"We have tried a number of times that real estate is different from industry lending and the land is a big security. We can’t go against them, 90 days due is sacrosanct," he said.
In most cases, lenders have land as security but financiers have no choice to respect the view of the regulator, adequate provisions have to be made but incremental funding can’t be done, Parekh added.
If a non-performing loan is there with a developer, whatever additional money financiers give as last mile funding constitutes as non-performing from day one, according to him.
"If a third party lends, it becomes an NPA for them too, it’s a vicious cycle," Parekh explained. "Once an NPA, you can’t finish the project unless the developer sells or monetizes assets."
More than Rs 1.3 lakh crore loans to real estate are under stress, which constitutes roughly 18 percent of real estate lending including old legacy projects, Parekh said.
Resolutions are happening and global funds and pension funds are looking to invest in India’s real estate sector to counter the low yields in their country, he added.
"Asset reconstruction is something that is knocking on the doors of regulators for approval. For instance, Brookfield and HDFC have entered into a MoU to start a dedicated ARC, " Parekh said. "The partnership is important because Brookfield is one of the largest alternative asset managers in the world."
Such investors with deep pockets and patient capital are needed, according to Parekh. Once regulatory approvals come, which Parekh hopes to come soon, it will be a win-win situation for all and many ARCs are bound to follow.
Developers will get access to last mile funding with ARCs, existing financers already having provided for such loans will have options to sell bad loans seamlessly and focus on incremental lending rather than be consumed with legalities and technicalities of resolution, he added.
"World over these are accepted modes of financing, so we need to catch-up with the rest of the world."
According to Parekh, the Indian real estate market is in the cusp of new growth cycle.
The housing market moves in cycle and research suggests peak and trough of each cycle typically entails six years, Parekh explained. While the last peak was in 2013 followed by trough condition that came with tight liquidity, leveraged positions, etc.
It takes six to eight year for an upward cycle to start and "we are there", he added.
As real estate leads the economic growth and multiplier effect plays out, yet, there is a need to be extra watchful and not repeat the mistakes of past, Parekh added.
He said China’s real estate market saw stress with the fall of Evergrande as real estate market in China contributes to 25 percent of the Chinese economy. The choices for Chinese Government was to allow it to fail or come out with rescue packages, he said.
There’s no housing bubble now (in India) but we should not be congratulating or thumping our chest, he said.
In his message to home buyers, Parekh suggested this is the right time to seize the opportunity as low interest rates are not going to last forever.