In an interview to CNBC-TV18, Dinesh Gupta, COO of Ansal Properties and Gulam Zia, ED of Knight Frank spoke about the outlook for the real estate market.
The Mumbai real estate market has been the worst hit by the economic slowdown with sales dropping 50 percent in the last six months, says Gulam Zia, ED of Knight Frank. He says construction projects are likely to slow down due to liquidity crunch. However, he rules out any major price correction.
Meanwhile, the sentiment was also hit after the RBI scrapped the 80:20 housing scheme. According to Dinesh Gupta, COO, Ansal Properties, not more than 5 percent of total sales comprise of 80:20 scheme, which he says was beneficial for mid-income residential segment.
Below is an excerpt of the discussion on CNBC-TV18
Q: Tell us about the industry. How many projects could be stuck you think?
Zia: It is a very difficult question to answer in a very closely guarded industry. How many projects are actually opting for those 80:20 scheme etc. It is a tough question but a rough estimate is that it would be closer to about 95-100 projects across various cities where this scheme would be offered.
Let us also understand that this scheme is essentially offered on under construction or newly launched project. We have seen about last year or so when the scheme came in the fore, initially it was a few projects in Mumbai, which were offered as a test case under the scheme and soon it picked up and practically every developer was launching that scheme in the cities of Mumbai, Delhi, Bangalore, Pune and so on and so forth. But it is restricted to the last couple of months where the new launches have happened and these are launches which have been brought in under this 80:20 scheme.
Q: For Ansal Properties as a whole, how many of your projects were being run possibly via the 80:20 scheme and what would be the impact on Ansal Properties as a whole?
Gupta: Rough estimate is that about 4-5 percent of the existing sales of the residential side in all the territories that we have were only offered under the 80:20 scheme or the subvention scheme. The other input that I would like to give is that initially when the 80:20 scheme was launched in fact it was 90:10. The margin money to be provided by the customers was only 10 percent and then two years back the RBI increased the margin money requirement to about 20 percent and that was again on the backdrop of the transactions that started taking place in the Mumbai region which was considered to be highly speculative. Obviously Mumbai is one territory and there is other India so all the needs or requirements have to be taken care of.
We have also seen in the past three-four years initially when the 80:20 scheme was launched, the banks were disbursing the entire 80 percent upfront even on the under construction property thereby leaving a higher risk or a larger exposure of the banks in the projects. But in the last two-three years we have seen that the disbursements are also now getting staggered and even the developers are very happy to take the disbursements in a staggered manner rather than taking the entire 80 percent upfront.
Even if you look in the NCR today, this 80:20 scheme is basically a new tool to market, which says buy now pay later, these are the typical jargons that are being used and you have to require to pay 20 percent upfront and then 80 percent two-three years down the line your EMI starts and during the construction period, the developer bears the interest cost. So it was a very good scheme especially for the mid-segment and people who are reeling under the inflation effect and people who are looking at the properties and they want the EMIs to start after construction. As far as the exposure is concerned, yes, the banks have already taken a step by limiting the exposure and making these disbursements in a phased manner rather than a one-time disbursement at the time of sanction of the loan or 80 percent coming to the developer where the risks are higher. So it needs to be reassessed and the upfront disbursement can obviously be looked into but the whole 80:20 scheme is not a bad scheme.
Q: Because of this upfront money now not available in future sales, is there a likelihood that entire construction process could slowdown at least somewhat in the margins?
Zia: That is for sure because at least if I go by the logic that was put forth when this whole scheme was launched was that it was to support the construction of the projects. If I go by that simple logic, I am sure at least that kind of money not being available in the system, the liquidity going out, it will have an impact on the developers, cash flows etc and having said that, last couple of years we have seen the sales slowing down, we have seen practically every city recording about 20-50 percent, Mumbai is the worst hit with almost about 50 percent of the sale shaved off so revenues hit, now this funding mechanism hit, so all these things will obviously have a severe impact on the developers.
Q: How is your liquidity situation at this point and because even though you have very less exposure to this 80:20 scheme, would it affect your borrowings at any level from the banks considering it would be at a higher level as opposed to what you were getting earlier via the 80:20 scheme?
Gupta: When we do sales and typically as we always say that more than 80 percent of our portfolio on residential sales is to the mid-income segment and typically the mid-income segment is a person who will always take a mortgage from the bank. So anyways our risk on the sales is covered on the mortgage whether it is under 80:20 scheme or on a conventional loan. So therefore, once you do the sale, the margin money comes in and then the banks keep giving the money as per the installments demanded. So from that aspect, the cash flow is more or less comfortable and as for the year also, this is not the subject for today, we are already planning about Rs 1,800 crore to be the cash flow and last three-four years this has been the backbone of our company and all the real estate companies who are thriving on the internal accruals which comes from the cash or lesser the sales and the collections that come from the under construction properties.
So if that keeps coming, obviously the debt levels will keep going down and that has been happening in the last three years. Even in this year, as I mentioned that not more than 5 percent of the sales were under the 80:20 scheme and only 3 percent has been delivered now. So we are not seeing any impact, which will come because of this 80:20 scheme and the conventional loan still remains, the customer loan is not barred. So therefore, the cash flow or the mortgage system is still in place. The only thing is that the quick money that may come because of 80:20 scheme that has posed a challenge and that poses a challenge to those developers who are doing new sales and not doing construction on ground.
Their balance sheets will get hit who were only probably rotating the money in the balance sheet and taking the money from one pocket to the other. There they are going to have a problem but if you are serious customer, if you are a serious contender, you are doing business around constructing on ground, I don’t think you will have some hiccups because of the smaller changes and as far as we are concerned, we don’t see major hiccups.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.