Be willing to offload unsold inventory at a 20% discount: HDFC's Deepak Parekh tells realtors

Deepak Parekh, Chairman, HDFC

HDFC Chairman Deepak Parekh on April 14 advised real estate developers to offload their unsold inventories at ‘whatever price’ as they require liquidity at this juncture, especially at a time when the sector is grappling with the novel coronavirus, or COVID-19, pandemic.

“How do we unwind from this crisis. For starters, the price of real estate has to come down and will come down. NAREDCO has estimated between 10 percent to 15 percent. I have said somewhere that one must be prepared even for 20 percent. For those potential future homebuyers who have got job security or cash flows, this will be an excellent buying opportunity as prices come down,” he said at a video conference organised by real estate developers associations- NAREDCO and CREDAI.

“Be willing to offload inventory at whatever price. Take hits in some projects. Get rid of inventory,” he told the developer community.

To which, Irfan Razack, Chairman and Managing Director of the Prestige Group, countered that when a clarion call goes out that prices should go down by 20 percent, even those customers who want to buy will stop buying. “We are completely reduced to the bone. There is no margin left with developers.”

To this, Parekh clarified that his idea was to create liquidity not by borrowing more, but by selling ready stock. “There is a misunderstanding. When I said 20 percent, I meant existing flats. Flats that are already built and people are sitting on it and not selling it because they want a particular price. Readymade flats can be sold and developers can take a cut. Get rid of the unsold stock and even reduce the price for those projects. How long will you sit on unsold stock. You should be able to move on. In two years, you will have to pay tax on unsold projects. Better to get rid of them and stay liquid,” Parekh said.

He added that new launches are bound to be postponed or delayed and that buying decisions for commercial real estate may get postponed until there is more clarity.

“Let me reiterate that commercial space requirements will not evaporate. This work-from-home may be possible to some extent, but I don’t think we are going to see the entire workforce migrate to the work-from-home culture on a permanent basis. There are jobs that cannot be digitised in our industry,” he told realtors.

He asked the developer community to focus on completing projects rather than starting new ones, “even at the cost of putting new ones on hold.”

Parekh in his speech also advised developers to abstain from borrowing heavily. “Borrowings are a double edge sword. While you can leverage and grow during good times, in bad times it can finish off your business,” he explained, adding that it is better to get an equity cushion rather than going in for debt.

He also advised the developers to concentrate on completing the pending projects on time, rather than going in for new launches. “You can also get into joint arrangements with corporates to complete projects,” he said.

In his recommendation to the state government, Parekh mentioned that a waiver of stamp duty for a limited time period just before the festive season would help in reviving demand as well.

“There is also a need to review the ready reckoner rates on a periodic basis. And also allow staggered payments on levies if you want the developers to come back. If this is not done, no one would be able to pay,” he said.

He also advised the developer community to get into joint development agreements, development management agreements. “Get into these arrangements. Work in partnership. Don’t do everything yourself,” he said while addressing representatives from the real estate sector.

He also recommended a one-time restructuring of stressed real estate accounts and relaxation in classification of NPA norms to 180 days from 90 days to help the sector.

“Today, most of the developers are in a stressful situation and many of them are NPAs or will become NPAs. So, first of all we have to convince the RBI that in the interest of the future of the industry, you have to allow us to do restructuring. Once you do restructuring, we can give you (real estate developers) additional money,” he said.

He said the recommendation has already been made to the Reserve Bank.

He also advised the developer community to use the moratorium as the last resort. “Don’t let it slip into an NPA,” he said.

Parekh said the RBI, for some period of time, should extend the classification of NPAs norms to 180 days from the present 90 days.

"This is absolutely necessary otherwise all lending institutions will have massive non-performing loans and massive provisions to be made. They will start making losses and rating agencies will downgrade everyone and it will be a real disaster because businesses will collapse," Parekh said.

He also said that renegotiation on repayment timelines is a better solution than getting into legal tangles. “Unwinding from a legal mess will be very painful,” he said.