A. Balakrishna Hegde goes down the Realty memory lane: 2005-08, and explains how 2009 promises to be the dawn of a new day, for the versatile Real Estate sector
Before coming to the year 2008, it is important to remember that the years 2005 and 2006 had witnessed phenomenally brisk transactions, both, in residential and commercial real estate segments. One of the key reasons for this spurt in demand was because of the incentives offered to Real Estate in the Union budgets for the first time in independent India, during 1999 and 2003.
The 2005-06 surgeIncome tax exemption upto to Rs 1.50 lakh on interest paid on housing loans, tax exemptions to developers who produced residential units upto a certain size, provision for repeal of Urban Land Ceiling Act, etc, were some of the important incentives. In addition to the sops offered by the Government, the surge in demand in Bangalore in the years 2005 and 2006, was primarily backed by a record number of IT, Research and Knowledge companies being established in Bangalore.
Cooling down the marketExtremely attractive interest rates and easy availability of funds for acquisition of residential units, provided additional impetus for an exponential growth. As the demand for real estate continued unabated, towards the close of 2006, with a view to cool off the market, the Union Government/RBI, intervened through certain monetary and fiscal measures such as withdrawal of the tax exemptions granted earlier, raising of interest rates, etc. This resulted in a peculiar situation — while on one hand, there existed a demand due to unprecedented number of jobs generated by continued growth of knowledge industries — on the other hand, the demand could not be translated into deals, mainly due to enhanced interest rates on housing loans, which went up from around 7% to 12.5% or more. Sluggish 2007-08The Real Estate sector, therefore, entered a phase of sluggishness, from the beginning of 2007. Deals concluded were not commensurate with the actual latent demand. Large section of the prospective purchasers preferred to wait and the situation continued till September 2008. In Bangalore, the prices during this period, either remained static or went up or down marginally in pockets.Come October 2008, the world witnessed the collapse of American financial system, preceded by the sub-prime crisis. The latent or the built-up demand found another reason not to surface sufficiently and while the sluggishness in Real Estate continued, almost every segment of the Indian economy entered a slow down mode. At this point of time, the Union Government quickly realised that perking up demand for real estate can be the most effective tool to revive the entire economy, as the Real Estate supports around 200 other industries.Wake up timeStarting November 2008, the Government took a slew of proactive measures to boost demand for real estate and they include concessional interest rates for loans upto Rs 20 lakh, pumping in Rs 3,00,000 crore to the Banking system over a few weeks, to ease liquidity, reduction in risk weightage for housing loans, refinance by National Housing Bank at low interest rates and many more such measures. Resultantly, banks started reducing their Prime Lending Rates (PLR). Banks also announced softer interest rates for loans not only below Rs 20 lakh, but for loans above Rs 20 lakh also. In addition, Government also announced packages for Export, Manufacturing and other segments of the economy, other than initiating huge spending on infrastructure. In the past, during times of slowdown, we have hardly seen such proactive interventions by the Government. This is a major differentiator this time and this is bound to play a crucial role in the revival of the economy. The interest rate cut should prompt those who were delaying decisions for sometime, now to wrap up deals for their dream homes during the first few weeks of the New Year. The built-up or pent-up demand should soon surface. More importantly, reasonable prices for residential apartments in Bangalore as compared to other metros, is also a key factor as the bulk of Bangalore residential units within about 10 kms from the CBD, are still available between Rs 2,500 and Rs 2,900 per sft, from developers with a good brand value, which certainly is attractive as this covers just about the cost of construction and the land cost. The other good news is that the IT majors have not altered their hiring numbers much. Besides, hiring numbers for banks, insurance and some other sectors are likely to go up drastically. Job creation due to these factors should generate fresh demand for housing.Proactive America?One school of thought also predicts that the American turmoil has the potential to bring more business to Indian IT companies due to mergers and acquisitions back in the USA, and also due to an urgent requirement for American companies to cut costs in times like this. Experts say, despite opposition, outsourcing will continue because companies don’t outsource for the fun of it, but they do so as it makes business sense for them and hence, a necessity. The Obama regime in fact, may throw up more outsourcing opportunities to India due to huge infrastructure investment that his team is planning, largely due to cost implications. Experts also predict that the revival of Indian economy will happen faster and sooner than anticipated, primarily due to Government interventions, unlike in the past, and that, when the revival happens, it can create jobs much faster than in the past. All these should bring buoyancy to Real Estate and to the Indian economy, post 2008. With this, the prices may also start climbing northwards.And a word of caution — when the prices start rising, all concerned should put in place a mechanism to control any price rise at a breakneck speed so as to ensure a stabilised period of growth from the year 2009.
The writer is Managing Director, Chartered Housing, and past president, CREDAI - Karnataka.
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