After a year of lull, real estate prices are rising in both commercial and residential sectors and developers are announcing a slew of premium residential projects. Though there is a pent-up demand for small and mid-sized apartments, any speculative increase in pricing would discourage genuine buyers this time around.

Many say a bubble is building up in the sector again and a timely intervention by RBI would cool things down. The memory of high-end and high-margin projects creating froth last year is still fresh. The central bank has already sent a note of caution to banks to factor in loans extended to subsidiaries, special purpose vehicles and related parties of real estate companies. Developers float a number of subsidiaries to buy land as it saves them the effort to raise money through the equity route to buy land. Bank data shows that while overall credit flow has slowed down, the banking sector’s outstanding exposure to the real estate sector was Rs 95,000 crore at the end of May—52 % higher than the same period last year—and a substantial part of the money has gone to subsidiaries.

Remember that increase in lending to subsidiaries led to tightening of bank credit last year. Given the hardening of real estate prices without substantial increase in sales, the central bank may once again increase the risk weightage for the commercial real estate segment. The same measure, announced by RBI in 2007, was criticised. But hindsight shows RBI got it right that time.

The other aspect is that when land price jumps sharply, demand for what is called affordable housing goes unmet. Recession or no recession, the demand for housing will continue to rise due to urbanisation, demographic change and falling household size. During the peak of the credit crunch, cash-strapped and highly leveraged real estate companies announced a host of affordable housing schemes mainly to take advantage of various policy initiatives and tax incentives announced by the government.

It’s time to do a realty check on their progress. The draft Bill on real estate regulator, which is likely to be tabled in the winter session of Parliament, has already drawn the ire of developers. Among other things, it mandates that a builder will have to register a project with the regulator before he can market the property. For this, the builder will have to submit a documentary proof of land ownership and mandatory approvals to the regulator. Only then will registration take place. Of course, this should not become another layer of bureaucracy that hassles businessmen. But a regulator who works fast but keeps an eye on things is not a bad idea. Some firms launch housing projects without having requisite land and some offer apart­ments that don’t have all approvals. That’s anti-consumer.

Source: The Financial Express

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