Real estate financing in India has changed significantly over the past 50 years for both developers and customers. Real estate developers have seen the universe of funding agencies expanding from unorganized moneylenders to the entire gamut of funding sources, including loans from banks and housing finance institutions, private equity, public equity offerings, bonds, and debentures. Customers have seen the shift from own-resource-funded home purchases to bank-funded mortgage finance. This shift has helped the real estate sector match the fast-growing customer demand on one hand, and has boosted the financial flexibility of developers to provide adequate real estate supply on the other.
Back in the 1960s, the real estate sector was largely unorganized and was perceived as a speculative and risky segment. Developers were funded mainly by moneylenders, who charged exorbitantly high interest rates of above 36 per cent. Customers largely funded home purchases through household savings, loans from friends and relatives, sale of property and ornaments, and subsidised housing loans extended by some private and public-sector employers. The banks did not provide mortgage finance to the retail customers until the late 1970s. In the organised sector, the government was the sole provider of housing finance, through its various social housing schemes including low-cost housing. The government implemented its schemes through state housing boards, which were responsible for allotting plotted developments and built flats to individuals.
In the 1970s, two key institutions were set up–the public-sector housing company, the Housing and Urban Development Corporation, in 1970, and the private-sector housing finance company, the Housing Development Finance Corporation, in 1977.
In the late 1980s, the Government of India (GoI) started recognizing the integral role of housing in the overall economic development of the country and undertook various policy measures to enhance the financing options of the sector. In 1988, the National Housing Bank (NHB) was set up to channel resources to housing finance. In the same year, GoI introduced the draft National Housing Policy, which was later adopted by the Parliament in 1994. Also, in the late 1980s, the government directed insurance companies, commercial banks, provident funds, the Unit Trust of India, and other agencies to invest part of their annual incremental resources in housing. The Reserve Bank of India (RBI) guidelines of 1989 required commercial banks to set aside at least 1.5 per cent of their incremental deposits for housing finance, direct or indirect.
During the 1980s and 1990s, housing finance institutions (HFIs) emerged as the key lenders in the real estate sector. These HFIs were set up either by industrial groups and individual developers (in which case the source of funds was public deposits or NHB refinancing) or as subsidiaries of commercial banks and insurance companies (which largely tapped banking or insurance funds).
The interest rates for loans closely followed the competitive activity on the housing financing front. While HFIs did not face significant competition from banks, interest rates remained highly stable and unchanged until the early 1990s; this was also due to the stability of the sources, namely insurance and NHB funds.
Further, the interest rates continued to be regulated by NHB until as late as 1994. Even when HFIs were finally allowed to charge market-linked rates in 1994, housing loans continued to be offered at fixed interest rates and any change in the cost of the deposits of HFIs was reflected in only new loans. The maximum tenure of home loans also remained under 15 years, as customer appetite for high-tenure loans was also low. The fixed-interest-rate loans resulted in asset-liability mismatch for HFIs. This, along with competition from banks, led to the emergence of variable interest-rate home loans.
Commercial banks started posing serious competition to HFIs 2001 onwards, and overtook HFI lending volumes in 2002-03. Bank loans for real estate developers increased sharply in between 2004-05 and 2009-10. Outstanding real estate loans grew at a rate well above 40 per cent during 2007-08 and 2008-09 to reach the Rs. 916 million as on March 31, 2009.
In 2002, the GoI permitted 100-per cent foreign direct investment (FDI) in housing through integrated township development. However, the rules required prior approval of the Foreign Investment Promotion Board, three-year lock-in period for repatriation of the original capital, and a minimum land holding of 100 acres. However, this did not have the desired effect, as stringent conditions continued to restrict the flow of FDI in the real estate sector. Accordingly, to overcome these constraints, in 2005, GoI allowed automatic approval of FDI in real estate, subject to certain conditions related to minimum development area, minimum investment options, and timelines for the completion of projects. Through the automatic approval route, foreign investors are not required to obtain prior permissions or approvals from GoI or RBI for making investments. As a result, FDI in the real estate sector increased from a paltry USD0.1 billion in 2003-04 to USD27.1 billion in 2008-09.
Strong growth in the real estate sector in 2005 and 2006 was accompanied by considerable investor interest in the sector. However, it was not before 2006 that significant events such as initial public offerings by real estate companies and the listing of such companies on national stock exchanges started to occur frequently. Real estate companies also tapped qualified institutional investors in 2009 to raise equity funds quickly and to meet debt liabilities during stretched liquidity situations.
Over the next decade, real estate mutual funds are expected to emerge as the next funding opportunity in the funding universe of the Indian real estate sector. Many real estate companies are already trying to raise funds at Singapore-listed real estate investment trusts. These developments will help diversify the investor base in the real estate sector.
To sum up, the increased availability of funding opportunities over the past 50 years have enhanced the growth opportunities for the Indian real estate sector manifold. It has also enabled the transformation of the sector from a largely unorganized one to a largely corporate one. This, in turn, will translate into a strong, resilient real estate sector, thereby paving way for the robust economic growth of India.
Courtesy: times property dtd:-15/05/ 2010
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