There is a need to support realty developers to maintain supply, says HDFC Chairman Deepak Parekh

“There is a need to support realty developers as without them there would be no supply,” he pointed out.

In our core business of housing, affordable housing is the name of the game. We see massive growth in affordable housing. We have a large fund (HDFC Capital Affordable Real Estate-2 or H-CARE 2), National Investment and Infrastructure Fund has also put in $100 million, so it is a $1.1 billion fund. We have launched half a dozen projects in the last three months across India -- Noida, Gurgaon, Pune, Mumbai and Bangalore. Reliable developers, right-sized apartments, right-priced apartments and fits in with the Prime Minister’s Awas Yojana (PMAY) scheme and they are selling like hot cakes. Trust me – on the day of the launch, 70-80 percent goes.

First of all there are two things. Recently, they have also increased the eligibility of a developer, which is tax-free income. For four metros, it has been increased to 60 square metres and in other locations, it is 90 square metres, this is carpet area. So developers on the outskirts of the four metros are building 400-500 sq. ft. homes, their total income is tax-free and that is the incentive they get and there is demand.

Some of the individuals who buy flats in this may qualify for the PMAY, some may not qualify because it depends on whether you own a house, it is a second house or new house, etc. So we see housing at the right price.

The other good news in the real estate sector is commercial real estate. Commercial real estate is booming. Particularly for the IT back-office sector, there is no slowdown. I have visited places like Hyderabad, Bangalore and Chennai recently and lakhs and lakhs of square feet are under construction.

The other good news is that builders want to build themselves, but there are buyers, there are buyers like sovereign wealth funds, there are buyers like private equity funds, there are buyers like the Blackstone, the Brookfield of the world who are buying and there are many more buyers who are coming in. They are buying it for yield.

Real estate is in a funk for larger homes, for homes which are unaffordable. In the centre of the city, close by suburbs, the real estate developers are in a bit of a bind; after demonetisation the spiral has come down and we have to help the developers, we have to support the developers because without the developers there is no supply.

The government and the regulatory agencies are trying to figure out the problem. There is some massive amounts of unsold inventory and no one is willing to lend fresh money to them.

My personal view is that even the way the non-performing assets is calculated, the regulators have to be a little different in looking at the real estate; it is not a factory. The land is always there with the developer, the land always has a value. If the developer is not able to build a phase because there is no demand, he cannot pay you back from the first phase, and you qualify his account as NPA. But he is sitting on land, which has value. When the demand picks up, when the economy picks up or he redoes his planning to make smaller apartments, you are going to get value. So real estate is something different. My personal view is the regulators have to look at it differently.

No, basically out of the unfinished flats, let us look at incomplete apartments, flats. I would say 50 percent of them need last-mile funding. We have to arrange that funding for these developers across the country where 80-90 percent of the building is complete. Let us finish it first. Today, the man on the street prefers to buy a finished product rather than an under-construction flat because many people have booked and are still waiting. So we have to help these people who are almost complete and not yet there.

The scheme should be that you can have a stressed asset fund, which can be initiated by the National Housing Bank (NHB). All of us could put in some money, an independent group can look at it and decide which project deserves this kind of money to complete. There are various ways to handle this but this is an urgent need today, complete the unfinished houses.

All the time we talk with NHB, our regulator.

Yes, we talk all the time and there is some movement, there is some recognition that we have to do something about it because there are a large number of projects, you can only do it where the developer has a reputation, where the developer is genuine. There are a large number of frauds that have taken place, developers have run away, you have seen the cases of Amrapali and Jaypee, I think the government or the Supreme Court has stepped in and asked the NBCCs to do it. So now those two projects will be taken over by NBCC.

My idea is that a similar thing we can do with private developers also or contractors. Why can’t we ask Larsen and Toubro or Shapoorji Pallonji Group or other engineering, procurement, construction contractors to do some unfinished projects?

Whether it is resolved or not, my firm view is that when IL&FS went down, it did not impact the financial system in India. That shows the resilience of the Indian financial system. That shows you have to give credit to the regulators, not to panic when something like this happens and the market and the lenders and the investors in the bonds and all are taking care of it by every quarter, writing off whatever is due. This is part of the game. So I think India has a strong financial base, the system is strong, one or two or three players collapsing by the wayside is not going to impact us. Our economy is not going to impact our financial system.

No, I think some effort is needed, some collaborative effort is needed but again in real estate, like in corporate loans, there is always a consortium of lenders. So if that consortium of lenders can work closely together in a stressed project, solutions can be found. But if the consortium of lenders in a particular project fight and each one wants to get their pound of flesh or their money out first, the problem comes.

So there has to be some legal mechanism where for instance, if there is a building, a project which is incomplete and it needs 20 percent funding and these three lenders are there, they should give equal amount. Something like that must be there. It can be done while discussing with each other but it is always difficult. When a project gets into difficulty, everyone gets scared and you stop lending.

That is also there.

Interest rate helps but it is not the ultimate reason. Self-confidence must be there, there must be confidence in the buyers, in the people and don’t forget, I am convinced India is a consumption-oriented economy. Domestic consumption is the strongest engine that drives the Indian economy. One quarter slowdown or two quarters slowdown should not upset me at all. I think it is part of the game, we have had phenomenal sales in auto for so many years quarter after quarter and so a couple of quarters is not going to impact. Again the government has given some incentives to the auto sector, so I think that things will come back slowly.

I personally feel that this is going to be short-lived and this is the right time because the festive season is coming, the last quarter is always – when there is good weather, there is good mood. When there is good mood, there is mood to spend and credit is available easily, penetration levels in India is very low whether you look at any item particularly here we are talking of consumption. Consumption as a percentage of gross domestic product is extremely low, it is less than half of China. So we have to grow in this. There is no question about not seeing growth. Even there is a global slowdown, it is not in India.

IMF has brought down the projections on the global growth. If you see their latest report, it is self-inflicted. It talks about the US trade war, it talks about technology disruption because of global supply chain being removed, it talks about Brexit, it talks about a number of things.

I think we have to improve the ease of doing business even more and this is on top of the mind of different government officials who I met. There is fair amount of interest in investment in India. I know large funds of billions of dollars who have not yet invested long-term money in India. India-specific funds have come in but global funds, sovereign wealth funds, they have just started looking at India. The amount of money we can expect from viable investments from Australia, Canada and Japan is still massive.

But he is a fund manager. You have to talk to the pension funds and the sovereign wealth funds; they are all looking at it. The sovereign wealth funds are underinvested in India, very much underinvested in India but they are looking at viable companies, good promoters and good track record.

My view is that rates will fall. It’s a global phenomenon and it will fall in India also and look at the broad macro parameters which are in favour of India for further reduction in interest rates. One, inflation is at all-time low and falling which is the main reason. Our reserves are $430 billion, all-time high, oil is around $60 per barrel; manageable, affordable and viable for India. Food grain production is at an all-time high, warehouses are reasonably full with food grain. What more do we need. So the macro parameters are good, there is a slowdown but the broad macro parameters, commercial real estate is doing well, which makes me believe that jobs are being created because I visit and there are thousands and thousands of people working in the back office and the jobs are increasing in that. It may not be at a speed which we want but jobs are being created in the IT and IT-enabled sector. So I personally feel that interest rates globally are coming down.

It’s not our problem. It’s a huge problem elsewhere. I have got an ad from a Danish mortgage company which says buy a house now and we will pay you.

I think there is space but if we think that this is the only reason, by going below 5 percent you are going to suddenly see a burst of consumer buying, I think that is a mistaken notion.

It is just first day, give it some time, it makes huge amount of sense, it makes immense sense and the finance minister has assured that no job losses will be there. A stronger bank is much better than three banks where two are weak and one is strong.

The attrition rate in public sector banks because everyone reaches that age and you have to retire, 10-15 percent of people retire every year, so that way you can bring more talent. Integration takes time, integration is painful but medium-term you will get good results. You don’t look at the stock market in one day. According to me, it makes utmost sense.

That we have to change, now we have to give more authority, more autonomy to the people and I think the FM did make a point that judgemental errors will be overlooked, she did make a strong point that judgemental errors will not go against the individuals, so they are trying their best.

The bigger issue here is should the government go down below 51 percent stake and here again my hunch is that government will again look at it selectively, go down to 26 percent because these banks need more capital and if we are a capital short country, we need to put money in infrastructure, in urban infrastructure. The urban infrastructure spend is a percent of GDP in India. It’s very low, we have to increase that.

The board is looking at it, the Nomination and Remuneration Committee (NRC) is looking at it and at the right time we will form a committee. We have the NRC which will look at it and we are going to have a look at some of the head hunting agencies, the NRC will look at it, appoint one some time.

The process is discussed, not yet started. I don’t think it will take that long. I think you guys are worried about Aditya’s successor than we are or the market is.

Investors are talking about it but it is still over a year more.

We are always a buyer at the right price.

I am very bullish on both asset management company and life insurance company and these are long-term value creators. We have already created value, both the shares have doubled after the IPO and both are doing well. We are always on the lookout for good quality assets or insurance companies. You may hear something even.

Bik Jayega, hume patta hain bik jayega.

The promoters have said if the banks take some haircut then it can be revived, so some decision of debt into equity, something like that will have to be done.

I would think so, I would hope so.