The realty sector has been one of the worst hit sectors in the recent past due to variety of reasons. The bad times for the realty sector commenced with rising cement and steel prices, coupled with the Reserve Bank of India raising the interest rates to combat rising inflation. Thereafter, the global financial crisis brought with it an economic slowdown. All of these reasons resulted in a quick slump in demand for residential and commercial properties.

During the last year a lot of realty firms had raised money from the capital markets and through private equity with RBI policies making it tough for the realty firms to raise bank finance. However, these alternative funding sources have dried up since the global financial crisis broke out. Realty firms finding themselves at the receiving end of the bloodbath on Dalal Street made matters worse for the realty sector.

These things clearly signaled a serious crisis for the sector which resulted in the industry leaders in the sector requesting for a Government intervention. The realty firms expected the Government to take steps to bring in more liquidity into the sector by easing lending norms and also requested for a reduction in housing loan interest rates to boost the demand.

The RBI provided a breather for the sector last weekend by announcing a slew of measures especially for the real estate sector apart from 100 basis points cut in the interest rates. One of the most important announcements includes Rs 4,000 crore refinance facility for National Housing Bank. The RBI has also decided to grant "priority" status for housing loans upto Rs 20 lakh and for loans given by banks to housing finance companies for on-lending to individuals for purchase or construction of homes of upto Rs 20 lakh.

As per the existing RBI norms, every bank is required to set aside 40 percent of its deposits for lending in the priority sector. As a part of the policy announcements on Saturday, the RBI has also clarified that banks can classify housing loans up to Rs. 20 lakh as "priority sector" advances, subject to a ceiling of five per cent of their total priority sector limit. The above moves are expected to provide a life line to the realty firms who operate in the low-cost housing segment. This measure would also help the housing sector and the realty firms which operate in the nonmetros or the Tier II cities.

The other major measure announced by the RBI on Saturday has been the relaxation of asset classification norms for commercial real estate advances. It may be recalled that the RBI had, earlier this year, issued a directive requiring the banks to classify advances to a property developer as a Non Performing Asset (NPA) the moment the advance was restructured. This directive of the RBI had made raising bank finances difficult for developers whose loans were classified as NPA by other banks.

The RBI has now relaxed the asset classification norms for commercial real estate advances, by granting concessional treatment to commercial real estate advances which are restructured upto June 30, 2009. This one time measure grants a relaxed treatment of non-classification as NPAs to second restructuring done by banks of real estate advances before June 30, 2009. This step would surely relieve the realty firms of the liquidity crisis. This move would also encourage the banks to increase their exposure to real estate sector. The 100 basis point rate cut should also ease the cash crunch situation if the banks lower their lending rates.

Though some of the realtors have voiced their opinions on the measures announced by RBI not being sufficient, these measures are intended to boost the demand for low-cost housing and also ease the cash crunch situation which the realtors are facing. These measures together with the Rs 30,700-crore fiscal stimulus package unveiled by the Government aimed at guiding the economy away from a possible downturn.

This is banking with a difference. It’s informal and unregulated. Reeling under a severe cash crunch and drop in sales, big realty companies are now turning to the unorganised market for their cash needs.

Industry sources familiar with the development say all major realty companies around the country are collecting cash from private financiers and even individual lenders at a whopping interest rate of 36-48% per annum to save and complete their projects.

These sources further say that the developers are taking at least Rs 500 crore to Rs 1,500 crore from financiers and putting on block projects with these financiers in lieu of these loans. In fact, such is the situation, that the top five listed developers in the country have reportedly picked up Rs 4,000 cr to Rs 6,000 cr at interest rates of 40-48% from these financiers in the last four to six weeks. Many developers confirmed that they were picking up money from the market at such high rates to complete their projects. Liquidity concerns were squeezing the real estate sector, with developers taking loans between 24 to 36%.

Earnst & Young India: “Private equity deals have dried up and there are no financial sources to support smaller real estate developers. Banks have made it clear that they are looking at viable lending options and will consider providing support to only large real estate companies. It remains to be seen how these companies go about reassessing their consumption model to bring it in line with the current market expectations.” Stock prices of major realty players, including DLF, Unitech, Housing Development & Infrastructure (HDIL), Indiabulls Real Estate, Puravankara Projects, Parsvnath Developers, Sobha Developers, Omaxe, Mahindra Lifespace Developers and Ansal Properties & Infrastructure have all tumbled more than 60% in the last six months on Dalal Street.

Industry sources, in fact, say that across all metros and tier II cities such as Mohali, Kundli (Sonepat), Jaipur, Lucknow, Indore, Surat and Cochin, there has been a 70% to 80% drop in the number of deals. Arvind Mahajan, executive director of KPMG India, feels that the recent steps by government to boost real estate sector will take time to trickle down. With banks cautious towards lending to smaller developers, consolidation should take place soon. Wealth perception is a big issue in the market right now, especially in the backdrop of these companies’ valuation going down drastically on the stock market. There is demand up to a point. In misplaced euphoria, these realty players created more supply than demand in some places, which has backfired on them. The mix of housing holds the key. For developers, who have priced properties between Rs 25 lakh and Rs 1 crore, the going has been tough.

In fact, realising that the industry is facing a cash crunch, many developers are planning to do tie-ups at a project level, or even give huge discounts on commercial properties which then can sell as hot cakes. Many in the industry feel that a lot of projects already announced may not actually take off.

With significant pressure on realty companies, they are likely to go for restructuring and focus on selective projects in the short to medium term. There will be more tie-ups at the project level. For developers, these will be testing times that will check whether they are strong enough to weather the downturn.