The Risks in the Indian Real Estate Market
India is an emerging real estate market but it lacks a regulatory authority that can control the risk involved in the housing financial sector.
This sector demands policies and laws to encompass property rights and mortgage markets to manage the risk involved.
The major threats in this sector come from
- Credit (collateral and lender)
- Operations (for renting firms)
- Legal
- Market (requirements and competition)
- Liquidity
- Interest rate
There are various administrative and regulatory barriers which are obstructing the growth of credit securities market in India. These factors include outdated laws like Rent Control Act, Urban Ceiling Act, contrasting and high stamp duty charges across different states etc.
The number of credit defaulters in India is quite low when compared with rest of the world. This is mainly due to the small loan amounts and high interest rates given out to people with a higher level of income. This might change in the near future with rapidly decreasing interest rates.
To counter this, finance companies should have a good administrative team that can manage credit and operation risk. At the moment, except for HDFC, all other banks and housing finance institutions have little experience in managing these risks.
Asset Liability disparity in banks and Housing Finance Corporations (HFCs) is another factor that can raise the liquidity risk. This is because, although the loan tenure has gone up to 15-20 years (from the initial period of 5 years), but the asset still remains in the ledger of the lender for only 8-10 years. This is not troubling the banks as much as they have a diversified pool of assets and lending alternatives. About 75-80% of the bank deposits (which can be anything around Rs. 400-450 billion) are long term in nature and this protects the banks from asset liability disparity. But this might be a concern for the HFCs which have a difference between their assets and liabilities’ maturity profiles.
In coming years, profit of a housing company will be decided by its ability to reduce the number of defaulting mortgage assets. Banks and HFCs are looking for new ventures – they are now targeting smaller towns. Also, a new model is being followed by some of the HFCs where they give out the initial loan (and cash on the processing fees) and then pass on the security to one of the bigger players. However, with new players entering the market, it is possible that only HFCs with an adequate distribution system will be able to stand in this sector.