Borrow-and-build model doesn’t work any longer, Parekh cautions realty developers

PTI, Oct 29, 2021, 6:25 PM IST

Mumbai: Deepak Parekh, noted banker and chairman of the largest mortgage lender HDFC, on Friday warned against real estate developers following their Chinese peers who have been over-leveraging saying that the Chinese ‘borrow-and-build’ model no longer works anywhere.

”The most fatal financial mistakes always happen in good times simply because leverage is a double-edged sword. Leverage amplifies profits in good times but it kills during a downturn,” Parekh told a Credai summit in the city.

However, he said India is fortunate that it does not have any housing bubble troubles currently, but it is also not the time to thump the chest.

Parekh said this is the best-ever time for housing and realty. However, he added, the fact is that the inherent demand for housing remains immense, and concerted efforts have been made to ensure supply at the right price points to meet the needs of various income groups.

China’s over-built, over-leveraged realty sector and the fall-out of Evergrande with more than USD 305 billion debt and some others is a stark reminder that a reckless borrow-and-build model no longer works, said Parekh.

He added that ”with a fragile recovery, another 2008-like global financial crisis, which had its roots in the housing sector, would be devastating for the entire global economy”.

He said that nothing resonates better than Charles Dickens’ words: ”It is the best of times, it is the worst of times.” Parekh said that without doubt, the housing and real estate sector is heading into the best of times.

”In over 50 years of my work life, I have not seen housing affordability better than where it is today in the country.

”I have not seen such easy liquidity conditions and interest rates at such record low levels, and most importantly, I haven’t seen such a burning desire to be a homeowner than in these current times,” he said.

Parekh said there is a lot of optimism in the air on the potential of the housing and realty sector.

”This is not just feel-good talk, it is for real as the realty market is on the cusp of a new growth cycle and it is important that we make the best of it,” he added.

He also noted that housing markets move in cycles and research suggests that for India, the peak and trough of each housing market cycle typically entail 6-8 years and another 7-8 years to get back to an upward cycle again.

The last peak for the housing sector here was 2012-13 and the triggers for the decline thereafter entailed impacted affordability, tight liquidity, and developers finding themselves acutely over-leveraged, coupled with projects, starting to get massively delayed on a large scale.

Calling for the extension of the credit-linked subsidy scheme or CLSS, he said the government should come out with a new version or extend the existing one as ”it has been among the best-executed and impactful government schemes”. It offers an upfront subsidy for economically weaker sections and low-income groups till March 2022.

Warning against excessive price hikes, he said a key lesson to hold is consciously guarding against excessive construction at price points that are out of reach of those who are keen to get a foothold in the property market.

It is because ”the most fatal financial mistakes always happen in good times simply because leverage is a double-edged sword. Leverage amplifies profits in good times, but it kills during a downturn”, he added.