Despite the country’s rapid urbanization, the Indian property sector has suffered in recent years as sluggish economic growth left developers around the country with shiny new residential units without buyers.
With the political and economic stability promised by new Prime Minister Narendra Modi, optimism has returned to the sector which is expected to follow India’s stock markets in reclaiming lost ground.
That buoyancy is palpable among developers at the annual HDFC Homes Fair in London where companies from across India came touting their wares this week.
Organized by HDFC, India’s largest bank by market capitalization, the event has proven to be a barometer of sorts, providing an insight into the health of the Indian economy.
The UKAsian caught up with Renu Sud Karnad, Managing Director of HDFC, to find out more about the fair and the Indian housing sector.
HDFC is not a UK-regulated financial institution and therefore not a lender in the UK. So what is HDFC’s specific role in the Homes Fair?
Our role is purely advisory. If you wanted to buy a property in India there are numerous questions that need answering. There are different land laws to tackle, different processes in which property is transferred. You also have to take into account the developers. Once you’ve bought a plot of land, then when will the property be built? And various other questions. Buying a home is a hugely complicated process because of the fact that even today there isn’t a lot of regulation of the sector. There are some builders who are well established and the entire process is looked after by them. There are other builders and developers who are first timers, in fact a lot of first timers. There are innumerable cases of people putting in money and the developer disappearing. So we provide a quite invaluable advisory service to people inside and outside India who are looking to invest in the country. So what we bring to the table is that expert advice on where to buy, how to buy and providing all the necessary checks on builders, lenders etc. We also provide advice on the financial side of things. What we see is that most Non-Resident Indians (NRI’s) bring a sizeable chunk of the money they want to invest and raise the remaining capital in India. In those cases we provide advice on where to go for capital, interest rates and ultimately loans in India as well so that potential buyers can have the advantage of getting a loan in India in Indian Rupees and paying it back in the local currency without being exposed to currency fluctuations.
Quite apart from the complexity of it all, what credit criteria would a potential buyer have to meet? British or Indian? And how do they differ?
Today the criteria that is being used in India is virtually the same as in the UK. We follow the exact same guidelines as are followed in the UK and US. We also have credit rating agencies that we didn’t have not too long ago. There is now data available on individuals up to a decade into their credit history. So the processes that assess a person’s ability to repay a loan as well as his intention to pay are well in place. The only thing that we lack is title insurance which is of course available here in Britain but is essential in a country like India where buyers also like to purchase plots and build on their own. I’m sure this type of insurance will come to India in the not too distant future.
How rigorous and effective is the implementation of credit checks in India?
To answer with some simple statistics: Our non-performing loans, i.e. people who haven’t paid us for ninety days or more, is just 0.53 percent which means that 99.47% of people keep up with their repayments. In 35 years, HDFC have only written off 0.04 percent of what it has lent. And we are one of the biggest lenders in the country. These figures compare very favourably to other parts of the developing world and even the West where the figure is around 2%.
What kind of trends are you seeing in terms of NRI investment in the residential housing sector in India?
When HDFC began operations 35 years ago, the NRI was not looking back home in any way. If anything, their new pastures were their physical and spiritual homes and most wanted a clean break away from India. But in the last 15 years, with the economic changes that have taken place in India, scores of NRI’s are either returning home or setting up bases in India and travelling frequently to the sub-continent. Earlier an NRI would buy a property because there’s a parent or other relative who needs a place to stay and that would be a major motivation. Today NRI’s are buying their second or third homes in India. It’s an exciting time for India and there are a lot of positive things happening and many people want to be around to be a part of that.
What about this ‘Black’ and ‘White’ money phenomenon that potential home buyers need to contend with in India?
The whole black and white money business has declined dramatically in recent years. Black money was a function that arose from the license raj. Developers who needed to pay ‘Speed’ money for various approvals would obtain some of that money from the buyer who didn’t have to declare it. When you have a shortage of essentials like cement or there is a massive lead time to obtain materials then inevitably things like this happen. That’s one of the things that our new Prime Minister has been talking about as well. Black money is the result of entrenched corruption and bureaucracy. If we are able to reduce approval times for projects then the corruption that is inherent in that process can be reduced as well. That in turn will have a direct impact on property prices as well, at least up to 20 percent.
With a booming housing sector come the speculators and the “flippers”. How do you prevent people like that from dragging the sector down?
You can’t prevent speculation. It happened in a big way a few years ago but I think people are more cautious now. Investors are far more aware now and know that bubbles are unsustainable. They know that what they are going to put in is not going to increase by a quarter in six months time. Perhaps in two or three years but not in a way that encourages speculation. So investors who want to make a quick buck by flipping will not find the returns that they would like or expected. Investors who hold the property and get a return out of it will benefit. And the medium-to-long term potential is far more attractive. There are huge shortages of property in India, particularly with our country’s rapid urbanization which currently stands at 32% but is expected to grow to 40% in the coming years. So the long term gains are far more assured for the smart investor.