(King Johnson Koyyada)
There is threat of real estate firms collapsing if they borrow funds recklessly from banks and financial institutions and invest the funds in new business areas instead of the realty projects. The collapse is inevitable if they fail to mobilise enough support from the market. It is always advisable for the realty projects to commence operations with own funds. A realty project in Tellapur stands as a testimony to this undesirable incident. The realty firms are advised against venturing into other sectors of activity taking advantage of bank loans.
What will happen to their realty projects if they fail to rake up the moolah there? Similarly, if the government were to impose new rules on bank loans, what would be the future of these realty firms? A situation that had arisen in China would occur here too. The major player in China’s realty sector Ever Grand collapsed. Similar situation is likely in domestic realty sector too, if precautions are not taken.
Following the collapse of EverGrande in China, the world economy has focussed its attention on China. The EverGrande became highly reputed in the shortest period with a total work force of over 2 lakh and its presence in 300 towns and cities. It has over 1300 projects. Of them, 780 are in various stages of construction. It builds over 6-lakh houses a year as against 3.80-lakh in India. It builds double the number of housing units in China, compared to India. The people of China who invested their life time savings to buy flats in EverGrande are now gathered in front of the EverGrande offices. EverGrande is yet to hand over 16-lakh flats to customers.
The current situation prevailed as a result of China imposing restrictions on loans to realty sector. The Chinese Government insisted that the loans of the realty firms should not exceed 70 per cent of the assets. The gross loan should not exceed gross value of the properties. Moreover, all developers should have cash balance which is higher than the quantum of short-term loans availed by them. These rules became the last straw on the back of EverGrande. It impacted the commercial and industrial sectors in that country.
What is the folly of EverGrande?
First and foremost, the business mode of the developer is not proper. It buys land in auction at a higher cost than the land price. The more and more loans granted by banks to it became a huge burden for the developer. The sale of housing units dropped due to unprecedented rise in the cost. Another folly of the developer is to divert funds borrowed from banks and spending the proceeds of the sales to other sectors instead of using the funds for construction activity.
It bought a foot ball team and is building a football stadium. It also entered into mineral water business and electric cars trade. Because of the Covid, the businesses suffered. It stands as a befitting lesson to those who would channelise the borrowed funds to other areas. It owed at least US dollars 100 billion for supplying steel, colours, cement and so on. The total borrowings of the organisation as on June 30 was US dollars 310 billion. Besides, it owed US dollars 100 billions to other companies and traders. On account of Covid-19, the company retrenched many of its employees. It even could not pay wages to them. To come out of the red, the company is selling flats, whose prices it hiked earlier, at 28-52 per cent less prices.
Recession is on the cards?
As Lehman Brothers went bankrupt in 2008 as the company was steeped in debts to the tune of US dollars 619 billion, economic recession was triggered world wide. The EverGrande of China owed US dollars to the tune of 380 billion. It posed the question, whether another recession is on the cards? The EverGrande, which is one of the Fortune 500 companies, failed to pay US dollars 83.5 million on Sep 23.
To find whether the government of China will come to the rescue of the firm or not one has to wait for some more time. Collapse of EverGrande and another 200 organisations going bankrupt, China is facing rough weather. If the Ever Grande problem is not resolved, economic recession is likely since China would have to clear debts to the tune of US Dollars 1.3 trillion in the months to come. There is no doubt that the EverGrande is likely to preside over the collapse of the economy.
64 per cent of Chinese population is urban (Box item)
According to a conservative estimate, 96% of the families that live in urban areas in China at least owned a house each. That is why, the demand for houses is very high in China. The size of the construction sector in China would be around US dollars 52 trillion, which is very high, compared to investor bonds and shares. Concentrated investment in housing will improve demand for houses. Development should not be limited to just one region and it should be diversified and planned. Then only, the construction sector would be able to survive.
Rocket science applicable to realty sector too
The physical science principles demonstrate that if any projectile like rocket is sent into space it would return to earth with equal force if the force of the rocket is not enough to overcome the laws of gravitation. The rule is equally applicable to business. Loans are a kin to fuel in businesses. If the business is not strong it is likely to crash. Therefore, if any business operates on the strength of loans alone it is likely to crash one day.
What are the lessons to be learnt?
The Covid-19 has impacted the Hyderabad realty sector in toto. If old projects, new projects and UDS projects were to be reckoned, the supply will increase manifold in near future. Therefore, those who launch the new projects should study the market fully before putting their best foot forward.
Realtors who sold flats under the UDS scheme are investing the amount so realised in other sectors of activity. In stead of the diversion, they are advised to use the funds in realty projects. If the realtors invested their funds in other ventures, the existing venture is likely to starve of funds. If the sale of flats fails to rake up enough moolah, the realtors would not be able to complete the projects. Therefore, they are advised against diverting funds to other projects.
<div class=”point”>Those who build flats and villas are advised against venturing into other sectors where they do not have any experience. If the new business fails to take off along the expected lines, they would have to be back to square one.</div>
<div class=”point”> Instead of focussing on development of one region building luxury homes, the realtors should build projects understanding the needs of consumers. Then only, they would be able to withstand the competition. The developers should not feel head ache handling too many customers of 2BHK projects. Whether they build luxury homes or affordable homes, they should not forget the rule that the developers are accountable for five years for new constructions if the RERA rules are any indication.</div>
