DELHI: In Noida, part of the National Capital Region and home to a burgeoning middle class, a builder is wondering where he'll find the money to finish building about 1,200 apartments that are to be delivered by the middle of next year. Unless he can find some cash, the construction will grind to a halt. But all the usual sources of funds have dried up, at least until the general election is over.
According to industry experts, this is because most of the money that used to go into real estate is being diverted toward funding poll campaigns in what is shaping up to be a tough election. The timing couldn't have been worse for builders who are already facing a cash crunch.
About Rs 10,000 crore was spent in Lok Sabha campaign in 2009, according to an estimate by the Centre for Media Studies, an independent research organisation. "This time that figure will be between Rs 15,000 crore and Rs 20,000 crore," said N Bhaskara Rao, chairman of CMS.
Given that there are strict limits on poll spending, much of this cash goes under the radar and is funded through income that's unaccounted for, analysts said.
Political parties and candidates don't reveal much about funding, except for the Aam Aadmi Party. But from what is known it appears real estate firms are among Association for Democratic Reforms, a non-profit group that tracks election funding, between 2004-05 and 2011-12, companies accounted for 87% or Rs 378.89 crore of total donations (Rs 435.87 crore) to national parties. The manufacturing sector led with 595 donations that added up toRs 99.71 crore, followed by 340 donations and Rs 24.10 crore from the real-estate sector.
"Ironically, one of the big issues in this election is corruption," said a builder, who did not want to be named. "It is well known that a chunk of the money invested in Noida's real estate sector, for instance, is linked to a prominent politician. In Mumbai, you can't buy land or launch a project without the blessings of a few big netas."
Over the past few years, governments at both the Centre and the states have been embroiled in real estate scandals, in which India's biggest builders have also figured. "The nexus between politicians and builders is well-known. Politicians extend favours to builders, who often are related to them, while builders help them convert black money into white," said Prashant Bhushan, a member of AAP, which emerged from the Anna Hazare-led anti-corruption movement of 2012.
Developers didn't want to com comment on the record about the issue. Privately many agreed that funds have dried up because money is now being used to fund campaigning.
Lalit Kumar Jain, chairman of the Confederation of Real Estate Developers Association of India (Credai), said, "The liquidity position of developers has worsened in the last few months and one of the reasons could be political considerations and the upcoming elections."
Builders are already in trouble due to growing unsold stock. Property research firm Liases Foras said such inventory at the end of September 2013 touched 711 million sq ft (or around 650,000 homes) and developers would need more than 37 months to clear this backlog at current pace of sales.
Deepak Parekh, who heads India's biggest mortgage lender, recently told ET that if corruption could be eliminated from the real estate sector, home prices would come down by at least 20%. Parekh admitted that there was a shortage of funds in the sector due to high interest rates and lack of sales.
The last few years saw several investors buy multiple homes in cities such as Gurgaon, Noida, Mumbai, Pune and Bangalore, but many of them are finding it difficult to exit due to the lack of end users in the market. Then there is political uncertainty, which is keeping home buyers away. "Nobody wants to catch a falling knife," said Sandeep Madan, a New Delhi-based high net worth individual who invests in real estate projects.
Builders are already worried about the exodus of labour at election time. Add to that, official sources of funds—private equity firms as well as banks—have become more cautious while investing or lending to the sector, forcing them to knock on the doors of money lenders who charge interest rates ranging anywhere between 36% and 48% a year and are asking for double the collateral.
"Most PE funds are being cautious and selective, are more expensive than earlier and are asking for guaranteed returns," said Amit Bhagat, managing director of Ask Property Investment Advisors, which invests in residential projects. Banks too are cautious. "The risk weightage for commercial real estate loans is higher today," said National Housing Bank chairman RV Verma.