Overkill of malls and misfires: Deepak Parekh

{image-HDFC Deepak Parekh_10092008.jpg news.oneindia.in}Mumbai, Sep 10: Cautioning against the herd mentality in the realty sector, Housing Development Finance Corporation Chairman Deepak Parekh on Wednesday, Sep 10 said builders of huge malls have become a casualty to such reaction.

In his keynote address to the FICCI International Real Estate Summit here, he said the mall mania across the country had resulted in oversupply of mall plans due to overestimation of the spending power of an average Indian which was way off the mark. ''Malls are increasingly becoming places to 'hang out' or eat and therefore most retailers with paltry sales were unable to sustain rentals that rocketed as high as Rs 300 to Rs 600 per sq ft''. He said today top eight cities in the country were already witnessing a 20 per cent vacancy across 40 millon sq ft of operational malls and there would be more vacancies coming around. While abandoned mall plans were scrambling to be converted into office space, certain cities were already seeing an oversupply of commercial space, especially in the light of slowdown in the IT and BPO sectors. It was critical to be able to assess genuine demand, he added.

Mr Parekh said there was compelling need to push through the long standing unfinished agenda of grater transparency in the real estate market. There was growing consensus for a real estate regulator. He had made a similar plea in the previous summit also, but nothing had moved in this direction, he said, adding that the land acquisition procedures should be simplified, stamp duties must be reduced and a single window clearance system should be in place to meet the present requirements and supporting infrastructure. Drawing rich experience in the sector, he said builders must realise that their absurdly high margins could not be sustained.

''It is unfortunate to see an ostrich-like approach where developers would prefer to put themselves on the brink or pay exorbitant interest rates rather than lower their prices and tide over their financial crunch.'' Developers need to guard against the dangers of excessive borrowing. ''If you live off too much on borrowed money, even the best risk management systems cannot save you,'' he cautioned the builders.

Mr Parekh said the overkill that happened on retail lending was now having its repercussions in terms of increased non-performing assets. Ultimately, there was no substitute for prudent lending, irrespective of whether the market is going through a boom or bust phase. One should be rational in an irrational market, he added. Developers should also guard against over exuberant development and identify genuine demand instead of being swayed by herd mentality.

He said that the demand for housing was enormous in the country and there would not be any saturation in the market for a long time to come if the sector was priced correctly. The attraction for developers in the affordable housing segment was assured of sales and upfront cash flows. The lower margins would be made up by higher volumes. Though riskier, more profitable projects include slum rehabilitation and it was encouraging to note that some developers were looking at this segment also.

The present situation might call for some consolidation within the sector and perhaps the need to create innovative financial instruments that could support financially distressed developers to tide over, he added.

UNI