Mr. Deepak Parekh, Chairman, Housing Development Finance Corporation (HDFC)

Developers committed a number of mistakes. The first was that they increased prices too much, too soon. Since sales volumes were strong, all developers across the country felt prices should be increased, even though many of the projects were on legacy land parcels. Developers kept raising prices to a point that went out of reach of even the upper class. The second, and more damaging, mistake was that they committed to buy land at exorbitant prices. Developers rushed to buy land as if there is no tomorrow and land is in short supply. Without tying up the necessary funds, developers bought land at unbelievable prices at auctions across the country. There was intense competition to buy land. The government was also increasing prices at each auction. Commercial plots of land in Bandra-Kurla Complex went as high as Rs30,000-35,000 per sq ft. If you add on three years of interest (as buildings take that long for construction), it is just too high. The third mistake was that developers refused to sell stocks that they held as they thought prices will only go up.

All three factors were due to greed—aimed to make quick money and more money. All these could have been avoided if we had a real estate regulator, for which I have been asking the government for a while. We have a regulator for the petroleum ministry and for civil aviation. But we are reluctant to have a regulator for real estate. Agreed that it is a state subject, but the industry needs to be regulated—in good times, you will notice that developers made a lot of money, but their balance sheets were still heavily leveraged. When RBI prohibited banks and housing finance companies (HFCs) from lending against land, developers went overseas to borrow money. Most of the deals were structured as cumulative convertible preference shares (CCPF) and generally carried very high rates of interest. These were convertible into equity in 2-3 years, and developers intended to repay the face value before conversion. Since these structures were categorised as equity, they came under the automatic approval route. Developers utilised these borrowings to purchase land. So, real leverage on developers’ balance sheet was very high.

Mr. Deepak Parekh, Chairman, Housing Development Finance Corporation (HDFC)