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Property prices can RISE

Harsh Roongta, Bienu Vaghela

18 Dec 2008

Mr. R Ramachandran Nair, Director & Chief Executive, LIC housing finance Ltd. (LICHFL) has held various prestigious positions in the past in India and abroad. He may be credited for establishing a new composite Insurance Company in Saudi Arabia Saudi Indian Company for Cooperative insurance at Riyadh and successfully completing its IPO in 2007. Prior to his appointment as Director & Chief Executive (LICHFL) Mr. Nair was Director, Management Development Centre, LIC of India in Mumbai.  


Undeterred by the current scenario and job related insecurities, Mr. Nair believes that this is just a passing phase. He supports the view that this is a natural cycle, whatever goes up, comes down.


"Yes these are trying timesand LICHFL is well geared for the challenges, but there are certain opportunities in this scenario" says Mr. Nair in a candid Q & A session with Harsh Roongta and Bienu Vaghela of apnapaisa.com/loan   


The real estate market is going through a crisis. What are your views on this and what advice would you have for a consumer thinking about purchasing his own home?

It is very difficult to predict the direction and magnitude of price movement on real estate. One can only assume that forces of demand and supply would always apply and price movement would follow accordingly. For the consumer purchasing an apartment for his own use, this could be a good time. Not only have interest rates softened, the home buyer can also possibly get a good bargain from the developer, if he negotiates well. In fact the kind of bargaining power customer is having today may not be possible in the near future particularly when interest rates have softened and property prices have spiraled downwards. If the scenario persists for 1-2 months and demand rises, the property prices can go up. Customers should positively look at the scenario as now they are getting benefited permanently owing to the negotiations across the tables which are leading to substantial cost reduction.


Independent of these factors, one factor which is a dampener prohibitive is job related uncertainties. Buyer sentiment is far from upbeat for home purchase. Pl comment.

It is more of a perception than a reality. On analyzing the various sectors in the economy, you find that there would be many sectors/ market segments which are reasonably insulated from such phenomenon. Financial Services sector is an exception in the overall economy is of less consequence. Fact and figures connote that cost cutting is happening but that is to contain losses. Small businesses are witnessing drop in profitability but are finding of tackling it. In case of low profitability we cannot pass on that to my customer but we should squeeze our margins and try to make saving of certain amount. Yes the times are tough and really smart people will be able to overcome the situation.


What is your advice to the home loan customers Fixed or Floating or why?

It is always advisable to opt for floating rate loans unless there is a strong indication of interest rates going up, and remaining at increased level for a sustained period of time.


There are complaints regarding lack of transparency in interest rates offered to the customers be it fixed or floating. Pl comment.

In case of rate change be it increase or decrease, we take marginal fund cost consideration into account. But it is not true to say that old customers are not informed. You can check our track record. But yes it is a business call that new interest rates are offered to new customers first on running cost.


Home Loan is a big liability, what is your advice to customers with regard to insurance of their property/ life?

It is in the interest of customers only. We strongly recommend that any liability especially a large one such as a home loan be covered by insurance on the life of the person whose income is considered for servicing the loan.  So much so that we reduce the interest rate to the tune of 25 basis points (.25%) if person has insurance cover  of 15 lakh. With this we try to send the message that property should be passed on to the heirs, not the loan. The insurance premium is a very small price to ensure this peace of mind. A house/ apartment is the costliest asset owned by any person during his / her lifetime; as such it appears surprising that most home owners do not insure it against damages caused by fire, flood etc. Here too, the insurance premiums are a very negligible cost.  


Awareness about the Loan against Property (LAP) is quite low. Is it part of your business strategy? How has been its performance?

We have LAP as a product and it is competitively priced. But what we have noticed that sometimes the time the money is utilized for non productive purposes and it is difficult to monitor. If that is the case then we are not doing any good to the person as well as to the society and we discourage LAP for such purpose.


Coming to correction in 'real estate' has it really happened? What needs to be done in this area, so that this sector gets a real boost?

There has been an inconsistent rise in the property prices for last few years. The demand sustains only if it is a value proposition. Till now there was a mismatch between the value proposition and the pricing, so correction was imminent but now it has accelerated because of the softening of interest rates. The real estate market is extremely location specific and heterogeneous, even within the same geography, there are micro markets which may behave differently. There are indications of price decline in some locations and there are pockets where prices have remained stable.

Real estate players will have to address the actual demand. The demand supply gap in housing is huge, but the demand is maximum in the low-end followed by the mid-market housing segments. A sizable portion of the demand is also in the premium segment. The real estate players would therefore have to generate adequate supply in the respective segments. Needless to say, pricing should be commensurate to the value proposition that is being offered in each of the segments. Reduction in the home loan rates would also increase affordability, thereby improving demand.


What is the size of Home Loans market in India? What is the market share of LICHFL? Are you looking to expand your market share?

The annual disbursements for home loan industry are estimated at around Rs. 120000 crore for the current fiscal. LICHFLs market share is approx. 7%. It is likely that the market share might improve over the next few years beginning FY09. Even in these testing times we achieved 31% growth and we are sure that we will achieve the targeted growth in this quarter too.  There are certain opportunities in this market that we seek to exploit.


How do you view competition from large private sector banks/ private housing finance companies vis-a-vis PSU Banks and housing finance Companies?

HFCs are specialized institution in the mortgage lending space, and because of their focused approach would always have an advantage because mortgage lending requires understanding of various legalities and also understanding of the real estate cycles. Therefore whether in the private sector or otherwise, this would also perhaps keep them ahead of competition in a down cycle.


Which factors have contributed in making LIC Housing Finance the preferred choice for home loan customers?

Over the years, the Company has built domain expertise in the sector, which provides an additional value-addition to the customers. It also has a nation wide presence which provides door-step services to the customers and a large array of products to suit every requirement, priced very competitively.

I would like to add here that in the last three years the organization has completely streamlined, and is totally independent. Our recovery mechanism structure is also in place. Last part of the reform is technology based systems which will speed up the sanction process further. Now people can apply on line and avail facility of 24 hrs sanction. 


What are your expectations from the market in the near future? What innovations do you expect in the home loan market in the near future?

The home loan market is set to grow at a sustained rate in the near future, since the growth is triggered by end-users. At present there is a huge demand supply gap in housing, which was possibly on hold for some time but could not remain for long. There is a demand for 25 million dwelling coming up where affordability may be an issue but here some kind of Government intervention is needed in the form of subsidies so that these dwellings become affordable for majority of people. Even corporates, NGOs and other social welfare organizations can play a role here. As far as innovations are concerned, products will probably be more customized and use of technology should also result in better servicing standards.


Small value borrowers (upto Rs. 5 lakh) are not really part of most lenders strategy. Do you see any changes in this? 

These have been there for many years and it is not true that small value loans do not figure in lenders strategies. The ticket size of loans depends upon the value of property financed. Most pan India institutions have a strong presence in smaller towns where loan sizes of Rs. 5 lakh are not uncommon.


Where does internet and online marketing figure in LICHFL's marketing strategy?

Internet medium has become really big in the recent times and we have been using it successfully for generating substantial business.

For motivation of marketing team, advertising is important. Besides we are also building our own team of Customer Relation Associates, then there are LIC agents attached to and we have a strong DSA network as well. We have recently launched financial services company which will be financial supermarket for LICHFL, LIC, Mutual Funds etc. and will market many products.

Indeed Mr. Nair with his clear vision and farsightedness will further cement the trust of his customers built on the foundation of transparency, trust and credibility.