FUTURE CONTRACTS IN INDIAN REAL ESTATE MARKET A GAME CHANGER?
BANKING FINANCE|August 2021
Curtains up! Imagine you deciding on buying a house six months down the line and already have arrested the purchase price thereby slaying the ghosts of cost escalations! Seems a fancy thought, but what if it actually happened?
Siddharth Mahanty

The insinuation is at incorporating derivatives like futures contracts in Real Estate wherein a buyer can lock in the future purchase price based on his or her view of the real estate market. The seller by all means will offer a contrarian view of the market for the transaction to take place. Futures would be more apt for the simple reason that unlike forwards they are standardized and in a nascent market, it would be more suitable.

The implication of such a price discovery mechanism in an illiquid asset class as real estate is untested and may lead to regulatory intervention. The process of price discovery may become speculative in nature as an investment in real estate stokes the basic societal requirement. As our country comprises an aspirational mass, owning a house is looked at as a necessity than an investment. The buyers in all likelihood may not have the know-how and information to venture into a futures contract. This in turn will offer newer avenues for banks to book futures contracts in addition to extending the usual home loans. The real estate market in India is roughly INR 14000 crores, with a CAGR of 13%. It is being predicted that by 2040 it will grow to a mammoth size of INR 65000 crores. This could be the breakthrough to revive the economy. A lip-smacking opportunity for the banks, albeit with a pinch of salt!

Most of the futures contracts will be booked by banks with the help of their treasurers, who presumably will have a sound understanding of the market in question. In comparison to the regular futures business volume of banks, the proposed real estate futures will only add to the bank's portfolio and more importantly to the fee-based income. With dwindling credit off-take for some time now, banks are gunning for fee-based income to spruce up their bottom lines.

Furthermore, the narrative of privatizing public sector banks and trimming the workforce would also mean that banks will have to continually invent and innovate new credit products to sustain themselves, more so in the backdrop of less government support in the foreseeable future. The customer bases, the demographic pattern, and the target markets for banks shall witness new changes being ushered in. The scope for traditional and conventional banking will gradually shrink and become redundant or passive. The banking space in India is set for an unprecedented galvanization and the resultant impact of which is yet to be fathomed in its truest sense.

Charting the Unknown Waters- A humbling first!

In India, normally the process of purchasing a house involves signing a pre- sales contract where the buyer and seller agree on a price. In a sense the pre-sales contract can be likened to a future contract, however, the differences can be stark. The major issues like cost escalation, delivery dates, and exit routes are noteworthy.

In tumultuous times, where a buyer has to wait anxiously because of the delay by the builder, thereby simultaneously paying both contractual payments and rent is a worrisome state to be in. Very often builders cite Force Majeure as a reason for their delay, sending buyers scuttling and scampering for resolution in courts. This furthers the delay in delivery. The much-touted RERA has had little success as it hasn't been rolled out pan India. Only a few states like Maharashtra and UP that had embraced RERA in its truest form can boast of the transparency and early resolution management under RERA Act.

Even before the Covid crisis, buyers were wary of the 'falling back on promises' attitude of the builders, and thus the number of cases filed has been plenty. There have been in excess of 70 percent of buyers who have filed cases against errant builders.

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