Friday, October 31, 2008

They're building, but who's buying?

Indian real estate developers slash prices to boost falling sales.

Sudipt Arora in New Delhi

It could be the best of times for those wanting to buy a home in Indian cities as developers have started slashing prices to shore up sagging sales.

The building continues in the bustling Guragon area near Delhi but the properties on offer are starting to get cheaper.

Considered as the barometer of economic growth, the real estate sector has grown 30 to 35% during the past five years, reflecting the rapidly increasing demand for office, commercial and industrial space. Even the demand for bigger homes, now considered within the range of prospering working classes, galloped phenomenally.

But the economic juggernaut began slowing earlier this year because of double-digit inflation and a severe liquidity crunch, fallout from the US sub-prime crisis. Now economic activity may shrink as part of a global slowdown.

India's growth estimates of 9% at the beginning of 2008 have been revised to well below 7%, and the effect is directly visible in the realty sector.

According to the industry lobby Associated Chambers of Commerce and Industry (Assocham), the real estate sector is estimated to be worth at least $15 billion in which foreign direct investment is $4 billion. The sector is bound to grow larger eventually as the IT sector alone is expected to require about 200 million square feet space across the major and large townships.

It is also estimated that in the residential sector, the housing shortage is around 20 million units of which nearly 7 million are estimated for urban India.

In June this year, wholesale price-indexed inflation passed into double digits, raising prices of construction material. Realtors over-ran their budgets and projects stalled, leaving skeletal structures dotting the landscape in big and small cities all across the country.

Then came the liquidity squeeze, as the government sponged away cash from the system to control inflation. Home-loan rates shot up, people who bought struggled to pay, and potential buyers kept away. Almost 90% of home buyers take the home loan route.

"No one's buying anymore," says Ashwani Shukla of the real estate agent Triveni Associates. "Two years ago, 25- year-olds earning fat pay packets from [multinational corporations] were buying high-end apartments. Now there are no takers for flats selling at 20% markdowns. We are finding it difficult to even meet daily overheads."

Mr Shukla says that if the situation does not improve, there could be distress sales within six months. The sector was heading for a cyclical slowdown even before the current economic slump. Over the past few years, increasing demand had pushed up prices with speculators jumping in to inflate the market. Eventually, inventory piled up when buyers refused to pay unrealistically high prices.

"So many transactions were taking place between speculators and investors that no one bothered to find out what the end user, the family who would eventually live in the house, would be willing and able to pay," Mr Shukla says.

Those prospective home-owners are the developers' biggest target as almost 80% of real estate developed in the country is residential space.

Some developers of high-end apartments are now even offering a free Mercedes C200K, Toyota Land Cruiser and BMW 320i, or at least a few gold coins. In some cases, even a small flat is being thrown into the deal for those eying premium segment bungalows. As a slowdown in the realty sector stares developers in the face, these are some of the innovations they are coming up with to keep buyers interested.

Other builders have started shifting from the premium housing sector and are launching projects in the more affordable range for middle-class buyers. Are these signs that realty prices will drop in the near future? Assotech CMD Sanjiv Srivastava said: "I wouldn't advise people to wait for prices to drop. If you are getting a property at a good location, bargain hard and close the deal."

But Anshul Jain, CEO of the India arm of the global property consultancy firm DTZ, has a different take. "Yes, a correction in property prices is on its way," he said.

Many builders said they were now concentrating on the middle segment. Manoj Gaur, promoter of Gaur Sons, said the group has launched projects in Indirapuram on the outskirts of Delhi in the range of 2,500 rupees per square foot (19,000 baht per square metre) to suit middle-class buyers. Not only this, many developers are reducing the floor size of the flats from 2,000 square feet to around 1,200 square feet (112 square metres). This translates to a 50% fall in the price of a three-bedroom apartment to around three million rupees.

Gaur said though sales of premium segment apartments have been hit, demand for mid-segment housing is okay. A number of projects in mid-market segment are being launched in Gurgaon near Delhi too in the price range of 3.5 million to 4.5 million rupees.

Anil Chawla, private equity head for of D.E. Shaw & Company, one of the biggest private equity investors in real estate in the country, says he also expects the prices to fall. Similarly, Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, one of India's leading real estate consultants and brokers, says that there are definite prices discounts available for people who are willing to pay upfront even now. "They may get 30-50% discounts even now," he says.

There are several factors going against the realty sector. The main one is the lack of demand from home buyers and the slow offtake and oversupply of commercial real estate. In the case of residential property, the rate of interest on home loans has gone up from around 7.75% in 2004 to around 12.75% now.

For a person taking a home loan, interest has increased 5% in the last four years. Also, the slowing economy and global financial crisis have squeezed liquidity. So even if someone is willing to take a home loan at a higher rate, the banks may not have the money to lend.

All these developments seem to point to one thing - that the market seems set for a price cut going forward.

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