Coming Down To Earth

A rise in funding rates as well as home loan interest injects hard reality into what had super-heated into an unreal market, says SHANTANU GUHA RAY

CONVENTIONAL WISDOM says that when the stock market falls, gold and land prices go up, as investors flock to the safety of more tangible investments. But, as the sub-prime crisis in the US has moved in critical tandem with the liquidity crunch, it’s clear that globalised markets don’t obey conventions. With the Reserve Bank of India ringing in fiscal measures to tighten liquidity in the face of double-digit inflation, one of the first sectors to be affected is real estate.

The fuel price hike and lower IIP (Index of Industrial Production) numbers were the first setbacks to the sector. Now, with a 11.05 percent growth in WPI (Wholesale Price Index), inflation has emerged as a serious threat as well. “Prices have corrected by 10-20 percent and even beyond and not touched bottom,” remarks Jai Mavani, real estate practice head, KPMG.

It’s true that prices may not hit the basement — yet. Across the country, most real estate developers are caught between the rising cost of capital and construction and the high interest rates on loans scaring investors away. Shobhit Agarwal, joint managing director, (capital markets), Jones Lang Lasalle Meghraj feels the government's fiscal measures to curb inflation will intensify the liquidity crunch. “Developers will soon face increasing problems because potential buyers — with lower disposable incomes — will defer property purchases and this will negatively impact an already struggling real estate market," he says. Indeed, the recent fate of real estate stocks on the bourses reflected such concerns: since the beginning of the year, the nine listed realty companies have seen their share prices fall by almost 60 percent, with share prices of the two largest companies, DLF and Unitech, crashing 57 percent and 66 percent respectively.

It’s a big come down from the kind of volcanic heating the sector had been experiencing, with growth figures of an average of 18-19 percent over last year’s 11 percent. This cooling down has even led many developers to operate as a cartel in some prime pockets, in order to buy parcels of land.

Right now, property developers pay interest rates as high as 18 percent on borrowed funds. And, since the RBI raised interest rates, sales have already declined by up to 70 percent in several markets and prices fell up to 20 percent in pockets like Gurgaon, Greater Noida, Ghaziabad and Kundli in the national capital region, portions of Kolkata, Bangalore, Chennai, Hyderabad and some Mumbai suburbs.

Experts agree that while higher interest rates will affect capital-intensive sectors such as engineering, capital goods and infrastructure negatively, it is sectors such as automobiles and real estate that will face the double whammy. “Demand depends on consumers having access to credit. If the interest rates go up and loans become expensive, the demand for real estate will be hit,” says Siddartha Sanyal, VP Institutional Equities-Research, Edelweiss Securities.

Agrees Gagan Banga, group spokesperson, Indiabulls: "The interest rate hike will force a 5-15 percent price correction in the real estate sector over the next couple of months.” Banga’s concerns are echoed by Rana Kapoor, MD and CEO, Yes Bank: “Real estate developers are all heading to PEs (private equity) because the banks are charging high rates. This means the traditional method of getting funded through banks is not happening. This means in the longer run, there will be a serious price correction in real estate properties as demands soften.”

It’s only those who have access to already garnered private equity that are on firm ground: ask Niranjan Hiranandani, MD, Hiranandani Constructions, and he doesn’t think the liquidity crunch will have a major impact in the long term real estate market. He feels there is a fairly long queue of investors waiting to pump money into the beleaguered real estate sector.

Hiranandani’s optimism is founded on the $500 million pool of reserves he’s raised internationally, through the United Kingdom’s Alternative Exchange. There’s no denying the current crunch is a good time for those with deep pockets to seal land deals at bargain prices — and wait for the economy to correct itself. “There will are many who have sourced money from private equities (PEs) earlier. This will be the time for them to enter the market,” Hiranandani told TEHELKA.

Experts agree there is no alternative to credit. Small developers also live under the fear that their projects might get mired in the resource crunch. With home loan rates likely to go up, the advance money received from customers too will dry up, forcing developers to slow the pace of project execution. “Developers are changing their expansion plans,” explains Sanjay Verma, MD, Cushman & Wakefield.

With the primary market for real estate on shaky ground, even those with private equity are being cautious and going slow on land acquisition. Sunil Rohokale, head mortgage & real estate, ICICI Bank, feels the current meltdown has weakened market sentiment. “These higher inflationary trends will call for some regulatory moves. Only then we can have better affordability,” says Rohokale.

VK SHARMA, director, Anagram Securities, feels that realty stocks are in for further hammering. “So far, builders are holding on to prices by absorbing the interest on loans taken for projects. But they cannot do it indefinitely because the compulsion will be to cut prices further. The PE fund is there but that’s for real estate developers with a good track record,” says Sharma.

Are the big guns worried as well? Unitech, which plans to launch houses at Rs 40 lakh in Gurgaon and at even lower price points in smaller cities, is confident of finding buyers. “We can do little about high interest rates, but must stimulate demand by making houses more affordable,” says Unitech general manager (corporate planning & strategy) R. Nagraju. Ansal Properties and Infrastructure CEO Anil Kumar says the company has adjusted to the changed demand scenario. “Our focus is execution, rather than launching more projects,” he says simply.

Should everyone hold that line, it might well be the foundation of a more realistic market.

(With inputs from Krishn Kaushik)