Tehelka Magazine, Vol 5, Issue 27, Dated July 12, 2008
|BUSINESS & ECONOMY
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)