Realty faces reality: 15-20% correction by Q1 2009

The real estate bubble has finally burst! The sector that was in the limelight a year ago is simply coming apart. Severe cash crunch with bank loans drying up, sales plunging, demand falling and stock market crashing have compounded the worries for real estate companies.

The real estate sector in India has grown 30-35 per cent in the last five years, reflecting the rapidly-increasing demand for office, commercial and industrial space, as well as bigger homes now considered within the range of India's prospering working class.

But the economic juggernaut has been slowing since earlier this year due to double-digit inflation, a severe liquidity crunch as fallout of the US sub-prime crisis, and now, the possibility of economic activity shrinking as part of a global slowdown. The country's growth estimates of 9 per cent at the beginning of the year have been revised to well below 7 per cent, and the effect is directly visible on the realty sector. The BSE Realty Index has already witnessed 82 per cent fall from October 2007.

“People are concerned about cash provisions and where real estate companies will get money from. People are exiting at any price because there are no buyers for realty stocks. Investors are now shifting from net asset value-based valuation to cash flows of the company. Real estate stocks have been correcting mainly because developers have not reduced home prices despite a slowdown in sales,” said Sandeep Acharya, analyst with Spark Advisory.

Developers are now hitting upon novel marketing strategies, absolutely unheard of in the sector, to woo reluctant flat buyers. Offers ranging from 'Buy 1 flat, get another free', 'Drive to your new dream home in your dream car' clearly show the desperation among real estate players.

A clear move to shore up the sagging morale of prospective buyers, property developers have even come forward to pay pre-EMI interest on part-money disbursed on the housing loan taken by a flat buyer. Local builders such as Mantri Synergy, Jains Sunderbans, ETA Rosedale and Hirco Palace Gardens have come out with such schemes to attract buyers.

Most of the real estate companies take debt at project level, which typically range from 2-4 years. This implies that every year, close to 30-40 per cent of the total debt becomes due for repayment. Hence, real estate companies need to monetize the project timely to be able to repay the debt on time.

“Due to the slowdown in the sector, this cycle has come under pressure, as property transactions have dried up considerably - delaying the monetization of assets. Due to the ongoing credit tightness, banks are unwilling to extend or refinance old loans and are imposing several new covenants on the developers. At the same time, financing for new projects is becoming more stringent with clauses for exclusive use for stated projects as a result, servicing of bullet repayments falling due in 2008 remains a key challenge,” said Motilal Oswal Securities in a report.

The credit crisis across the globe has taken the sheen off large property firms, with DLF and Unitech, two of India's leading real estate companies, seeing their market cap eroding almost completely and their fund raising plans being hit.

Source: EconomicTimes