The slowdown is temporary

Realty Check

Vishwakarma | New Delhi | 25 August 2008 |

The real estate players who have built fundamental strengths will always move forward

The slowdown in the real estate sector real or imaginary? A look into various reports, industry players’ perspective, demand expectations in commercial and residential properties both from domestic and NRI market and Q1 results of real estate companies project a strong picture for the industry. Let’s take a realistic look.

Reports emanating from different parts of the country show that some sectors are hit – for instance Mumbai, the commercial hub of the country, has seen a slight reduction in demand for rental spaces. Reports from other parts of the country show that there is no let-up in the demand for commercial space. The overall slowdown of the realty market is thus not substantiated. Reports which are indicating de-growth should actually do a reality check and give out the real scenario rather than projecting a superficial picture in front of investors and consumers.

Builders claim that the slowdown in some parts of the country has been caused by a combination of the current economic slowdown, exorbitant property prices and soaring inflation. Some real estate companies have been feeling the heat due to the sharp rise in interest rates, but as a large number of property consultants point out, this is being faced by only some of the smaller players in the tier 2 and 3 cities of the country. What this means is that the industry has stabilised and the players who have built fundamental strengths will move forward.

The demand for commercial space will still have an upswing. The Indian biotechnology industry is expected to contribute approximately 140 million sq. ft. to the office demand within India by 2010. Even though the country currently holds a minimal marketshare of two per cent of the global biotechnology market, it has immense potential to develop as one of the major players by 2010 and is expected to generate $5 billion revenues, creating employment for a million by 2010 through its products as well as services.

The report indicating this has shown that Hyderabad, Bangalore, Chennai, Pune and Mumbai would emerge as the preferred destinations to set up a biotech facility and scored considerably high on the parameters with each city having distinct fundamentals / factors driving the growth. These cities hold proven potential and have sustained the confidence of the corporate entities operating in the sector.

The demand for both IT and BT space has continued to grow, albeit at a slow pace, especially in the IT sector. Though this was also fuelled by the weakening of the dollar against the rupee, in recent months the US currency has seen resurgence and is trading against the rupee at the mid-40 level, which would in the short term help the industry. If the dollar maintains those levels, companies that had stalled their expansion plans would re-look their strategies.

A boom in the commercial space demand would have its effects on the residential sector also. Industry analysts feel that there will be  a correction in the market as some of the smaller builders would have to sell at lower rates to attract buyers. But once the interest rates plateau out, larger players in the industry like DLF score because they already have a huge land bank and at the same time, consumer’s belief in brands is driving demand for DLF homes.

Experts point out that there is a growing demand for residential properties from Non Resident Indians. The reason they are investing in India is that while the US and European economies are going downhill, the Indian economy is still climbing, albeit at a slower pace. This has resulted in these NRIs investing in various sectors, including real estate. Several real estate projects across the country have gathered approximately 10-20 per cent participation from NRIs. The reason for their renewed interest in the real estate sector is that the return on investment provided by Indian real estate has been found to be more attractive than that offered by developed nations. The NRI can expect appreciations anywhere upwards of 15 per cent per annum and rental yields of 4-6 per cent on his property in India.

Surely, buyers will figure out that appreciation in property prices will be far higher than the additional amount they have to spend because of interest costs. Hike in the interest rate is a temporary phenomenon, just a measure to curb inflation. Government will ensure the rate comes down after it manages inflation, which experts are expecting to stabilise by March next year. Therefore, it is not advisable for a home buyer to postpone his decision to buy.

Looking at it from companies’ point of view, the so-called slowdown has not affected bigger players like DLF that have posted reasonably good quarter numbers boosted by an impressive increase in both residential and commercial projects. DLF posted strong financial results for the first quarter of FY09 ended June 30 with net profit of Rs 1,864 crore. Similarly Q1, other industry players such as Unitech have also shown positive results.