Home loan enquiries have dropped by 30-40 per cent

Real estate feels the loan pressure

Realty Check

Vishwakarma | 15 August 2008 |

The slump in the housing sector might seem like depressing news, but it is only part of a slowdown. Worldwide, property prices have never declined in the long run.

The Great Indian Realty Dream may not have shattered yet, but it surely seems to have got a temporary setback resulting from the current economic slowdown, exorbitant property prices and soaring inflation. And as if this were not enough, a steep hike in interest rates coupled with negative investor sentiment is playing havoc with the prospects and fortunes of a industry which was in the pink of  health and was growing at the rate of 30-40 per cent till a couple of years ago.

In view of the realty boom earlier, global research agencies were even expecting the Indian real estate market to grow from the current level of $14 billion to $102 bn in the next 10 years, with the main growth thrust coming from favourable demographics, increasing purchasing power, professionalism in real estate and  reforms initiated by the government to attract global investors.

But, sadly, everything appears to have turned topsy-turvy now. Among obvious reasons, while hardening interest rates have affected the demand for residential space — which had witnessed the highest price appreciation in recent years – they have also increased the cost of funds for real estate players. This, along with a constant rise in the cost of construction,

has subdued the growth of this sector. For instance, in addition to the skyrocketing land prices in major cities, the prices of steel and cement have risen sharply, escalating the cost of construction.

According to a rough estimate, deals in the real estate market are already down 20-25 per cent with a majority of fence-sitters and second-time investors deserting the market, while home loan inquiries are said to have fallen by 30-40 per cent even in a prosperous metro city like Delhi. Worse, with the ongoing liquidity crunch in the market, lots of developers may now face escalating problems in completing the ongoing projects and launching new ones.

Subsequently, they may also have to look towards other sources of funds which could be on higher rates, thus impacting the cost-benefit ratio of companies. This situation, in fact, has already forced many developers to mop up credit from the unorganised market where the interest rates are as high as 30-50 per cent. As lots of real estate companies are in dire need of credit to complete projects at hand, this may also result in distress selling at some point of time, impacting the prices of properties further.

True, owing to the substantial profits made by them over the last couple of years, the bigger players still have good holding power and they could hang on their unsold projects for some more time. But they too can’t remain immune to the market situation for a long period and may have to look for other options as well as incentives to maintain growth and boost sales. Residential developers, for example, may begin to look more seriously at incentivised formats such as townships, while office space developers may have to consider the SEZ option.

However, as mentioned earlier, all is not over yet and there is still hope. It is only a temporary phase and there’s no need to panic as each sector and industry has its ups and downs during its course of growth. Even the realty sector is only hit by the economic slowdown and is witnessing

price corrections at some places where the prices are or were abnormally high owing to speculative activities and artificial pricing. So while the current situation will drive speculators out of the market, the genuine buyers and end-users will ultimately benefit. Also, once the economic situation improves, inflation is tamed, interest rates start moving southwards, and investor affordability goes up, the realty sector will surely be back on track. Even now investors can make more profits by investing in upcoming zones and places of importance. Anyway, there are no instances in any part of the world of property prices going down in the long run!