Thursday, September 3, 2009

Real estate buffeted by strong currents

Real estate in India has always been the playing field for entrepreneurs. This industry has witnessed unprecedented highs and frightening lows
over the years. One is often left dyspnoeic with the continuous shifts in this sector.

Market Dynamics

Due to rise in demand in the IT/ITeS sector and significant increase in FDI, the commercial and retail real estate markets experienced tremendous growth in the first quarter of 2008. Land deals accrued around Rs 23,000 crore with additional deals worth Rs 10,000-crore in the pipeline. The highest recorded land deal was Mumbai's Bandra-Kurla Complex.

However, it has not been an easy journey for all in the property market. Last year, the global property collapse exacerbated by the credit bubble burst resulted in reduced finance and business activity. Equity markets also remained lacklustre and raising money through IPOs proved to be difficult. Both real estate giants, Unitech and DLF, delayed the plans to raise money through REIT issues after witnessing unfavourable initial response.

Consequently, lack of funds forced developers into high interest loans. High credit amounts proved to be detrimental for property companies. Most companies borrowed a large portion of their land-development outlays up front and relied on advance sales to repay these loans. However, poor sales led to delays and massive cost overruns. According to industry estimates, around Rs 8,000 crore worth of projects had faced considerable delay by June 2008.

The Ripple Effect

The collapse of Lehman Brothers, in September 2008, was perhaps the most significant event that spiflicated an already floundering property market in India. It triggered a shockwave that rippled through the liquidity centric commercial and retail real estate markets leaving a trail of defaults, delays, and losses. Even though property prices have corrected by 22-42% in major cities over the last few months, 10-15% downside is further expected. Commercial real estate demand has languished as corporate firms deferred expansion plans to deal with the
credit situation.

Negative absorption rate aggravated by falling rentals led to decreasing margins. Companies like DLF, with 40% of its portfolio in the commercial and retail space, reported 29% y-o-y decline in 2009 revenues while its net profit plummeted by 43%. Similarly, the top line was also distorted for companies like Ansal (-26%), Parsvanath (-60%), etc.

Timely Measures

Timely and synchronised measures taken by central banks and governments around the world restored balance and prevented a total collapse of the financial system. Thus, markets saw a mild recovery. According to Rajeev Rai, vice-president of Corporate Assotech Ltd, “To counter decreasing demand and to gain confidence of all stakeholders of Indian real estate, associations like NAREDCO and CREDAI decided to bring down prices of various properties by reducing overheads and marketing costs. In some cases, ticket size of the property was reduced with reduction in size of apartment to make it more affordable for the masses.”

As per a report by Grant Thornton, the total number of PE deals announced during the first half of 2009 stood at 93 with a total announced value
of $2.89 billion with the highest proportion invested in real estate and infrastructure management worth $1.61 billion. Bhim Yadav, CEO, Falcon Realty Services Pvt Ltd, reckons, “A higher FAR not only brings in more supply to the market, it is also vital for creating room for more affordable housing and control the steep rise in prices, ultimately benefiting the common man.”

The Mumbai real estate saw a sharp price correction. Average peak rentals fell 40–60%. While there was a slight mismatch with excess supply, (supply of over 30mn sq ft over 2008–10E vs expected demand of 22mn sq ft), the demand in Mumbai has been healthy.

Comparative Analysis

UnlikeMumbai, commercial and retail space in NCR is expected to languish due to weaker absorption rate. As per Centrum, the average vacancy rate in malls across India was about 9% in Q408 and NCR had the highest vacancy rate of around 25%. According a study by Knight Frank India, average rentals in Gurgaon was down from Rs 120/sq ft to the Rs 51/sq ft while rents in Noida dropped from Rs 90/sq ft to Rs 44/sq ft.

In conclusion, as market conditions stabilise, the financial markets will slowly pick up resulting in an improved liquidity scenario, stable government, and affordable prices. This may well serve to bring back the shine to this lacklustre sector.

1 comment:

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