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Property Markets — a Downturn Wasted

08 June, 2010

It is well known that the recent downturn in the Indian property markets started because of the global financial crisis post the Lehman collapse.  It is lesser known that this hypothesis is just that – a hypothesis.

The reality is that the property markets in India had run well ahead of themselves as early as end of 2007. Residential prices were getting unaffordable, absorption was slowing down and developers were beginning to feel the pain of carrying massive undevelopable land banks and excessive leverage on their balance sheets. Offices and Retail, the other two big segments apart from Residential were being priced outside of reality and hence were driving occupiers away. Further, there was also a big overhang of an enormous potential pipeline supply across locations.

 

Given this background, a sensible market reaction would have been to drop prices aggressively to get rid of inventory, cut back on the pipeline projects, sell assets and manage cash flows better to reduce the debt burden. Instead, we got a typical high handed response from real estate developers. Their idea of a solution was to keep denying the slowdown even existed, hold their prices & assets and lobby the government for debt rescheduling.

 

And then Lehman happened! Suddenly the whole world was running for cover and the Indian property developers discovered their much awaited fig leaf. Hiding the slowdown behind this fig leaf, everything was possible.

 

For starters, the RBI threw in the debt rescheduling plan as a lifeline for cash strapped developers. Then, after waiting inordinately for buyers to blink first, developers finally cut prices in Feb-March 2009 – a move that showed instant results across markets. Hungry prospective home buyers who had been waiting for months and years for affordable prices rushed in to make purchases thereby providing cash flow to developers. Finally, some of the listed developers were also able to raise money through QIPs, while others were able to conclude asset sales, albeit in a limited manner.

The net effect of all this was that a large number of developers were able to resolve their immediate cash flow problems. A similar continued approach would have ensured that developer balance sheets in the medium to long term would have been strengthened with an ability to match assets and liabilities.

Unfortunately, we saw instead an immediate rush to increase prices (especially in Mumbai & NCR followed by Bangalore & Pune) from July 2009 – with the net result that end buyers in all these markets have again been outpriced. Predictably, transaction volumes have been dipping month on month. Further, the RBI has clarified that no debt rescheduling would be permitted beyond the June 30th 2010 deadline while most developers don’t really have the cash to start paying the banks.

As far as external funding goes, real estate PE money has been sitting on the sidelines for a while with few deals being concluded. Public markets which were supposed to be the final saviors have not been too happy with their past experiences and hence not too enthused by the new real estate offerings.

Effectively, we are back where we started – unaffordable properties, low sales, debt issues still existing with little hope for any significant external funding. The ‘O’ shaped recovery predicted for property markets seems to have taken shape! How the next few quarters will pan out remains to be seen.

 

My biggest lament in all this is that in the past 24-30 months, we have thoroughly wasted a market cycle. What could have been a great opportunity for the developers to set the house in order, introspect, take learnings and chart out a different path for the future has been given a quiet burial. ‘What slowdown?’ is the common public refrain you hear from developers. What they talk in private is anybody’s guess!

 

(Ritesh Vohra is the Managing Director, Saffron Asset Real Estate Advisors. The group currently manages assets worth $450 million. The views expressed are personal.)


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7 Comments
vivek . 6 years ago

Good article, but Govt and RBI only helpng builders and not putting any restriction.. common people taking huge huge loan and crying.. 50% flats are sold at 20% discount to investors with black money but not to common man..

Salil A . 6 years ago

Sir,

Great article. Lot of people deny that there is a bubble in India. I have seen flats in Kandivli, Borivali now reaching 1 Cr mark. For the infrastructure of Mumbai, the water quality, education and other necessities i find these prices totally unreasonable. Yet builders seem to treat buyers like dirt not even willing to negotiate on prices. The attitude is like “Take it or leave it”. Someday there will be a reversion to mean. Prices cannot go on increasing 25-30% each year for an asset like real estate which doesnt have inherent earning power like Stocks. But for the buyer it seems there is a long wait ahead…

shivani makkar . 6 years ago

Excellent insight into the real estate situation as it exists in India.. i would describe the developer’s attitude as “Ignorace in Bliss”..

We are still witnessing continous price increses.. however, i m not sure if sales volumes has gone down..

Vikas . 6 years ago

Good article. A few thoughts:

1. The Indian consumer is also to blame. He does not see the ‘dark’ apartments in constructed buildings. Those should be lighted if people were living in them. Massive supply.

2. I also have a bone to pick with the Real Estate industry. Lack of transparency / information. It works both ways. Builders themselves do not know how many projects are there, and how many available etc. And the customer does not have the correct picture either.

Vikas . 6 years ago

Good article. A few thoughts:

1. The Indian consumer is also to blame. He does not see the ‘dark’ apartments in constructed buildings. Those should be lighted if people were living in them. Massive supply.

2. I also have a bone to pick with the Real Estate industry. Lack of transparency / information. It works both ways. Builders themselves do not know how many projects are there, and how many available etc. And the customer does not have the correct picture either.

Kunal . 6 years ago

No one seems to give attention to the phenomenal amount of black money in the real estate ecosystem. That is what makes buying properties extremely unaffordable for the ordinary salaried class. I was shocked when I recently called a top notch developer in Mumbai and they to talked about black component. Pathetic situation. Everyone including governemnt, private equity, is incentivised to turn a blind eye to this problem.

Nasik Property . 6 years ago

Great post! I want to know when you update your blog, where can i subscribe to your blog keep the good job going.

Property Markets — a Downturn Wasted

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