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.)