Real Estate Developers Ready to Start Price War

The daggers could be out soon, as massive loans taken from market players may start to burn holes in real estate developers balance sheets if the properties are not sold soon.

The cartel for real estate players who have been holding up rates for the last six months may soon get in to desperate mode. Real estate developers are bracing themselves for a 50% cut in their property rates. This despite the fact that real estate prices in India have fallen 20-25% over the last seven months. Industry experts at a recent TiE-Indian Angel Network summit held in New Delhi agree that further price cuts are in the offing.

Kashi Nath Group's CEO Sanjay Khanna clearly admits that those who do not reduce prices now will be forced to do this some time or the other. Ask Ashish Mathur, head of business development and marketing for Mahindra World City, who gave a resounding "yes" when asked if a 30% cut can be expected in realty prices.

Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, says that a 30-50% discounts are available even now, if one is willing to pay cash down.

In the case of residential property, the rate of interest on home loans has gone up from around 7.75 percent in 2004 to around 12.75 percent now. Almost 90 percent of home buyers take the home loan route. For a person taking a home loan, the rate of interest has increased 5 percent in the last four years. If a person borrowed a lakh for 20 years at 7.75 percent in 2004, he would have to pay around Rs 96 thousand as interest eventually. At the present rates, the interest rate burden has now increased to more than Rs 2 lakh on the same amount.

The liquidity crunch has been fueled by expensive home loans, a slowing Indian economy and the global financial crises. Banks too have become reluctant to lend to the realty segment. The ing economy has had a direct impact on commercial property market. During the quarter ended September 30, commercial space demand has slowed down in all major metros, with low leasing demand in the first two quarters of the year.

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Realty Gripe Strikes PE Fund Managers

The gripe is now being seen in the stomachs of the fund managers at PE funds. Until December 2007 and a few months in 2008, they were seen sashaying with the developers, wiggling their dollars pulled out of desperate investors in the US, who were facing a massive downturn in their real estate markets. Somehow, these PE funds were able to convince them that India and Asia were insulated from any US downturn, and that instead of earning 4% of returns in US, it was wise to invest for 25% in India.

They are not dancing anymore, instead their ass is grass, if this realty slump in India continues for another 6 months, and most likely it will. We need one nice high in the stock markets, and that seems to be coming, to make retail investors and baby speculators from entering lock stock and barrel in to real estate again. This will be the final high, because, post this, we will see such a severe shock, that it could be that real estate in India will not rise again.

When first mentioned in February, that a top had been reached in real estate, my own colleagues did not agree, but now as they see their homes drop from Rs 60 lakh to Rs 54 lakh, they are beginning to see the dawn of reality.

Now, evidence is showing that nearly 30% of realty deals are stuck as PE fund are asking developers to revalue the deals, else no money would come in. It appears a real close haircut if no a shave is in the offing for realty players. The norms for valuing real estate are no longer butter and jam, but hard crust.

Even Renuka Ramnath of ICICI Ventures, which has raised two funds of $1.5 billion, for India-specific investments, had to be prodded in to saying that these funds would be deployed in to real estate. She was on the BBC, talking more about infrastructure and retail, while the anchor pushed for realty, which she very half-heartedly agreed to. Reading between the lines, basically, real estate is no longer the favorite child of PE funds.

Even Saffron Asset Advisors, a fund that is relatively gung-ho over real estate, is very measured in their words. This fund has raised a lot of money for sector-specific investment, and has a large proportion allocated to real estate. However, Ritesh Vora, director (investments) for Saffron, said evaluations are more rigorous than they were a year ago.

But the situation was not so tough for real estate companies earlier. With the stock market on a downslide, real estate companies deferred their IPO plans and turned to PE funds to raise money. According to ICICI Securities, during the last two years, around 60 funds raised $30 billion in assets to invest in Indian real estate.

According to Cushman & Wakefield’s joint managing director, Anurag Mathur, the focus on delivery timelines, costs, quality and sales targets are now becoming the norm. Om Chaudhry, CEO of FIRE Capital Fund said more realistic valuations of projects are being seen.

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