Distress Sales Await Real Estate Investors

Real estate companies have so far been booking paper losses, but after Diwali, these losses will be real, according to Nayan Bavishi, a UK investor of the Baron Group, who invests in Indian and Dubai real estate. This should lead to some sudden wave of distress sales, which would bring apartment prices to realistic levels. "Right now, it is only depletion of paper profits; wait till after Diwali and their [real estate companies]'s pockets will get eroded further."

The Indian real estate market has been hurt by a slide in the stock market, rapidly rising interest rates and aggressive demands from private equity investors. After five years of boom, real estate firms in India are grappling with lukewarm sales and cash crunches as inflated property prices and interest rates at near-decade highs scare away buyers.

"The aggression for acquiring land has disappeared. Deal volumes are down 35-40 percent," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. Till last year, property firms, flush with funds from public offers or advance bookings, rushed to bid for land parcels, even at distant locations in metros, and in second-tier towns.

Even mid-size developers in India say they hold land reserves of 60-100 million sq ft, sufficient for projects planned in the next 3-4 years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say. "We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, Managing Director of Akruti City told Reuters late last month.

Akruti City, a leading developer, has not acquired any land in the last 9 months. A shortage of cash has caused delay in projects and it is likely that some announced projects may not even take off the ground. Builders are now unable to fund through advance bookings by buyers. "Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downward target price on sector stocks by 15-25 percent.

Most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

Read the Reuters story here

South Mumbai Slumps; Jolly Maker Flat has no Takers

An apartment in Jolly Maker Apartment I and II, has no takers despite a 27 percent price cut.

Located in the prime residential area of Cuffe Parade, in the southern part of Mumbai, this flat - measuring 1,700 sq ft carpet area - was priced at Rs 18 crore in January 2008. Today, even at a discounted Rs 13 crore, the apartment remains unsold. [pic: World Trade Center and IDBI Tower, located near the JMA I and II]

Investors who rode the wave of the great Indian real estate juggernaut of 2004-2008 are now wringing their hands. Not just individuals, but even corporate speculators, unrelated to the realty business, who were lured in to real estate speculation, are now stuck.

Consider another case of an apartment that Siemens India put up for an auction sale in June 2008. With a base price of Rs 4 crore, the auction received 3 interests, two of whom bid Rs 3.75 crore each - in what appears to be a coordinated bid - lower than the base price. In better times, Siemens would have had a choc-o-bloc room with bidders vying to outdo each other. Forget a significant premium, Siemens had to contend with a lower price.

Cut to individual investors, who picked up properties at severely high premiums in areas like Noida, Gurgaon and Greater Noida, as well as in Mumbai and Bangalore. Almost all of them, loaded with floating rate interest loans, are now facing higher interest charges, as the value of their properties are slipping. They all face the prospect of a negative equity, where the monthly EMI is higher than the monthly return that such an investment would face in a riskfree bank deposit.

Declines of up to 30% are already being seen in many areas of the cities. Even areas which are usually considered hot and insulated from price cuts - like South Mumbai - have seen a 15% decline. The major victims of these declines are investors - those who purchased homes with an intention of selling them to genuine users for hefty prices. In Delhi and its suburbs, nearly two of three residential transactions are resales.

The main attraction for investors was the fact that property returned 200-300% for those who invested in late 2003 to early 2004. Investors would take loans, book the apartments, and sell them off before the year was through. This does not appear to be the option any more, and with less interest from new investors, demand has tapered off, leaving investors stranded with high loans and declining value.

The lack of interest is affecting residential developers too. Residential projects are usually self-financing in nature, meaning developers use the money they get from customer advances to fund the development. This money is used by builders to build projects, making their investments virtually riskfree. With investors shying away from new realty projects, developers are finding it tough to get finance for their projects.

The high cost of raw materials is also impacting developers, who are now focusing on completing projects rather than signing on new ones. Investors continue to hold on to their properties, latching on to the ubiquitous hope, that prices would rise.

Discounts abound the realty space. Apartments at Parsvnath City in Dharuhera near Delhi, have a list price of Rs 1,800 per sq ft, but even with a discount of 4% buyers are hard to come by. In Bangalore, a 2-bedroom apartment located in Indiranagar, purchased for Rs 29 lakh, three years ago is now available for Rs 34 lakh, 20 percent less than what it cost six months ago.

However, there does not appear a respite in sight. Another 15 percent correction is expected by property market consultants, and with exhibitions of distress sales of apartments planned by real-estate service providers, it may soon be a bonanza time for bargain hunters.

Read the Livemint story here

Bandra Aparment Rates Sink to Rs 16,000 Per Sq Ft

The hottest real estate area in Mumbai is now facing a cooling real estate prices. After having commanded over Rs 25,000 per sq ft in 2007, apartments in Bandra are being quietly sold for Rs 16,000 and Rs 14,000 per sq ft.

While premium areas, like Pali Hill and Carter Road, which have celebrities living in them, are less affected since they have celebrity value attached to them, the less glamorous areas of Bandra, are facing the onslaught of sinking real estate rates.

In fact, some broker sources are expecting apartment prices to sink to between Rs 13,000 and Rs 14,000 per square feet. Apartments in TDR (transfer of development) buildings have even been sold for Rs 12,500 per sq ft.

A small developer in Juhu, scrounging for cash, has even put on offer apartments at a discount of 35% to current market rates.

Even Mahim, located next to Bandra, used to command between Rs 14,000-Rs 16,000 per sq ft during the height of the real estate mania, which ended early this year. Today apartments are being sold at Rs 12,500 per sq ft on the higher side.

A knowledgeable builder has asked his friends to hold on to any purchases of property until the next year. He said that property prices in Mumbai are slated for another 20% drop once the monsoons are over.

A lot of builders are hoping that the fortunes of the stock markets would turn, and that new buyers would come again in to the property market after the rains, and during the festive seasons of Diwali and Christmas. However, even they are now beginning to see the reality and are exiting in a low-key manner.

A few months ago a developer had purchased an old industrial estate in Lower Parel area. Tenants are still waiting for the builder to come to them with a proposal to vacate the premises. It has been months, but in so far, noone has come forward.

Read the DNA story here