Bangalore/New Delhi/Mumbai: The global financial markets turmoil since Standard and Poor’s downgraded US sovereign rating last week may have a medium-term impact on India’s real estate sector, putting a freeze on fresh office rentals and property purchases as well as on foreign capital.
India’s property sector is already battling its own issues—a liquidity squeeze with banks restricting lending, slowing sales, high property prices and soaring debt.
The impact of the economic situation in the US and Europe on India’s realty market may resemble the panic during the first days of the Lehman Brothers Holdings Inc. bankruptcy that triggered the 2008-09 slowdown, said Chintan Patel, partner-real estate practice, Ernst and Young.
“Buying decisions would be put on hold and luxury developments would be in a tough spot since debt markets are getting tougher,” said Patel. “But the good part is that the fundamentals of the real estate market are strong and there is demand for affordable properties.”
June-quarter earnings of many of the developers that have announced results so far have been dismal, mostly hurt by lower sales in Mumbai and the National Capital Region (NCR). Net profits of DLF Ltd and Orbit Corp. Ltd have declined on margin pressures.
Besides, India’s top six developers account for 60-70% of the Rs70,000 crore debt burden the sector is reeling under, said Rajeev Bairathi, director-investment advisory, DTZ International Property Advisors.
DLF has a debt of Rs21,500 crore, UnitechRs.5,000 crore, Emaar MGF Land LtdRs4,000 crore, and Parsvnath Developers LtdRs1,200 crore.
“I believe that the current environment, impacted by both external and domestic problems, will lead to a consolidation in the sector, where mostly companies with stronger fundamentals will survive,” said J.C. Sharma, managing director, Sobha Developers Ltd.
Shares of large real estate companies have plunged since October, when a bribes-for-loans scam broke out involving realty firms. DLF Ltd, Unitech Ltd and Housing Development and Infrastructure Ltd (HDIL), the country’s top three realty firms, respectively, have lost 44-68% of their value.
So far this year, the Bombay Stock Exchange’s (BSE) realty index has declined 35.75%, dropping faster than the Sensex’s 16.82% fall.
“Plotted sales and sale of non-core assets have not happened at the pace at which they happened last year,” said Unmesh Sharma, associate director, Macquarie Capital Securities.
Mumbai, India’s most expensive property market, has seen a 27% year-on-year rise in property prices to Rs9,716 a sq ft., in turn resulting in a 33% fall in sales to about 8 million sq. ft a month, according to research agency Liases Foras.
With the global shake-up, access to foreign funds may be constrained in the medium- to long-term. “Raising money overseas would get difficult because investor appetite is low and they are reluctant to commit to long-term investments,” said Sunil Rohokale, executive director, ASK Investment Holdings.
With 60% of Indian software exports headed to the US, and nearly 20% to Europe, and since both these geographies are affected, there will eventually be an impact on Indian information technology companies, potentially reducing demand for IT-centric office spaces, said Anuj Puri, chairman and country head, Jones Lang LaSalle India.
Banks have already taken into account the slowdown in property sales and continue to be reluctant to lend to developers due to a high-risk perception. The Reserve Bank of India (RBI) too has cautioned banks about lending to the sector. According to senior bankers who didn’t want to be identified, some real estate companies have begun defaulting on interest payments.
According to RBI’s latest data, bank exposure to commercial real estate went up to Rs1.14 trillion as on 20 May from Rs95,659 crore in the same period last year.
But lending has tightened and developers are raising money at rates as high as 18-20% from alternative channels such as non-banking financial companies. Banks lend to realty firms at 12-14%.
Anshuman Magazine, managing director, CB Richard Ellis, said that during the 2008 slowdown, property prices corrected followed by recovery in sentiments and sale. “In the present scenario (too), prices should correct as they are sky-rocketing.”