The Capitalist | Real estate developers brace themselves for the worst

The Capitalist | Real estate developers brace themselves for the worst
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First Published: Thu, Dec 11 2008. 01 48 AM IST

Updated: Thu, Dec 11 2008. 01 48 AM IST
The Mumbai attacks tipped real estate prices down by another 5-10%. This brings the decline in real estate prices in Mumbai to around 25% from peak levels. But market watchers say real estate prices in Mumbai could fall by another 25% over the next six months. Expectedly, most developers are bracing themselves for the worst of times (see the next item). The only silver lining appears to be the reduction in rates on home loans. But with consumers expecting real estate prices to fall much further, it is doubtful if too many people will queue up for such loans right away.
In fact, one of the most comprehensive surveys of this industry in recent times is the 24 November report by the Goldman Sachs team in India . The report points out that in most cities, there is gross oversupply of both residential and commercial property (Bangalore appears to have the least unsold inventory, but is not likely to go unscathed). In Mumbai, supply could be four times demand, and in New Delhi it could be almost double the demand (see table). Overall, supply outstrips demand by at least 40%.
The last time when there was a crash in property prices (in 1996), it took four years for real estate prices to bottom out. This time, while property prices have fallen 25% rather sharply, the bottoming out is expected to take at least another year. So, evidently, the real estate sector could experience either a sharp downturn, or a slow prolonged one (see table).
Also See Building Up To A Crisis (Graphic)
What makes the situation worse is that housing remains one of the key indicators of wealth for most people. And its value has fallen sharply. This is true not only in India, but in most countries, as reflected by the house-price indicators of The Economist, which, quoting surveys by Knight Frank Llp., an estate agent, points out how “on a quarter-on-quarter basis, residential property prices are dropping in 23 of the 45 countries surveyed”.
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Rough times ahead
Real estate developers are a worried lot. So are their suppliers.
One of the largest developers headquartered in Mumbai, but with real estate development plans in most major cities in India, shot off letters to most of its suppliers in October this year, informing them that it was revising its list of “preferred suppliers” and wanted to know if they wanted to continue their business relationship.
Among the terms that would have to be accepted by anyone keen on remaining on the “preferred supplier” list was the condition that payments would be made only 365 days after delivery. Apparently, similar letters are beingshot off by other real estate developers too, especially the bigger ones, who know they have the purchasing clout.
This has got most suppliers worried (especially quarry owners who must pay lease rentals to the government irrespective of sales). If they refuse to accept the terms, they will not be able to sell anything. And if they do, they face twin problems—(a) bearing the interest burden for?delayed payments?and?(b) the frightening possibility of the developer going bankrupt.
Either way, the risks are too difficult for anyone to bear.
Evidently, the first crunch will be on any “discretionary” expenditure, including wages of the weakest of the workforce. The next slicing off could affect all capital expenses as well. Rough times do lie ahead.
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Rough times ahead
Real estate developers are a worried lot. So are their suppliers.
One of the largest developers headquartered in Mumbai, but with real estate development plans in most major cities in India, shot off letters to most of its suppliers in October this year, informing them that it was revising its list of “preferred suppliers” and wanted to know if they wanted to continue their business relationship.
Among the terms that would have to be accepted by anyone keen on remaining on the “preferred supplier” list was the condition that payments would be made only 365 days after delivery. Apparently, similar letters are beingshot off by other real estate developers too, especially the bigger ones, who know they have the purchasing clout.
This has got most suppliers worried (especially quarry owners who must pay lease rentals to the government irrespective of sales). If they refuse to accept the terms, they will not be able to sell anything. And if they do, they face twin problems—(a) bearing the interest burden for?delayed payments?and?(b) the frightening possibility of the developer going bankrupt.
Either way, the risks are too difficult for anyone to bear.
Evidently, the first crunch will be on any “discretionary” expenditure, including wages of the weakest of the workforce. The next slicing off could affect all capital expenses as well. Rough times do lie ahead.
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R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Sandeep Bhatnagar / Mint
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First Published: Thu, Dec 11 2008. 01 48 AM IST