Mumbai: India’s real estate market is likely to continue to remain sluggish in the quarter ending 30 June and developers may have to drop prices to revive demand for offices and homes, according to industry reports and analysts.
The real estate sector remained weak in the year ended 31 March as investors, buyers and tenants kept away from a market that is bearing the brunt of delays in approvals, rising construction costs and high interest rates. New investments in the real estate sector across India slumped by about 55% in the March quarter to Rs.42,000 crore from Rs.92,600 crore in the corresponding period last year, according to a 6 May report by industry lobby group, Associated Chambers of Commerce and Industry of India or Assocham.
Slowing economic growth over the past year continues to take a toll on rental demand, according to a commercial property survey on 7 May by the Royal Institution of Chartered Surveyors (RICS) India, a qualification and standards body for the real estate and construction sector. The supply of office properties from developers is likely to increase further in the April-June quarter. The rental market saw demand rising modestly in the first three months of 2013 but “the development starts remained broadly flat in first quarter (January-March) of fiscal 2014, with anecdotal evidence suggesting financing is still an issue”, the survey noted.
In a 24 April survey, real estate consultant Jones Lang LaSalle (JLL) showed that cost management was a top business challenge for office occupiers and 45% of the organizations have reduced office space per employee recently.
“Developers within the commercial space are facing problems of funding. India has not been able to attract a lot of foreign investments in comparison to other countries such as China and Malaysia within the region,” said Simon Rubinsohn, chief economist at RICS. “Ongoing issues such as high inflation, large budget deficit and the slow pace of regulatory reforms are weighing down on business sentiment.”
According to a 25 March report by Cushman and Wakefield, the market witnessed institutional sales (excluding apartments) of Rs.12,800 crore, concentrated in commercial development sites and office segment including stand-alone and pre-leased office buildings. “Investors are waiting for the right opportunity and currently the market is not conducive,” said Sanjay Dutt, executive managing director, South Asia at real estate consultant Cushman and Wakefield. He added developers will have to make meaningful price adjustments to revive sentiments.
According to analysts, foreign investors are cautious because of the continued weakness in the Indian rupee which would impact their returns. The rupee has weakened 6.27% against the US dollar in the last fiscal.
Banks have been cautious in lending because of these delays and due to tightening of lending norms by the Reserve Bank of India (RBI). With RBI restricting use of bank debt for land acquisition, equity and mezzanine capital has become the favoured option for such use. As the traditional source of finance dried up, developers approach non-banking financial companies (NBFCs) for short-term debt and private equity (PE) funds.
“Investors are shying away as the returns have become lower. Even private equity investors are ready to take a haircut while exiting,” said Kapoor.
Seeking greater control on projects and higher returns, real estate funds have started venturing into development. Mint reported on 1 May that the Ajay Piramal-backed Indiareit Fund Advisors Pvt. Ltd had started its own property development arm called Address Makers.
“As investors have kept away from the market, it is the end users that dictate (trends in the) market. So there will be downward pressure on price correction and resistance from developers,” said Pankaj Kapoor, managing director at real estate research firm Liases Foras. He added the stagnant phase is going to continue for the next 18 months.
Meanwhile, according to the Assocham report cited above, new investments in Maharashtra’s realty sector have plummeted by over 55% during the last fiscal. The state accounted for about 20% in the total outstanding investments worth over Rs.14 trillion attracted by the real estate sector across India as on 31 March, according to the report. “Maharashtra has fallen back in infrastructure development and overall incentivization of the real estate sector. While the lack of contribution to the real estate sector is not surprising, it can definitely be seen as a wake-up call,” said Anuj Puri, chairman and country head of JLL.
The Mumbai property market will remain subdued in the first half of fiscal 2014 with prices and volumes remaining soft, said a 15 April report by Edelweiss Securities Ltd. It forecast an improvement in the second half (July-December), supported by pent up demand, lower interest rates and economic recovery.