Bangalore / New Delhi: Between January and March, well into the economic slowdown, India’s third largest realtor Housing Development and Infrastructure Ltd (HDIL) attempted various ways to get its balance sheet right.

Fast forward: In 2010, real estate developers will be focusing on faster delivery of projects after delays in completion this year caused mainly by the financial crunch led to buyer exits in many cases. Hemant Mishra / Mint

It stepped out of its land sale business and new areas such as oil and gas, and sidelined its plans for developing special economic zones (SEZs) to focus on its core competence— building homes. The firm is now upbeat with the pick-up in sales—it raised apartment prices by 10-15% in the second half—but its growth mantra for 2010-11 hasn’t changed: play it safe and consolidate.

For a sector on the recovery path, key issues such as getting the prices of properties right, quick execution of projects and the fate of the multiple realty initial public offerings (IPO) lined up for 2010 are still testing terms, analysts say.

The realty sector has seen significant recovery in volumes only in Mumbai and the National Capital Region that includes New Delhi, while Bangalore, Chennai, Hyderabad and Kolkata are still languishing, Nomura Equity Research said in a 14 December report.

It added that developers should not increase prices for now as it could hurt sales. Mumbai, the best performing realty market where sales volumes had bounced back to March 2008 levels in May-June after a 30% cut in prices, saw a sharp reversal in June with the first round of price increases, Nomura pointed out.

“The bull run continued till early 2008 but we don’t see that happening (again) for at least 1.5 years," said Hari Pandey, vice-president (finance), HDIL. At least half of HDIL’s portfolio will continue to be residential, though it may do an odd land deal, he said.

A look at the key issues for realty firms in 2010:

Right pricing, product

After at least two rounds of price cuts that were tagged with smaller apartments or distant locations, the first raises came around July. Realty experts say developers should hold on to prices in 2010 for at least six months, even if that erodes their profit margins.

Unitech Ltd, India’s second largest realty firm, having sold 4 million sq. ft of residential apartments between April and June, hiked prices by 2% in two of its affordable housing projects. A more hopeful Lodha Group raised prices by 10-15% and said it could still attract buyers as prices were well below 2007 levels.

R. Nagaraju, general manager, corporate planning and strategy, Unitech, said demand for homes will be driven by the demographic profile of the location. “Home prices might gradually rise but I guess developers will not like to kill the goose by raising prices dramatically. They will gradually increase price(s) so that (the) affordability factor is not affected," he said.

“My only concern is developers should not start increasing prices too rapidly," said Kaustuv Roy, executive director, Cushman and Wakefield India, a property advisory.

Wherever prices were raised, sales went down, Roy noted.

Demand, sales, expansion

Developers and consultants say demand and sales have largely been in the Rs15-30 lakh category of homes, apart from projects in the below Rs10 lakh bracket. But like pent-up demand, there may also be a case of pent-up supply, say analysts.

Developers such as Bangalore-based Sobha Developers Ltd which didn’t launch projects in 2009, say it’s time to bring in new supply. Sobha plans to launch 8 million sq. ft of residential space in 2010, said managing director J.C. Sharma. “But we don’t want to increase our prices even though we are optimistic about the sales."

Cushman’s Roy said that while metro cities have relatively less real estate inventory, there would be a lot more unsold projects in smaller cities and towns.

Realty demand has been volatile in both metros and smaller cities. But developers are betting on metros for residential launches, and favouring tier II and III cities for shopping malls and retail outlets.

“Developers tried to control supply as much as possible in 2009. So even next year, developers will pace their development out. They will not follow a very bullish approach and will not build a lot unless it is in really prime locations," said Roy. “In 2010, there will be new launches but not like 2007-2008 when several real estate projects were launched."

Another key area is execution of projects. In 2009, projects were delayed by six months to a year, leading to buyer exits in many cases. Analysts say developers should focus on timely delivery of projects in 2010. HDIL says it will focus on executing its developments in 2010 rather than just launching projects.

IPOs and fund-raising

With the Bombay Stock Exchange realty index surging 70% so far in 2009, it wasn’t surprising to see real estate firms lining up to go public. Eight developers, including Emaar MGF Land Ltd and Sahara Prime City Ltd, are set to raise at least Rs14,244 crore through IPOs in 2010.

Realty firms need to raise money now as the market improves, both to expand and to repay debt. In 2009, several realty firms raised money by selling shares to institutional buyers as the few non-realty IPOs during the year saw a lukewarm response.

Analysts don’t rule out the risk factor in the number of realty IPOs coming up, and say it’s too early to forecast investor appetite for these listings.

An analyst with a Mumbai-based brokerage that’s a banker to some of the firms in their IPOs said if the listings disappoint, it could lead to projects being delayed or developers curbing their expansion plans and looking for alternate funding channels. “The firm would then try to raise project level funding," said the analyst, who didn’t want to be named.

But Lalit Jain, a promoter of Kumar Builders, says an IPO, besides helping raise funds, lends accountability. “We will build as much as we can sell and will focus on execution and delivery of projects."

Kumar Builders, a relatively small company from Pune with a 1,700-acre land bank, had initially planned an IPO in 2008 but postponed it as the markets slowed. It now plans to raise Rs450 crore through an IPO in 2010 and has lined up 9 million sq. ft of development for launches in 2010.

Concerns remain

While residential demand and sales have been life savers for the sector, there’s still space for recovery in the commercial and retail markets.

According to a report by Cushman and Wakefield, total commercial space absorption in 2009 in the major cities declined 29% to 26.3 million sq. ft. Fresh precommitments for office space created in 2009, due to be absorbed over the next two years, was 4.6 million sq. ft, a 64% drop from 2008’s 12.8 million sq. ft.

“On the commercial side, the sector that will do well is pure office space. IT/IT-ES (IT enabled services) will still see an oversupply of space and IT end-users are very ambivalent on whether they want to take space within SEZs if the tax benefits are no longer going to be there," said Roy.

On the retail front, analysts say there will be more realignment. Earlier, many retailers reserved space in malls under construction but now prefer malls already launched. Big realty retailers such as Aditya Birla Group have rejigged their model by moving to a revenue-sharing format.

“Value retail will be the winning ticket, and we will see the stronger value retail players make calculated plays in key tier II cities," said Anuj Puri, country head, Jones Lang LaSalle Meghraj, a property advisory.?“High-end retail (too) will show a stronger hand in 2010."