Mumbai: Bhav gira kya (Has the price fallen)?" the prospective buyer asked.

“Bhav chada hi nahin girne ke liye (It needs to rise before it can fall)," came the stoic response from across the counter from the Housing Development and Infrastructure Ltd, or HDIL, representative.

That exchange more or less sums up the current dynamic between discount-seeking buyers and reduction-resistant sellers in India’s real estate market, a chasm that was apparent at Property 2008, the 13th real estate and housing finance exhibition, a four-day event held last fortnight at the Bandra-Kurla complex in Mumbai.

A dozen signboards outside the site of the expo screamed, “Take the right decision. Buy now", but buyers seemed indifferent to that message, even though they flocked to the exhibition in droves on Saturday.

Even as analysts caution that the days to come will be critical for developers as their inventory of unsold houses increases, real estate firms put on their bravest faces at the exhibition and said they wouldn’t consider reducing prices.

Under pressure: Real estate development in the country, including housing projects such as this one in Ghaziabad, is heavily dependent on population migration due to rapid urban growth. Harikrishna Katragadda / Mint

Everyone has got it wrong, they insist. “Make up your mind, this is the right time. The economic cycle is maturing and, by January next year, apartment prices will go up," said Vinod Manwani, marketing head at the Nahar group, which is developing more than 100 acres in the heart of Mumbai, near Powai lake.

Analysts say real estate firms aren’t helping themselves with this attitude.

“The current slowdown in demand for realty, coupled with declining internal accruals and reduced funding options, exposes them (real estate firms) to the downside of this aggressive strategy; there are large amounts of debt already on their balance sheets and, (with) external funds increasingly hard to come by, we foresee delays on their many ongoing and planned real estate projects, thereby leading to the possibility of sale of projects or even enterprises," said Akash Deep Jyoti, head of corporate and government ratings at Crisil Ltd, a Standard and Poor’s company.

A report in Monday’s The Economic Times said banks and finance companies have begun pushing developers to sell cheap.

To make matters worse, many companies have borrowed from outside the banking system at much higher rates.

The best way out is for them to sell assets and offload completed projects, said Jyoti.

Builders also need to get realistic on pricing, as a significant correction is yet to happen, added Jyoti.

“Discounts, such as footing the stamp duty, are now being offered by developers. At the maximum, they have started offering 7% discount," said Rahul Samonta, an investment adviser at Liases Foras, a real estate rating and research firm. But customers want more.

Some developers, however, seem to believe that things will get better, and continue to expand. The Nahar group, for example, is building a premium apartment complex in Powai, aimed primarily at non-resident Indians.

Two 22-storeyed towers, an international school, an Olympic-size swimming pool, and a 515,000 sq. ft podium garden by Singapore-based landscaping firm Belt Collins are part of the package, but Manwani is cagey about revealing prices.

“Show us the colour of money, and we’ll give a discount," he said, adding that discounts will be in the range of 3-7%.

The price-will-rise-by-January theory does seem to have taken a hold among developers, though. Roopesh Menon, assistant manager, sales, at Sobha Developers Ltd, alluded to an increase in prices because “input prices are also going up". The company, largely present in south India, is now looking to expand to Pune.

Banks, whose financing is critical for most buyers of residential property, say they don’t see things changing in a hurry.

“The people who are coming seem to come here out of curiosity, rather than any serious intention to buy property," said a State Bank of India, or SBI, official manning the desk at the SBI stall at the exhibition.

Since last year, interest rates have risen while the quantum of loans has fallen. Last year, banks were willing to fund up to 90% of the cost of an apartment, a figure now down to 80%; interest rates, meanwhile, have climbed from 9.75% to 12% this year. “The existing high rates have affected demand in the home loan segment," said the SBI official, asking not to be named because he is not authorized to speak to the media.

Home loan rates could come down, if only marginally, because of Monday’s cut by the Reserve Bank of India of a key rate. That, though, might not be enough at a time when consumer sentiment seems to be down.

Disappearing investors

And investor sentiment would appear to be down too.

Manwani is banking on the belief that investors who have “lost faith" in the stock market will turn to “tangible assets" such as gold and real estate, likely the latter.

But, at the exhibition, at a stall for Kalpataru Ltd, an official admits that there are fewer visitors at the event this year and that most of them were genuine buyers.

Most developers agreed that so-called investor buyers, who buy property as an asset to be sold later, have all but disappeared from the scene.

Fundamental strengths

Still, India’s demographics might yet come to the rescue of the real estate sector. Newly weds and young double-income families may still be looking to buy houses. Then, there are factors such as migration and urbanization.

Population migration due to rapid urban growth holds the key to real estate development and, at 29.2% in 2007, India’s urban population was among the lowest among large global economies—China’s is 42.2%—said a report in Global Research, authored by HSBC’s Ashutosh Narkar.

“Urbanization is driving Indian residential realty, but high property prices and weak affordability have cut demand. Slowdown and oversupply in the IT sector could pull down property prices," Narkar wrote, estimating an average 15% drop over fiscal 2009 through fiscal 2013.

“It is not yet a doomsday scenario for the real estate sector," said Jyoti, who explained what is happening in the business as part of its “inherent cyclicality".

The shake-out in the business has begun in the third quarter (October-December) of the current year and will last for two years, he added.

J. Haren, an executive director affiliated to a project consulting firm and a regular equities investor who was scouting for an apartment for his son, is one of several customers waiting for prices to fall: “I am a prospective buyer, but not at this price."

In a recent report on the real estate sector titled Falling land prices—first step in the chain of events, JM Financial Ltd’s Somy Thomas, Jay Asher and Shweta Iyengar referred to the recent development when “Rail Land Development Authority (RLDA) reduced the minimum reserve price for 45,371 sq. m plot at Bandra East, Mumbai, by 14.4% from Rs4,628 crore to Rs3,960 crore."

What is significant is that the land is close to the Bandra-Kurla complex, the established business district in Mumbai. “We take this incident of (a) cut in reserve price as a reference for prime land in Mumbai to indicate that land prices across most of the regions will need to correct in order to account for the slowdown in demand and macroeconomic scenario."