Mumbai: Most Indian developers have hit the brakes on fresh land acquisitions as a slide in the stock market, rise in interest rates and aggressive demands of private equity investors have limited funding options.

After five years of boom, real estate firms in India are grappling with tepid sales and cash crunch as inflated property prices and interest rates at near-decade highs scare away buyers.

Beyond reach: The 35-storeyed South City building in Kolkata. Real estate firms in India are grappling with tepid sales and cash crunch as inflated property prices and high interest rates scare away buyers. (Photograph: Indranil Bhoumik / Mint)

“The aggression for acquiring land has disappeared. Deal volumes are down 35-40%, though prices still haven’t moved significantly," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. “My land division guys are crying."

This is a sharp turnaround from as recent as a year ago, when property firms, flush with funds from public offers, or advance bookings, rushed to bid for land parcels, even at distant locations in metros and in tier II towns.

Even mid-size developers in the country say they hold land reserves of 60-100 million sq. ft, sufficient for projects planned in the next three-four years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say.

“We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, managing director of Akruti City Ltd, had said late last month.

Analysts say shortage of cash has also forced developers to put off new project launches and delay work on current projects. Some planned projects may not even materialize.

“Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downwards target price on sector stocks by 15-25%.

Rising inflation and an expected slowing of the economy will only worsen the situation, say analysts, who are now reviewing their target prices on these stocks.

An analyst at a domestic brokerage said it had recently changed the valuation methodology to net asset value (NAV) basis, which had led to some downward revision in target prices. The new method values companies based on current assets rather than future cash flows, he added.

Financial research firm CLSA lowered its NAV estimate for Housing Development and Infrastructure Ltd (HDIL) by 29%, citing higher costs on account of rising interest rates.

Shares of real estate companies have been among the worst performers on the stock market, as funding concerns and the US subprime crisis drove away investors.

Shares of the four largest real estate companies in the country by market capitalization, DLF Ltd, Unitech Ltd, HDIL and Indiabulls Real Estate Ltd, are down by 50-65% so far in 2008. In comparison, the benchmark Sensex index of the Bombay Stock Exchange has lost 27%.

While most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

“Right now, it is only depletion of paper profits," said Nayan Bavishi of UK-based investor Baron Group International, which invests in real estate projects in India and Dubai. “Wait till after Diwali. Their pockets will get eroded further."