Indian property to fall further before funds bite

Hong Kong: Indian property prices are likely to fall by a quarter in the coming year as the global economic crisis saps homebuyer confidence, adding to the problems of capital-strapped developers.

A property market boom has been waning for a year, with land prices already falling about 15% from a mid-2007 peak, although forced sales have been rare. But consultants and investors at the MIPIM Asia conference in Hong Kong this week predicted tougher times ahead.

“We’re expecting a horrible 2009," said Anshul Jain, chief executive for property services firm DTZ in India.

“Prices have already shown signs of coming off, and chinks in the armour are surfacing."

Indian property prices doubled in the two years after the country eased rules in early 2005 on inward investment in the construction industry, sparking interest in home-building among foreign funds.

Developers, sometimes in league with funds run by the likes of Morgan Stanley, Citigroup and Merrill Lynch, snapped up land.

The bigger firms, such as DLF Ltd and Parsvnath Developers Ltd, launched huge initial public offerings to fund new townships in a country where little housing had been built for 50 years.

But the sharp rise in prices, coupled with interest rate hikes designed to calm inflation in the booming economy, slowed home sales. And the global crisis has added to the gloom, with residential transactions down by half from a year ago.

“We could see a 20 or 25% price correction," said Anurag Mathur, joint India managing director at consultants Cushman and Wakefield. “There’s a lot of pressure. Whether we reach distressed sales, only time will tell."

Shares Slide

Faced with overheated markets, India followed the lead of China in clamping down on loans to the property sector -- a policy that will probably force some small and medium-size developers out of business in both countries.

The global credit crunch and a stock market slump cut off the supply of funds from capital markets. And now a drop in home sales is shrinking cash flow.

A barometer of the troubles is DLF’s share price, which has tumbled more than 80% this year, compared to a 58 percent drop in Mumbai’s BSE index.

Foreign investors, with their own economic worries at home and bargains popping up elsewhere, are unlikely now to jump into a market muddied by red-tape, land disputes and unclear titles.

But the funds already raised, somewhere between 75 and 100 of them, are waiting for developers to drop their pricing for joint ventures, so they can get the 30% internal rates of return they hanker for, even in a bad market.

“Right now our focus is on making sure we’re buying good assets in the better locations, working with better developers and getting better terms," said Chetan Dave, chief executive at Sun-Appollo Real Esate Advisors, which manages a $630 million fund.

However, developers are still hoping that as inflation softens, falling mortgage rates will make homes affordable again, especially if they start building $60,000 apartments for the middle class rather than $1 million homes.

But financing deals, to perk the market up again, will not happen until developers get a better grasp on how far the market will fall, DTZ’s Jain said.

“Private equity players think prices will fall more and developers are in the semi-denial stage," Jain said. “They were in complete denial a few weeks ago."

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