The real estate market in India’s financial hub of Mumbai has been severely hit by the liquidity crisis, making it even more vulnerable than the National Capital Region (NCR), the worst hit in the slowdown so far.

Mumbai, India’s most valuable real estate market, is grappling with a lack of lenders and is showing deeper signs of distress, reflected in the schemes and discounts offered by developers to push sales.

After the serial defaults by Infrastructure Financing and Leasing Services Ltd last September, that sent shock waves through the financial services sector, particularly non-banking financial companies (NBFC), most lenders and institutional investors are wary about investing in Mumbai, focusing instead on the more stable residential markets in the South.

While NCR is coming to terms with the slowdown, the impact of the crisis on Mumbai is just unfolding, said investors and analysts.

Moreover, concerns over builder cash flows have risen with the National Housing Bank advising home financiers earlier this month to desist from financing subvention schemes—which were predominant in Mumbai and NCR to incentivize sales through indirect discounts.

“We’ve been cautious about investing in NCR, and now, Mumbai. NCR’s problems are already out in the open but in Mumbai, the leverage levels of developers are high and total exposure of NBFCs is the highest," said Sharad Mittal, chief executive, Motilal Oswal Real Estate, the realty-focused private equity arm of Motilal Oswal. “The cost structure (of projects) is skewed due to high land prices and the premium FSI (floor space index) that needs to be paid by developers —as a result prices can’t drop dramatically."

While Mumbai can’t be ignored completely, Mittal said Motilal Oswal Real Estate is mainly deploying its funds in Hyderabad, Bengaluru, Chennai, Pune and, now, Ahmedabad, in projects with an average price of 5,000 per sq ft.

Gautam Chatterjee, chairperson, Maharashtra Rera (Real Estate Regulatory Authority), said the situation has worsened in the Mumbai Metropolitan Region (MMR) after the NBFC crisis because cash flows are weak and external financing is not easily available. As per Rera estimates, MMR has 48% unsold inventory, but developers have launched more projects despite weak demand.

“…How are they so bold when it’s tough to sell existing stock? Builders say that sitting on land is expensive and they have to launch. But the major challenge today is high-value projects, which are incomplete or not selling," Chatterjee said.

Residential project launches rose 22% in Mumbai between January and June 2019 compared to the same period last year, according to a Knight Frank India report, far exceeding a 4% increase in sales. Weighted average prices have corrected 12% in the past three years, even as subvention schemes, direct discounts and freebies dominated the market.

Predominantly an investor-driven market, NCR’s troubles have been largely developer-created wherein Gurugram was focused on the luxury or upper mid-segment with affordability being a critical reason for the slowdown in sales. In Noida, land was given to developers on credit, which led irrational expansion.

Mumbai’s challenges mounted because developers overestimated demand and the purchasing power of customers. With increasing supply, prices came under pressure, leading to an increase in inventory of under-construction properties.

Luxury is the hardest hit but even mid-segment project prices are equivalent to luxury properties in Bengaluru, Pune and Chennai.

After the liquidity crisis, refinancing became tough, making it more challenging for Mumbai developers.

“...Easy availability of debt postponed price correction in Mumbai. Lenders provided debt for redevelopment including slum redevelopment, where rehabilitation portion was not handed over to existing dwellers. This led to over-leveraging of developers since their right to free sale portion is not fully paid till they deliver the rehabilitation portion," said a top executive of a private equity firm, who did not wish to be named. “With downward pressure on prices and unfulfilled commitment, projects are getting stuck due to cash flow problems and mounting debt."

Niranjan Hiranandani, managing director of Hiranandani Communities, said sales have been good for established brands, but 80-85% developers in Mumbai are not selling well.

“More than half the developers will find it tough to survive if the liquidity crisis continues and recovery, right now, seems a long way off," he said.

Pankaj Kapoor, CEO of Liases Foras Real Estate Rating and Research Pvt. Ltd, said prices are unlikely to appreciate for the next two years and while builders earlier were not in a hurry to sell because funding was available, that’s not the case anymore.

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