Track2Realty Exclusive-Yearly Analysis:During the boom, many developers dreamt of transforming the urban landscape with millions of square feet of homes, offices and malls and set off on an aggressive expansion financed with debt that at 6 per cent interest was cheap by Indian standards. When the going was good, they went overboard with over ambitious big-ticket projects in various cities, many of which still remain stalled.
Though the year 2012 saw even leading developers exit from several projects, many of the developers failed to understand that property tends to be a local business in India and successful developers stick to home markets, where they own land and know the bureaucracy. But the sprawling ambitions of many nouveau riche realtors ultimately failed them and resulted in more debt and lesser cash flows.
Despite the fall in sales, property prices till date have been rising modestly in most of the cities. Gurgaon saw the maximum rise of 32 per cent over previous year, while prices in MMR remained flat. As a result of a drop in sales, new launches have slowed down too. Across the country new launches are down between 30 per cent (Bangalore) to 42 per cent (Pune).
The biggest worry, for such developers is piling debt and for some of them company’s cash flows haven’t been enough to meet the interest cost of the debt. Some of these companies pay over one-fifth of its revenue to service the debt. It has become difficult for them to alleviate the problem due to adverse economic factors like high interest rates, paucity of funds and subdued volumes as buyers defer purchases.
Anshuman Magazine, Chairman and Managing Director, South Asia, CBRE says real estate companies are now moving back to their core areas and are now less-diversified versions of their earlier avatars. They have cut down their land holdings and focusing on their core business areas. According to Magazine, this has been driven by the market, liquidity crunch and learning, which the companies had, from their earlier launches.”Last five years, we have seen this changing” says Magazine.
The year 2012 has seen slower business in the real estate markets but there is still some demand being driven in certain micro markets. “The year 2013 will be critical for the sector – as it will be the year when the companies in the sector would actually get into bigger trouble if the situation doesn’t improve”, says Magazine.
Home sales in Delhi-NCR and Mumbai Metropolitan Region fell over 50 per cent and even the Bangalore market which is said to be steady saw 18 per cent drop in sales in the first half of the year 2012. Mumbai and Gurgaon have seen the sharpest fall in absorptions during the period with MMR seeing a drop of 58% and NCR with a drop of 57%.
A report by the broking house Jefferies says that property volume has declined by 32 per cent year-on-year. The report points out that rising prices and high interest rates are the main contributor to the slowdown. Jefferies expects weakness in the sector to continue for some more time. The bigger worry however, is raising inventory.
Low sales kept the morale low for most of the leading realty companies and new launches were few and far between. With a piled up inventory from the past and long delays in delivering projects, the real estate sector is going slow on new launches this year. However, that — sadly for the consumers — has not meant a drop in the property prices.
As per the Confederation of Real Estate Developers’ Association of India (CREDAI), the number of building plans sanctioned over the past 10-15 months has drastically come down. Delay of realty projects, it says, is to be blamed on multi clearances and approvals numbering over 40 by various departments of the government.
“There are hardly any new launches that have taken place in the last few months. And, in the near future also, the scenario does not seem very favourable. Right now, it is only in states like Bihar, Gujarat and Andhra Pradesh, where real estate development is taking place in full swing. The government policies in these states are real estate developer friendly,” said Lalit Jain, President, CREDAI.
Indian developers are beset by a faltering economy, weak home sales in key cities, and high interest rates, prompting them to scale back or put on hold projects planned during the boom years of 2005-2007. The accumulated debt of Indian realty companies is estimated to be around Rs. 50,000 crore. The combined debt of six listed companies only stood at Rs 35,425 crore in the March 2012 quarter. Several real estate companies had approached banks for a restructuring package, in the wake of the economic slowdown, post the Lehman crisis as they were unable to pay their loans.
