‘The realty slowdown is already happening’

Shobhit Agarwal, managing director, Protiviti Consulting India, says that there is little chance of a major correction happening in real estate prices. But various factors are affecting speculative demand which is where a slowdown is happening

The realty sector is facing a crisis. While talks about challenges and opportunities continue, sales are plummeting and the fund crunch is becoming more evident. Shobhit Agarwal, managing director, Protiviti Consulting India, has worked with many clients, and has done audits for several real-estate companies. In an interview with Moneylife, he explained why he believes the sector has to tread cautiously.

Moneylife: Currently, we are seeing a lull in the real estate business. How bad is the situation?
Shobhit Agarwal
: There are two ways to view the situation, the demand and the supply side. Some micro-markets have a significant oversupply and demand is slow. In places where there is more demand, there is no capital flow, for several reasons. There is a visible credit crunch. Now in this situation, a developer has to look at his priorities: Does he have to fund a project? If yes, he can go for private equity funding, or other ways, but the cost is going to be very high. On the other hand, input costs are going up, and raw materials are becoming more costly. A big developer may decide to hold back, hoping for better returns in the future. But for the individual investor, it's really bad.

ML: We have been hearing that realty prices are headed for a correction. Do you see any possibility?
Frankly, a 5%-10% correction doesn't mean anything. And I don't see a major correction happening. For projects which are ready to be delivered, there is not going to be any correction. If the purchase is for end-use, there will be no correction.

There are slight chances of correction for those projects which are still in the conceptual or blueprint stage. But like I said, the chances are only slight, because apart from the construction costs, capital shortage, etc, there is a shortage of labour, because many schemes have generated income in rural areas, and hence, these people do not have to come to the cities. So the big builders are not likely to bring down their prices.

In the next six-eight months, unless a situation is created when all the costs come down, I don't see any significant change. But I will not generalise, because it also depends on the micro-market situation. Small builders, in selective pockets, may offer discounts and lower the prices to sell the inventory and lower monthly instalment rates, because otherwise, their source of income will also dry up.

ML: About holding power: In Mumbai, we have a huge pile of unsold inventory, because prices are high. So if the holding continues with this price structure, will the crisis deepen?
: Of course, it will only get worse. At a time when other cash flows are drying up, sales are the only way out. Debt, in that case, becomes a big problem. I don't see interest rates or inflation going down any time soon. So if you hold on, you are not solving the problem, you are prolonging it. All the companies are showing huge debts on their balance sheets. Clearing that must be the first priority.

ML: So where does this end?
You hold on as far as your balance sheet allows. You can hold back as long as there is a defined cash flow to balance the debt, which is lacking now. Due to inflation, by holding back, you are bringing down your value by 6%-7% annually, and at that point you are actually discounting yourself. Then, you are not getting the equity to replace debt on your balance sheet. And the longer you keep the debt there, the more you acquire. When you cannot clear that, ultimately you don't have a balance sheet. And at that point, you have to go for a distress sale.

ML: Let us come to commercial real estate—how do you think this will perform?
Well, commercial real estate will be driven by commerce, which depends on our economy. When you have good industrial output, it will create the demand for allied services, which will again add to the demand. With growth of industries, you have new centres. But when GDP (gross domestic product) levels go down, we will see a slowdown. When there is a long-term flight of capital, inflation and negative sentiments start to impact the market and there is trouble brewing. So I am optimistic about the future of commercial real estate, but I hope the growth rate doesn't stagnate.

ML: How do you see sectors like retail, hospitality, education and healthcare contribute to the realty growth story?
Definitely, there are a lot of opportunities. But not all realtors specialise in these structures, so there can be strategic tie-ups with other companies, which can manage the space.

ML: What about the other issue that realtors complain about, which is about land acquisition?
If you are acquiring huge tracts for industrial purposes, then there are some problems. But, otherwise, lack of land records or things like that hardly matter. Trouble starts when you involve too many people, especially the government, in the land-acquisition process. For smaller projects, the only hitch is when that plot is slapped with multiple legislations.

ML: Keeping in mind all of this, do you see a 2008-type of slowdown coming? Some developers believe it won't be, because this time the costs are very high.
It depends on how you view the term 'slowdown'. There is no major price correction, like I said—though there can be some local variations. The premium, however, will get wiped out because there is some oversupply. But, on the other hand, basic costs will not come down. I talked about labour, construction, capital and raw material costs. Land prices are also very high, because there is a huge difference between government rates and market rates.

Also, with tier-2 and tier-3 cities developing, we will see less migration. And migration is always a big influence on demand. The oversupply means that the buyer has many options. The speculative price, I think will come down now, because there are no sales. So now, the developer cannot actually inflate the price, he is seeing what the real demand is. Now, the developer must hold on to a customer. Inflation is a big problem, and it will also affect speculative demand.  The investment is not realising any returns, and that I feel, is where we see a slowdown. And that is what is happening.




6 years ago

One woners as to the basis of the reasearch made by the author. Where the slowdown is and where the prices are going down are a mystery!

ONGC board approves red herring prospectus for proposed FPO

While the company’s board has cleared the proposed Rs11,500 crore share sale, the RHP will be filed with SEBI aster getting a nod from the Department of Disinvestment

New Delhi: The board of Oil and Natural Gas Corp (ONGC) has approved the red herring prospectus (RHP) for a proposed Rs11,500 crore share sale, but is still awaiting the Department of Disinvestment’s (DoD) nod for filing papers with the Securities and Exchange Board of India (SEBI), reports PTI.

The full board of ONGC, including three newly appointed independent directors, yesterday approved the RHP, an official said here today.

“We are ready. Whenever the DoD tells us, we will file the prospectus with SEBI,” he said. “The FPO will hit the market in three weeks from the filing of RHP.”

The government is selling 5%, or 427.77 million shares, through a follow-on public offer (FPO) and ONGC is assisting in the sale. “The call on when the FPO has to be launched will have to be taken by the government,” he said.

The official said the government earlier this month appointed three independent directors, including former RBI deputy governor Usha Thorat, on the board of ONGC, paving the way for the sale of shares in the state-owned firm.

The other independent directors appointed to the ONGC board include Prof Deepak Nayyar (ex-vice chancellor of the Delhi University) and former finance secretary Arun Ramanathan.

The appointment meant that ONGC now conforms to market regulator SEBI’s listing requirement of having an equal number of executive and non-executive directors.

The share sale was originally planned to happen in 2010-11, but was deferred to 5th April as the company did not have adequate number of independent directors on its board.

The FPO was then planned to be launched on 5th July, but was deferred due to the same reason.

ONGC has six functional directors, besides the chairman.

It also has two government-appointed nominee directors, taking the total strength of functional/promoter directors to nine.

In comparison, it has five independent directors and needs four more to meet SEBI’s listing norm.

But since the company does not have a full-time chairman and director (human resources), the appointment of three directors would help ONGC meet SEBI’s norm, the official said.

Post-FPO, the government’s stake in ONGC would come down to 69.14% from the existing 74.14%.

ONGC in February had received the report of independent auditors, who certified the company’s oil and gas reserves, a mandatory requirement for explorers making public offers.

Bank of America Corp, Nomura Holdings, HSBC Holdings Plc, JM Financial Services, Citigroup Inc and Morgan Stanley are managing the FPO.


Supreme Court provides interim protection to Tata Motors

The order was passed on a Special Leave Petition by Tata Motors to stay distribution of land till the Calcutta High Court has disposed of the main matters

New Delhi: The Supreme Court today provided interim protection to the rights of Tata Motors till disposal of the main matters pending before the Calcutta High Court on the land earmarked for the Tata Motors' integrated project at Singur.

The order was passed on a Special Leave Petition (SLP) by Tata Motors to stay distribution of land till the Calcutta High Court has disposed of the main matters. Tata Motors appealed to the Supreme Court that the position on the ground should not be irretrievably changed when the main matters are pending before the Calcutta High Court.

"As an interim arrangement, we direct the State not to return the land to the unwilling owners until further orders being passed by the High Court," the Supreme Court said "taking note of the apprehensions expressed by the petitioners".  

The Supreme Court said, "Considering the fact that the petitioners have approached the High Court challenging the action of the State and in as much as the main issue is pending before the High Court, we are not inclined to interfere at this stage."

The Supreme Court added, "All the parties are directed to co-operate with the High Court for early decision in the main matters. In view of the urgency expressed by all the parties, we request the High Court to dispose of the main matters as early as possible preferably within a period of one month."
Tata Motors had appealed on 24th June to the Advocate General of West Bengal that the government should not proceed with any action on the Singur plot in view of the ongoing hearing on the company's main matters on The Singur Land Rehabilitation & Development Act 2011.  

On 27th June, the Advocate General informed the Calcutta High Court that the state government was unable to accept the proposal of Tata Motors.

The Singur Land Rehabilitation & Development Act 2011 charges Tata Motors with non-commissioning of the plant and abandonment, and takes away its rights to the land without providing for a reasonable compensation, despite the company having made an investment of over Rs1,800 crore in the plant. All the equipment had been installed and trial production had begun. In fact, about 15 to 20 cars were ready for roll-out.

On Wednesday, Tata Motors ended 1.48% up at Rs997.80, while the benchmark Sensex gained 1.09% to 18,693.36.


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