Even as economic activity picks up, the real estate sector is stuck due to funding constraints and fewer buyers
After a tough 2008-09, there was a feeling that developers would change their high-rise focus to help more average-income buyers find decent housing. There were some who did a little in this direction this year. But most others forgot the bad times quite quickly and returned to their previous high-end ways.
Now, as 2010 draws to a close, it doesn’t appear like the real estate business has very much to celebrate about. Till a couple of years ago, high prices and equally high interest rates did not deter people from buying a house. Today, the continuing uncertainty is keeping more and more buyers back.
In the face of sluggish demand, developers are stuck with large unsold properties and heavy debt. A tight liquidity situation has made it even more difficult for them to arrange for finance. And with some big names in the net for bribing housing finance officials to secure loans, the situation is getting tighter. Even the extended festival season beginning with Dassera, through Diwali and into Christmas and the New Year has not helped revive business.
If anything, the widening investigation into the bribes-for-loans scandal has already increased the risk weightage for the sector and it will make it even more difficult for the players. On 24th November, eight finance sector executives, including the chief executive of LIC Housing Finance and a Bank of India official, were arrested by the Central Bureau of Investigation (CBI) for sanctioning loans to real estate companies, bypassing the rules and accepting illegal payments to do so. These deals were allegedly facilitated by Mumbai-based Money Matters Financial Services.
The scandal puts a huge question mark on the credibility of an already-tarnished real estate sector, public sector lenders, as well as valuations of real estate securities. Some of the big names involved are Lavasa Corporation, DB Realty, Oberoi Realty Limited, Emaar MGF Realty, Kumar Developers and Mantri Realty. Also, work at the Lavasa project and DLF’s first project in Goa has been stalled for violation of environmental norms.
The extent of the malaise in the real estate sector was evident in yet another scam involving numerous influential people, even top army officials. In this case, a six-storey building originally planned for Kargil war heroes and widows, was illegally converted into a 31-storey structure and the flats allocated former service chiefs, serving army officials, bureaucrats, politicians and their family members.
One of the politicians found to have benefited was Ashok Chavan, who had to resign as chief minister of Maharashtra. The Adarsh Housing Society building, located in the vicinity of sensitive naval installations in Mumbai’s plush Colaba area, violates coastal regulation zone laws. The CBI is also investigating this case.
Both the bribes-for-loans and Adarsh scandals erupted in the past couple of months and it may be a little early to gauge the effect they will have on business.
Among the costliest real estate deals in 2010 was the sale of a four-storey commercial building at Worli by the Nusli Wadia Group to Axis Bank for Rs640 crore. The private lender plans to set up its headquarters in this building.
Some industry analysts have suggested periodically that for the property business to revive, prices would have to correct soon. But it seems they have only got costlier and nearly out of reach of average-income people. Today, residential rates are at back to the peaks touched before the financial crisis. As a result, many of the projects we see advertised over colourful spreads in most publications are running empty. This has led developers to offer big bonuses for those managing to entice buyers and bigger discounts for those signing up.
Brokers have been gifted luxury cars like the BMW and even foreign trips, while buyers have been given incentives through schemes like’90:10’ financing. The recent decision of the Reserve Bank of India (RBI) to cap the loan-to-value ratio for housing loans by banks to 80%, has increased the risk weightage for residential loans of over Rs75 lakh, further dampening overall sentiment for the sector, particularly in Mumbai.
For developers, financing options have only got tougher as the RBI has periodically tightened the purse strings of banks and alternative financing routes that are also costlier is eating into the bottom lines of most companies. Some real estate companies came up with the largest initial public offers this year—DB Realty (Rs1,500 crore), Prestige Estates (Rs1,200 crore) and Oberoi Realty (Rs1,000 crore). However, this fund-raising happened before the scandals came to light, and other companies that hoped to raise funds similarly, have put off plans.
According to real estate consultant Jones Lang LaSalle (JLL), the value of investment grade real estate in India for under-construction projects crossed $100 billion in 2010. Mumbai was at the top in the real estate investment chart, followed by Delhi (including Noida, Gurgaon, Faridabad and Gaziabad in the national capital region), where maximum construction activity is in progress, and the five other major cities.
The commercial property segment performed better than the residential segment, as business houses resumed expanding their presence in various cities, with the recovery post the recession. Mumbai, Bangalore and Delhi were the top choices for office space. The information technology business grabbed the most properties, also in Pune, Hyderabad, Chennai and Kolkata.
With high land cost a major issue for developers who are looking to provide affordable housing, some enterprising companies launched residential projects on the outskirts of cities and even beyond. Tata Housing, HDIL, Matheran Realty and Shapoorji Pallonji were among the names who took up such initiatives. But these were too few and far in between.
With the economy continuing to improve, the prospects for commercial properties are looking better. But in the residential sector, if sluggish demand and high rates have not made developers change their high-end plans, it is difficult to imagine what will.
Chennai-headquartered TI Cycles of India, part of the $3.03 billion Murugappa Group, is on course to achieve its bicycles sales target of 4.3 million and cross Rs1,000 crore in turnover this fiscal, said a top company official.
"We sold 3.85 million cycles last year and are on track to achieve the target of 4.3 million. Also, we are targeting Rs1,150 crore turnover against Rs960 crore last fiscal," TI Cycles and BSA Motors president D Raghuram said.
The company in the last five-six year has achieved 20% year-on-year growth, he said.
Mr Raghuram claimed the company held 32% market share in traditional models and 50% in the special models category.
Punj Lloyd Ltd said it has won a contract for construction of two commercial buildings in a township being developed by the Hirco Group at its special economic zone at Panvel, in Maharashtra.
The township, Hiranandani Palace Gardens, is a part of Hirco's Panvel SEZ in Maharashtra and is expected to be completed within 24 months.
"The contract entails the construction of two commercial buildings and a podium, adding up to a built-up area of about 2 million sq ft. The first of the two buildings will be completed within 12 months," Punj Lloyd said in a statement.
Hiranandani Palace Gardens is a mixed-use township project, which will boast world-class residential complexes, offices, educational institutions, healthcare facilities, etc, once complete, it said, adding that the commercial towers will be built near residential apartments.
The project is situated near the recently announced Navi Mumbai International Airport and is easily accessible by road and rail.
On Tuesday, Punj Lloyd ended 0.28% up at Rs107.80 on the Bombay Stock Exchange, while the benchmark Sensex closed 0.02% down at 20,025.42 points.