Indian real estate sector: In a tougher spot
Shukti Sarma 16 June 2011

With the RBI tightening its grip, inventory piling up and decreased sales, expect a drop of 20% or more in real estate prices

The RBI's (Reserve Bank of India) Financial Stability Report, released a couple of days back, has tightened the noose around the realty sector's neck. The RBI has said that the rise in the number of non-performing assets (NPAs) and the subsequent increase in provisioning is taking its toll on the profitability of banks.

"NPAs in real estate loans remained above the system level NPA growth. Going forward, the asset quality in this segment may decline with further pressure, given the increasing interest rate environment," the RBI said yesterday. The rate of growth at 19.8% of NPAs in this segment was also higher than the overall NPA growth rate of 14.8%. Credit to the sector was up 24.6%, which was faster than the overall credit growth of 22.6%.

With RBI's 10th hike in policy rates in 15 months, home loans can become more costly. The 25 bps (basis points) repo rate hike and a similar hike in the reverse repo rates to 6.5% may not result in an immediate increase in bank interest rates, but it definitely comes as a further cause of worry for the distraught realty sector.

Skyrocketing prices have put off buyers, leading to a piling up of unsold inventory.

"The residential property prices are exorbitant at Mumbai's prime locations. 180 units sold in Mumbai from January to March 2011 were priced above an average capital value of Rs20,000/sq ft. No wonder the market is slowing down perceptibly now. Around 3,350 units priced at Rs20,000/sq ft and above remained unsold by the end of March 2011 in the city," said Himadri Mayank, manager-research & real estate intelligence service, Jones Lang LaSalle India.

Liases Foras, realty researchers, had estimated that almost 92,000 flats remain unsold in Mumbai. A Hindustan Times report says that there has been a 30% rise in the inventories of real estate giants over the last year. DLF, HDIL and Indiabulls Real Estate have inventories collectively worth Rs23,197 crore on their respective balance sheets as on 31st March.

DLF has sold 10 million sq ft in 2011, whereas in 2010, it had sold 12.5 million sq ft of property. Other developers too, have fared badly. "The pre-monsoon scene was terrible," said a Thane-based broker, "we are not putting up any hopes during the rains. So many builders are advertising via radio, newspapers and hoardings-but there are no sales. Even discounts haven't got us many customers."

India will need some 26.30 million houses by the end of 2011, as a government report on the 11th Five Year Plan (2007-2012) has said. Most of the affordable housing schemes for the poor have failed drastically. The details can be seen here: India will need 26.53 million houses by 2012, says ministry of housing report. "But when big builders' associations have holding power over the prices, you cannot do anything but wait until they decide to lower the prices," said an analyst.

Confederation of Real Estate Developers' Associations of India (CREDAI) says that following the RBI move, prices may rise further. But, a Mumbai-based builder said that the stagnation in the sector may ultimately result in a 20% drop in prices by year end.

Most realty companies blame the delay in procedures and getting clearances, etc., for the inflated prices. But these explanations are losing their credibility with buyers. However, if the sector does not reinvent itself and starts restructuring prices, it will find more difficult to raise money through sales and bail itself out.

Mukesh Parikh
1 decade ago
Builder's rarely display Bank's Hypothecation/lien on project at the site or in advt....
Now it's time for the banks to put on website which projects are mortgaged to them which will give clear picture to the common who is putting his hard-earned life time earning in booking property.
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