1st December, 2008  Source:Asani Consulting

Real estate business faced a challenging year in 2008 so far after heady days of 30 per cent average annual growth for the last few years. Spiralling input costs, sagging demand and hullaballoo over asset-price bubble in the Indian real estate market plagued sales and eroded credit ratings of real estate development businesses in India. From the macro perspective, Indian economy witnessed record levels of inflation in the current fiscal, rising commodity prices, unsustainable land values especially in the metro cities and heightened speculative activity in the securities market over most part of the current fiscal. The last one particularly was impacted by a torrent of foreign institutional investments (FII) into Indian stock markets, due to flagging rates in developed country markets. To a huge relief to the industry members and the investing community, a silver lining is in the sight despite the pall of gloom in the real estate sector.

Indian economy grew at slowest pace in Q1 2008 since 2004, according to latest GDP estimates by the Central Statistical Organization (CSO). Even though the construction sector growth slowed down to 11.4 per cent in Q1 2008-09 (in comparison to 12.6 per cent in Q4 2007-08), it bettered the 7.7 per cent growth rate in Q1 2007-08. Manufacturing gained paltry 5.6 per cent compared 10.9 per cent in Q1 2007-08. Financing, Insurance, Real Estate and Business Services grew at 9.3 per cent. Clearly therefore real estate is among the better performing sectors in the economy.

India was demoted in the ‘Real Estate Transparency Index 2008’ list from ‘semi-transparent’ rating to ‘low’ rating.  The present consolidation in the real estate industry would lead to more transparency. This would be possible through introduction of regulatory authority, more professionalism and adoption of international best practices in real estate that will significantly cut operational costs. Fringe players exit during the course restructuring of the industry. Companies that adopt corporate models survive downturns of this nature and build a strong foundation for future. As an example of optimising costs and delivering differentiated products with higher value, foreign architectural skills are being hired by Indian developers. The idea is to embrace competition and deliver better products. On the administrative reforms front, Haryana government is all set to embark on the computerisation of land records in 2008.

A lot of new real estate projects have taken-off this year despite numerous apprehensions of bubble-bust in the real estate sector in India. Huge investments have been committed by existing players and new players have entered the industry expecting to earn premium. This is a strong indication that the market is maturing and it has evolved to sustainable levels. Real estate Developers continue to post impressive profits; Purvankara notched up 41 per cent profit growth, Unitech 15 per cent, Shoba Developers 23 per cent and DLF 23 per cent – growth in net profits in Q1 of the current fiscal.

Foreign investments continue to flow into the realty sector in India; Taib bank of Bahrain and J P Morgan Chase invested both in PE and FDI segments; Germany based PE firm MPC Synergy has committed to invest Rupees 1300 crore in various SPVs of the Phoenix Mills Group of India. Huge sums have been committed by Ansal Properties (Rs 900 crore in Haryana SEZ), Sunil Mantri (Rs 200 crore), Sun City (Rs 8000 crore) and CHD Developers (Rs 2500 crore in next 5 years). Indu Projects Limited received Rs 325 crore out of total Rs 476 crore credit line from Credit Suisse. Several real estate projects across the country attracted NRI participation to the extent of 20 per cent of the total project investments.

Only recently California based INC Developers has announced its plans to enter the Indian real estate market with a super luxurious apartments scheme worth Rs 100 crore over next 2 years. Morgan Stanley Real Estate is planning to invest an additional $1 billion over the next five years in Indian market. It has also recently set up a Indian operations. These facts and figures speak for itself. We have just left behind a lean phase in the Indian real estate business.

Although the retail sector has no immediate promises of foreign investments by relaxation of regulations, Indian firms are aggressively diversifying and expanding their retail business. Dabur expands its retail biz in Hyderabad, Pantaloons’ ‘Big Bazar” is expanding in Chennai. Shriram Group from Chennai has diversified into mall construction business. The Transport Corporation of India (TCI) is planning to foray into the real estate business.

A spurt in the hotel business in India was anticipated long back. Indian hoteliers are even expanding overseas most notably Indian Hotels of the Taj Group. The Mariott Group has declared its plans for expansion in India. The Jindal group is set to tap the market for budget hotels. Union Minister Ambika Soni, declared a shortage of 150,000 rooms in the budget hotel category. SEZs approval and more development projects are in the pipeline.

It is pertinent at this point to recall that raw material prices for the real estate sector were volatile and erratic during most part of the current year and this had a major contribution in jacking up the home prices. Asset price bubble in Indian real estate market is just a myth and a fallout of US credit crisis hype in the media.

Public policy response was cautionary but prudent. Higher risk-weights were assigned to real estate exposures of banks and ECB (External Commercial Borrowing) window for real estate companies were suspended. Stricter norms for lending based on land value were imposed and restructuring of loans taken by real estate developers was stopped temporarily. However, liquidity to the tune of Rs 2.80 lakh crore was pumped into the banking system. Reserve Bank of India (RBI) announced measures as policy support to the cash starved real estate sector, and check outflow of foreign exchange reserves. To ensure more funds for the real estate sector, RBI allowed registered housing finance companies to raise short-term funds from overseas markets. Indian banks were allowed to offer competitive interest rates on foreign currency deposits by the non-residents. Risk weights for corporate and commercial real estate were reduced to 100 per cent from the earlier 150 per cent.

Over the past two years, interest rate on home loans had gone up to touch 11.75 per cent to 12.5 per cent as compared to 7 -7.5 per cent offered by banks two years ago. Due to the increase in rate of interest, buying capacity has been compromised and this was another reason for the slack in the market. However, led by PSU banks, interest rates on home loans have been slashed, albeit marginally and currently it is less than 10 per cent for some banks.

The need of the hour is an open approach. Policies offering incentives should come in lieu of more affordable housing, green buildings and other innovative real estate products. And above all a regulatory body to tap this huge opportunity. Indian realty might just have a reality check with this downturn and would come out stronger and bigger in times to come.