Real estate market heading for a dip

Real estate market is heading for a steep fall in the coming quarters. Lack of buying interest at the current exorbitant prices and rising cost of funds both for developers and customers have reduced activity in the market to a trickle. While most developers are resisting cutting prices, they can do little to push sales at the going rates.

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Published: Mon 27 Jun 2011, 10:33 PM

Last updated: Tue 7 Apr 2015, 4:53 AM

After a moderate correction in 2008 following the global financial crisis and slowdown at home, real estate prices climbed back in 2010, with some sectors regaining and even surpassing old peaks.

The year 2011 opened with cautious optimism. But halfway through the year, the outlook has turned distinctly somber. With the economy slowing down, demand for office space is slackening. But it is the bread-and-butter segment of residential properties affordable to middle class is the worst hit.

Demand has all but dried up. The past several months, especially the period after Diwali, had been rather bad for the real estate sector.

In the first quarter of 2011, home sales dropped 17 per cent in Mumbai, 14 per cent in Bangalore and 15 per cent in Hyderabad. Sales in tier-II and tier-III cities are steady, though there is some fear due to the increase in interest rates, which have climbed to about 11 per cent from 8.25 per cent a year ago.

Apart from astronomical prices of flats and offices, the single biggest factor hindering the demand is the steep rise in interest rates during the last one-and-half year. A hike in interest rates not only increases the EMI for loans already taken but also reduced the loan eligibility of buyers. As a result, customers have to reconsider the size and locations of houses they wish to purchase.

As there is no indication from the RBI that it is done with rate hikes, many buyers put off their purchases altogether till home prices come down andrates stabilise. Builders and developers are facing their own problems, the most pressing one being the funds crunch. Banks had already turned cautious about lending to developers on receiving the signal from the banking regulator. Now with stagnation in sales, they are likely to become even more reluctant in lending to the sector. Private equity is unlikely to throw out a lifeline since they do not relish being locked into a medium-term plateau if not trough.

Moreover, the cost of private equity funds is high, which is another major concern for developers. Unless they see 30 per cent return on their investments, they would not invest as they feel the risk is high.

Colds shouldered by banks and shunned by private equity, builders are turning to other sources of finance which are even costlier.

As it happens, most developers are groaning under the burden of mounting interest costs which in many cases are threatening viability of projects.

The situation is not likely to improve in the next few months as analysts and economists across the board expect the policy rate to be hiked by at least another 50 bps by March 2012.

It is against this backdrop that many analysts and industry insiders see the market heading for a steep fall in the coming quarters. Sales are sluggish, interest burden is mounting for developers and prices are too high for most genuine buyers.

This situation cannot continue indefinitely. Estimates differ on how much prices will fall, ranging from 25-40 per cent in metro cities, where the rates have peaked, to 20 per centelsewhere.

Views expressed by the author are his own and do not reflect the newspaper

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