Monday, January 01, 2007

Speedbumps ahead in property market

From the newspaper DNA

Speedbumps ahead in property market
Rabin Ghosh
Sunday, December 31, 2006 23:59 IST

2007 likely to witness some correction

Sometime during the middle of 2006, when Deepak Parekh, chairman of Housing Development and Finance Corp, India’s second-largest mortgage lender, predicted a 15-20% fall in property rates by the year-end, not many doubted.

After all, the stock market was in a bear hug (in what proved to be short- term), the Reserve Bank of India was making periodic noises about the overheated property market, and interest rates were moving north.

By the end of the year, nothing of that sort happened. On the whole, real estate as an asset class performed fairly well in 2006, gaining 30-40% on-year, though in some pockets the rise was as much as 100-150%.

While specifics vary, almost everyone believes that, in 2007, reality market would behave much logically and rationally. The heady days of 40-50% growth rates are over.

Brokerage house India Infoline estimates the Indian real estate market, currently about $12 billion, is likely to touch $50 billion by 2010, registering a compounded annual growth rate of 33%.

“The year 2007 will see rationalisation of property prices. I am not calling bursting of the bubble. The India growth story is still very strong, but the same bullish sentiment we saw in 2006 won’t be repeated. Already, there are signs pointing to an impending correction in the second half of 2007,” says Ankur Srivastava, managing director, DTZ Debenham Tie Leung, India, an international property consultancy firm.

The year gone by was an interesting one for the real estate industry. In 2006, for the first time, foreign money began to look at India seriously. Over 100 foreign institutional investors committed funds for the sector. It was also the first time that banks were cautioned against lending money to the sector. This was also the year when demand was unprecedented across all the reality buckets - residential, commercial, retail, and hospitality and across geographies.

According to a DTZ report, commercial property absorption in Delhi NCR for the first nine months of the year was 6.03 million square feet (msf), against 3.5 msf for the whole of 2005.Chennai absorbed as much in one quarter (1.8 msf) as it did for the whole of last year.

Jackbastion Nazareth, marketing director of the recently listed Bangalore-based Shobha Developers, feels that property as an asset class would continue to grow.

“In 2007, people with short-term goals will vacate. Against about 15% speculators we had (in our projects) in 2005, the number came down to 8-9% in 2006, and we see their share further coming down in favour of genuine buyers,” he says.
Nazareth says the only thing holding back people wishing to invest in property for long-term horizon was lack of information and transparency.

“In 2007, real estate would shed the tag of an unorganised sector. With about 25 real estate companies to be listed by 2007 end, transparency would no longer be an issue for those looking at investing,” he says.

DTZ’s Srivastava points out to negative yield (difference of finance costs and rentals) that in certain markets. “In 2007, at least four of the top seven cities would see rationalisation. In Chennai, against an estimated demand of 5.5-6.0 msf of office space, the supply in 2007 would be 10 msf. For Delhi, against a best case absorption of 10 msf, the supply would be over 15 msf. In certain markets, we see office lease rentals falling by as much as 40% in 2007,” he says.

In commercial office space, Srivastava says markets like Chennai, Pune, Kolkata, and Hyderabad are headed for huge oversupply. In the residential segment, he sees Gurgaon and certain areas of Bangalore facing correction.

“In the residential market, Chennai is a strong market since not too many quality projects are coming up. However, Whitefield (Bangalore), Gurgaon, and Pune will see major correction. At Whitefield, already developers have begun to hand out freebies and holding property expos to hawk unsold properties. Rental values are down by 25% over the last six months,” he says.

Mukesh Khandelwal, president, Infrastructure Advising Committee, Feedback Ventures, a real estate and infrastructure consultancy firm, too, sees a severe price correction in Tier-I residential projects.

“At places like Jaipur and Lucknow volume of supply is not matched by adequacy of demand. In Gurgaon, too, we see price correction since that kind of pricing is not sustainable and more supply would hit the market in the coming months,” he said.

1 comment:

Raltor said...

Bubble or not, NRIs are certainly watching the Indian real-estate market as a juicy investment vehicle.