Tuesday, June 26, 2007

Smaller realtors take exit route

Its judgement day for the small time builders and it looks like the brunt of the fiasco will be felt by the consumers who have booked apartments with these crooks.

Economic times reports

MUMBAI: Liquidity crunch in the real estate market is driving many small-time developers to look around for a cover. Many want to liquidate their land or incomplete projects by selling them to larger developers or private equity players even on reduced valuations. What is forcing them to take this drastic step is the stagnant market, where property rates are showing signs of a major correction, said industry sources.

“I am sitting on, at least, five-six such proposals. Some deals are at an advanced stage. The small-time developers are mainly offering land that they had acquired earlier,” Pradeep Jain, chairman of Parsvnath Developers, told ET.

An official with Mumbai-based realty developer Runwal Group said it had received similar proposals, mainly from markets like Pune, Nagpur and Bangalore. “Though we have not concluded any such deal so far, there are, at least, a couple of proposals we are working on,” he said.

“Small developers are under pressure now. Fund flow into this sector has begun to dry up. Selling incomplete projects to big developers or private equity firms is an option explored by many such developers,” said Pranay Vakil, chairman of KnightFrank India, a frontline property consultant. He added that in the past two months, home sales have come down by over 70%.

“A sharp fall in sales would force them to cut the price in the coming months. The trend is visible in many suburban markets,” Mr Vakil said.

Industry observers said the residential property market, which remained stagnant for the past few months, has started developing cracks, especially in Mumbai’s suburban markets and the tier-II and III cities. The volume of sales has dropped by 70-80% in the past two months in the wake of rising interest rates and additional pressure on household budgets.

Besides, there is pressure on real estate developers due to the tightening of fund-raising norms. The recent moves by the Reserve Bank of India (RBI) and the finance ministry have left them with a few choices like private equity and public offering for their fund needs.

While RBI has been imposing increased restrictions on banks on their exposure to real estate sector, the finance ministry has been trying to curb unrestricted flow of foreign funds.

In May this year, the finance ministry had said that all foreign funds raised by Indian companies, through the issue of partially convertible, non-convertible and optionally convertible preference shares, would be treated as debt and would be subject to guidelines applicable for external commercial borrowings (ECBs).

This move has made it tough for developers to access foreign funds, since ECBs are allowed only in large real estate projects and the conditions are far more stringent than FDI. Several real estate funds admitted that they are working on a clutch of projects now, much more than what they used to around two-three months ago.

“The quantum of deals has seen a manifold increase over last three months. We feel it is mainly due to the tight fund raising norms introduced in the sector,” said Ritish Vohra, director, investments, Saffron Asset Advisory.
According to Mr Vohra, the developers are seeking private equity funds even for small-sized projects. “The valuations are also more realistic now,” he said.

Property consultants said in Navi Mumbai, one of the largest residential markets, prices have fallen sharply. “The enquiry level have come down to almost nil last month. Developers are now slashing around Rs 1,500 per sq ft in the property prices,” said PM Raju, a Navi Mambai-based property dealer.

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