Tuesday, October 21, 2008

Time reports on the Indian realty meltdown

I guess to all the ostriches, this article is one more nail in the coffin. Drop prices 30-40% or go bankrupt, seems to the mantra come Janurary. The only hope is the centuries old tradition of praying to Goddess Lakshmi for wealth and prosperity. In the Indian secnario, the developers who are leveraged to the hilt are the sub-prime of India.

Mirroring the US, India's Real Estate Sector Melts Down
By Madhur Singh / New Delhi Monday, Oct. 20, 2008
The new moon of the lunar month of Kartika marks Diwali, the Indian festival of lights, when Hindus across the country worship the goddess of wealth, Lakshmi. But divinities know full well the laws that govern finance and Lakshmi may not be a little tight-fisted about circulating her riches amid the ongoing global credit crunch.
Indian tradition decrees that it is auspicious to make purchases during the days leading up to Diwali — which falls in October or November. With faith meshing so effortlessly with commerce, the season sees sellers, advertisers and marketers urging the devout to spend money with a religious fervor, hawking everything from chocolates and consumer durables to gold and houses. Buying a home is considered especially propitious. What better way to welcome the goddess of wealth into one's life than by inviting Lakshmi into one's new abode? So much so that the period from just before Diwali through March is usually a bonanza for the real estate industry: usually 70% of the annual business is conducted at this time.
Not this year. With just about a week to go until Diwali, the mood is decidedly downbeat. The demon of impending economic doom refuses to die, and as tightened liquidity makes people put off larger purchases, the real estate sector is facing the worst attack. "This time last year, I was selling 10 to 12 properties every day," says Alok Gupta, who runs Advanced Real Estate in the New Delhi suburb of Noida. "This time, I haven't sold a single property all month!"
Considered the barometer of economic growth, the real estate sector in India has grown 30% to 35% during the last five years, reflecting the rapidly-increasing demand for office, commercial and industrial space, as well as bigger homes now considered within the range of India's prospering working classes. But the economic juggernaut has been slowing since earlier this year due to double-digit inflation, a severe liquidity crunch as a fallout of the U.S. sub-prime crisis, and now, the possibility of economic activity shrinking as part of a global slowdown. The country's growth estimates of 9% at the beginning of the year have been revised to well below 7%, and the effect is directly visible on the realty sector. "No one's buying any more," says Ashwani Shukla of New Delhi-based Triveni Associates, "Two years ago, 25-year-olds earning fat pay packets from [multinational corporations] were buying high-end apartments. Now, there are no takers for flats selling at 20% markdowns. Estate agents are finding it difficult to even meet daily overheads."
Shukla himself has branched out of real estate and started selling insurance six months back, "to pay the bills." According to various estimates, sales in cities like Mumbai and Chennai are down 30% to 40%. Hoping to induce buyers at Diwali, realtors are advertising cash discounts of 5% to 10% for down payments, and as much as 25% discounts if buyers are willing to wait two to three years before taking possession of the property. "But there is no liquidity with the end user," says Arvind Nandan, director of consultancy at real-estate consultants Cushman & Wakefield India, "Home-loan rates have hit the roof, and people's investments have lost value at the stock market. No one has the money to buy."
Shukla says if the situation does not improve, there could be distress sales within the next six months. The realty sector was heading for a cyclical slowdown even before the current economic slump. Over the last few years, increasing demand had pushed up prices, with speculators jumping in to further inflate the market. Eventually inventory piled up when buyers refused to pay unrealistically high prices. "So many transactions were taking place between speculators and investors that no one bothered to find out what the end-user, the family who would eventually live in the house, would be willing and able to pay," Shukla says. And those prospective home owners are the biggest target of India's real estate industry: almost 80% of real estate developed in the country is residential space.
This all comes at the worst possible time. Even as buyers refused to bite, inflation passed into double digits in June this year, raising prices of construction material. Realtors overran their budgets and projects stalled, leaving skeletal structures dotting the landscape across big and small cities all over the country. Then came the liquidity squeeze as the government sponged away cash from the system to control inflation. Home loan rates went from about 7% to over 12%. People who bought struggled to pay, and potential buyers kept away.
Realtors like Shukla and Gupta may have little reason to light firecrackers this Diwali, but their prayers to Lakshmi, the Goddess of Wealth, will definitely be more fervent, especially as experts predict things will get worse before they get any better. "This was a much-needed correction," says Nandan of Cushman & Wakefield India, "And it isn't complete yet. I expect the market to go down further, and it's hard to say when the recovery will begin."
Yet, no one is entirely pessimistic. Experts and industry insiders believe once the storm blows over, demand is bound to rise back up for the same reasons it did last time — a large, young workforce; gradual but consistent liberalization reforms; and a high rate of consumer and private sector savings. "The silver lining is that once this phase ends, land and property prices will be corrected to rational levels, speculators will be out, and the sector will have stronger fundamentals," says Shukla. If everyone's prayers go right, the goddess will eventually be propitiated and her blessings will issue forth once more.

9 comments:

Anonymous said...

It is interesting to note that doomsayers have yet again moved the day of imminent collapse a few months ahead! The doom predictions started 12-18 months ago (although this blog -"India's housing bubble" had the foresight to predict it 3 years ago). A few months ago, the collapse was to occur in summer 2008 because bank rates had gone up further, then it was to be in September because of the stock market collapse, then immediately after Diwali. The latest article on this blog seems to suggest that collapse will now actually occur in Jan,2009 !!

I continue to maintain at www.meridharti.com that prices will not crash-in NCR in particular and Tier I cities in general. These cities include -Mumbai, Bangalore, Chennai. Ofcourse, I continue to maintain (as is clearly mentioned in articles on my website) that some pockets even in these 4 cities might be overpriced. Certainly, the whole market is not overpriced. Time will tell if the crash indeed happens or not. Let's hope for the sake of affordability that prices do actually fall.

I clearly think they will not.

Ashish Abrol
www.meridharti.com

Abdulla said...

Madhu Singh's report is more of a fiction, than the actual situation. Written like poetry, it's aim is to paint a gloomy picture that a consumer wants to see. My sincere advise to potential home buyers to to approach the builders directly and find out the truth.

There might be slight correction in the coming few months, but don't expect to see anything drastic.
Having stated the above, i'd like to point out that the site www.meridharti.com is a scam and many more sites like these aim to attract investments that may disappear just like the chit fund companies.

Anonymous said...

Abdulla,

Can u pl explain why www.meridharti.com is a scam? Is there any particular developer whose properties www.meridharti.com is promoting? Is there a particular person that meridharti is promoting? Infact, meridharti is the only website in India which has a headlines news section which has news from all leading newspapers and most of these newspapers are saying prices will fall. meridharti has no problem in having such news on its website although the editorial position of meridharti is against falling prices. Why would the website allow an opposing view to prosper on the website if the website had an agenda to favour someone?

Maybe, you can tell us.

Later,
Ashish Abrol
www.meridharti.com

Anonymous said...

The inevitable is delayed because the people responsible for reducing prices are living in denial. Due to the black money component in the construction business the balance sheets don't accurately reflect the the income which is sales - costs. Once cash flow dries up which will happen in the next few months, we will see mass reductions. There are thousands of apartments on Palm beach road in Navi Mumbai which are empty or rented out at paltry rents. Anything over 5k is overpriced and we will see a revision to mean, sooner or later.
For the buyer waiting for a six months is no big deal. If the apts are not getting sold at todays prices, why will they sell at 10% above today's prices. The only way gravity works is "DOWN"

Anonymous said...

Abdulla,
meridharti.com promoted by Ashish is not a scam.

The only difference with other bloggers is the difference in opinion. Ashish has a very optimistic approach and a lot of people here are pessimistic.

But, my opinion is that the housing is going into toilet and no force on Earth can stop it to decline by 50-60% in 1-2 years.
Sell your assets now before it is too late. Cash is King.

Anonymous said...

I totally agree with Abdulla meridharti is the promotional site, a conspiracy by Delhi builders. If Aashish is so neutral about the real estate market why he is again & again giving the same BS, before telling us this crab can you tell us how many inquiries you did, what are the current market prices.
6 month back I personally inquired to couple of builders in Pune for some luxury apartment, they were not ready to negotiate the & today I am getting call at least twice in a month for negotiation.

Anonymous said...

Abdulla do have your own opinion ? or thinking ability. Madhu Singh's report is fiction, meridharti is scam can’t you give your own analysis instead of throwing mud on other people? Every time on blog you started fighting with some or the other. Better join political party, good place for you.

Realty Rider said...

Real Estate industry is talking on correction period all over India. Brokers, especially, are absolutely convinced that the market is set to fall. In many areas the property rates have already started falling. Accordingly, Goregaon, Malad, Mira Road, Vasai and Virar on western suburbs and Mulund, Bhandup, Kurla, Chembur and Govandi on central side have started stagnating the level of property prices.Pune, Nashik, Noida, Jaipur, Bangalore, Chennai and Hyderabad are also feeling the cold wave in the property market. Reason for the same is related with hike in housing finance interest rates and unaffordable property rates.For more view- realtydigest.blogspot.com

Neel Patel said...

Good peace of information and discussions going on and shared here. Good article on Indian real estate industry. I think imvestor should be very cautious while investing in residential real estate properties, but for commercial properties, It is still a safe heaven. http://www.pravesh.co/