What’s the way out for Indian realty?
The volatility of the real estate sector is becoming increasingly evident from the size of the advertisement space that has been shrinking with time. A few months back, the real estate supplements of the mainstream newspapers used to have more number of pages than the regular newspaper, with numerous real estate firms occupying full page advertisements about their projects. The trend of full page advertisements has been disappearing and has reduced to classified section, indicating that things are not good as they were till a few months back.
Over the past few years, easy availability of finance and growing demand from both housing and commercial space had been the main drivers for the unprecedented growth in the sector. As the market started moving northwards, it was not just the end users but more than them, it became a paradise for speculators. So it was not just the easy availability of funds but along with it speculators’ funding that created a ‘real’ rampage in this sector. Interestingly, like it happens in all other conventional businesses, in real estate too, the size of land bank determined the terms of trade. Accordingly each and every real estate firm went about aggregating land bank, without paying much heed to complete their existing projects. In fact, all sources of funds were exploited by the real estate companies to amass huge tracts of land. Even the farmers, over time, started demanding illogical prices which the real estate companies were ready to pay. In fact no one had a problem till the time monies and buyers were available for the projects that would be raised on these tracts of land. But then historically it has been observed that such trends and subsequent corrections are universal. So when with growing inflation, the apex bank had tightened the money supplies, things started looking terribly awry.
The apex bank had been tightening the money supplies for it has been observed that things are going out of reach for many end users. So with External Commercial Borrowings being restricted, escalation of input costs, term loans attracting the highest interest rates, ban on pre-bookings and other forms of liquidity crunch have left the sector completely high and dry. In fact, with the kind of meltdown that is being speculated, even Private Equity investors do not seem to be interested in this domain anymore. Against this backdrop of slowdown, what is eventually evolving is indeed a scary scenario. Real estate companies are sitting on large inventory of land bank, with literally no funding available that would help them to finish their projects and liquidate. In fact some companies have even gone to the extent of attracting private retail investors to bail them out, guaranteeing obscene returns of 36 to 42 per cent upon their projects.
So, the billion dollar question is: how long can these companies stretch? The sources of fresh funds have almost dried, which had put sudden brakes on their ongoing projects. Plus there are pressures of servicing previous debts. In the given scenario, the market would still see some action, but the day the sustenance breaks, what we are going to observe is a huge pile of distressed assets under the debris of these real estate companies! One way out of this catastrophe is to divert whatever funds available towards low-end and affordable housing. Many developers are evidently targeting a miniscule set of the whole target population, thereby premium housing is generally oversupplied. In an economy like ours, it is still a long way to go before the demand for low-end housing saturates!!
The volatility of the real estate sector is becoming increasingly evident from the size of the advertisement space that has been shrinking with time. A few months back, the real estate supplements of the mainstream newspapers used to have more number of pages than the regular newspaper, with numerous real estate firms occupying full page advertisements about their projects. The trend of full page advertisements has been disappearing and has reduced to classified section, indicating that things are not good as they were till a few months back.
Over the past few years, easy availability of finance and growing demand from both housing and commercial space had been the main drivers for the unprecedented growth in the sector. As the market started moving northwards, it was not just the end users but more than them, it became a paradise for speculators. So it was not just the easy availability of funds but along with it speculators’ funding that created a ‘real’ rampage in this sector. Interestingly, like it happens in all other conventional businesses, in real estate too, the size of land bank determined the terms of trade. Accordingly each and every real estate firm went about aggregating land bank, without paying much heed to complete their existing projects. In fact, all sources of funds were exploited by the real estate companies to amass huge tracts of land. Even the farmers, over time, started demanding illogical prices which the real estate companies were ready to pay. In fact no one had a problem till the time monies and buyers were available for the projects that would be raised on these tracts of land. But then historically it has been observed that such trends and subsequent corrections are universal. So when with growing inflation, the apex bank had tightened the money supplies, things started looking terribly awry.
The apex bank had been tightening the money supplies for it has been observed that things are going out of reach for many end users. So with External Commercial Borrowings being restricted, escalation of input costs, term loans attracting the highest interest rates, ban on pre-bookings and other forms of liquidity crunch have left the sector completely high and dry. In fact, with the kind of meltdown that is being speculated, even Private Equity investors do not seem to be interested in this domain anymore. Against this backdrop of slowdown, what is eventually evolving is indeed a scary scenario. Real estate companies are sitting on large inventory of land bank, with literally no funding available that would help them to finish their projects and liquidate. In fact some companies have even gone to the extent of attracting private retail investors to bail them out, guaranteeing obscene returns of 36 to 42 per cent upon their projects.
So, the billion dollar question is: how long can these companies stretch? The sources of fresh funds have almost dried, which had put sudden brakes on their ongoing projects. Plus there are pressures of servicing previous debts. In the given scenario, the market would still see some action, but the day the sustenance breaks, what we are going to observe is a huge pile of distressed assets under the debris of these real estate companies! One way out of this catastrophe is to divert whatever funds available towards low-end and affordable housing. Many developers are evidently targeting a miniscule set of the whole target population, thereby premium housing is generally oversupplied. In an economy like ours, it is still a long way to go before the demand for low-end housing saturates!!
In housing sector design, climatology and circulation aspects play a key role. But this has been suppressed by stereotype design. More flats per core reduce the wasted super area per flat. But the trend is 2-4 flats per core. What an enormous waste of resources.
ReplyDelete