Tough Year for Realty, No Respite Seen in Short-Run

Thursday, 29 December 2011, 06:40 Hrs
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New Delhi: The realty industry in India faced a negative sentiment in 2011, with developers, buyers and investors caught in a quagmire due to a host of unfavourable conditions, notably a slowdown in the economy, muted flow foreign direct investment, rising inflation, fluid stock market and rising interest rates.

Liquidity crunch was the bane of the industry. The average cost of debt shot up, adding to developers' debt burden. Top 11 listed real estate companies accumulated a debt of over 38,000 crore, with DLF alone contributing more than 50 percent to it.

As a result, many developers scaled down their projects and some even sold their non-core assets. There was also an increasing trend of cash-strapped developers pooling land, marketing and capital resources for joint projects to minimise risks.

The residential segment, principal demand driver for real estate, remained restrained. Key market indicators like sales and absorption were low due to prohibitive prices and high home loan rates. Prices in the National Capital Territory (NCR) and Mumbai peaked to 2008 boom-time levels. Home loan rates were hiked as many as 12 times, aggregating 375 basis points since March 2010.

Buyers' hopes of price correction were dashed. Despite pressures of low sales volumes, developers stuck to high property prices due to low margins. Consequently, home sales were significantly hit and even the festive season could not bring cheers.

Affordable housing that had led to residential real estate recovery in 2010 also faced a slowdown. Noida and Greater Noida, which had dominated affordable housing sales in NCR, suffered a setback due to land rows. As a result, 160,000 units remained unsold in NCR.

According to industry statistics, 5.76 million square feet of inventory piled up in top six cities of NCR, Mumbai Metropolitan Region, Bangalore, Pune, Hyderabad and Chennai. The inventory pile up by 10 listed companies amounted to 31,000 crore.

Developers were on the horns of dilemma. On the one hand, there was desperation to raise funds through advance bookings from new projects. On the other, they were faced with the execution challenge to complete ongoing projects than launching newer ones. Majority of developers preferred to deliver committed projects, resulting in a dip in new launches.

The residential segment witnessed a growing trend of high rises and niche housing like sports homes. Small towns emerged as major hubs for residential realty.

Commercial office real estate was in stress due to a slowdown in demand and an oversupply situation. There was excess supply of nearly 166 million square feet of ready and under construction commercial space across top seven cities of Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad, Pune and Kolkata.

Around 60 million square feet of office space is likely to remain vacant this year. But due to a dip in demand for corporate leasing and an oversupply situation, there has been a correction in rentals. Commercial office real estate also witnessed a trend of leases skewed towards suburban sub-markets due to easy availability of cost-effective space. Taking cost advantage, many large office occupiers, especially big IT companies, relocated themselves to special economic zones.

For the retail segment, it was a year of renaissance and maturing market, as retailers expanded their footprint in not just Tier-I but also in Tier-II and Tier-III cities with both mall and high street space leasing picking up.

Retail real estate supply grew rapidly with additions of six million square feet of space in the first half of the year. Rentals in malls and high-streets appreciated to the tune of 15-20 percent. There was a clear shift towards well-designed and well-managed malls and transactions were skewed in favour of revenue-sharing deals than simple leasing.

The year brought mixed fortunes for real estate reforms. The high points were subsidy on home loans of up to 15 lakh, introduction of green building rating, mandatory sale deed for property transfer and a new National Manufacturing Policy to give boost to industrial townships. But the inability to introduce a Real Estate Regulatory Bill and a New Land Acquisition, Rehabilitation and Resettlement Bill was a big disappointment.

The real estate investment scenario was also not very encouraging. Foreign equity inflows remained moderate and a number of companies deferred their public issues due to volatile stock market conditions, with realty index taking a severe beating. Investments in land banking, too, experienced a slowdown to the tune of 20 percent.

Due to curbs imposed by the Reserve Bank of India on exposure to real estate, private equity was much sought after and is likely to top the $1-billion mark this year. There were also signs that non-resident Indians were taking advantage of rupee depreciation to invest in real estate.

Going forward, the sector is expected to be in the grip of slowdown at least till the first half of 2012. Things may improve only in the latter half if the economy improves and political stability is back to push key reforms.

Source: IANS
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