Rising interest rates, tighter lending norms, poor sales--they all add up to an imminent slump in property prices

Property prices in major Indian cities, including Mumbai and New Delhi, are set to slump by as much as 30% in the next three-six months as rising interest rates and tighter lending norms have led to a sharp drop in demand for homes. "Softening in prices would begin in a month or two if sales continue to be low," said Adhidev Chattopadhyay, an analyst at Mumbai-based Edelweiss Securities Ltd. A Credit Suisse note on 19 January forecast that property sales in India may decline unless prices are cut 10-30%.

The Reserve Bank of India (RBI) has signalled borrowing costs will rise further after increasing interest rates seven times in the past year to curb price rise. It has also tightened lending norms for the purchase of property to rein in surging prices. Even as the supply of residences outstrips demand, property developers, who need to repay an estimated Rs14,000 crore to banks by the end of the financial year, are facing the spectre of loan defaults as dropping stock prices make it difficult for them to access equity markets, and banks tighten lending.

"A consensus is emerging that we are seeing the tip of a slowdown or a semblance of a bubble and the nervousness is evident on a pan-India level," said Amit Goenka, national director, capital transactions, Knight Frank India.

The Bombay Stock Exchange realty index, a measure of 15 property stocks, has dropped 26% in the last year, compared with a 17% rise in the benchmark Sen. The realty index has plunged 25% this year.

In November, RBI asked lenders not to loan more than 80% of the value of a property priced at more than Rs50 lakh. It also asked banks to increase the risk weightage of property loans of more than Rs75 lakh to 125%, making it more expensive to lend. Risk weightage assigns the minimum amount of capital that lenders have to maintain, as a percentage, depending on how risky a loan is.



"This was an additional factor along with the price rise which directly impacted investor sales in the higher end of the residential market," said Chattopadhyay.
"The loan-to-value ratio being capped at 80% effectively reduces the purchasing power of a homebuyer," analysts Aashiesh Agarwaal and Chattopaday wrote in a note to clients. "With a homebuyer having to cough up additional 5-10% equity for buying a house, he may have to delay his purchase decision, leading to a fall in incremental sale volumes."

The drop in residence sales has led to an increase of inventory in several cities. Mumbai has been the worst hit with about 88,000 unsold flats in the metropolitan region. About 25,000 of them are within the city limits of India's commercial capital, according to a survey of 2,400 housing projects in Mumbai, conducted by property researcher Liases Foras.

Recent home sales data suggest it may take as many as 22 months for the inventory to be cleared in cities such as Mumbai, Delhi-NCR (National Capital Region), Chennai and Hyderabad, said Pankaj Kapoor, chief executive of Liases Foras.

Residential sales tumbled 15% in Gurgaon, 20-25% in Greater Noida and Ghaziabad and almost 40% in Faridabad during the last two months of the past year, according to PropEquity Research.

Data from across India shows that only 15% of the home deals struck between April and September were at prices less than Rs2,500 per sq. ft, suggesting it is now difficult to buy even a 1,000 sq. ft house for less than Rs25 lakh in most cities. As a result, volumes have begun to slow and new bookings reported by major developers have been lower than expected, Credit Suisse said in their report.

"Builders have started negotiating across the table and are willing to cut prices by 10-15%, but prices need to fall further to become affordable," said Kapoor.

Some prospective buyers have now decided to delay their purchases until prices fall.

Vishal Jain, 35, has taken a break after six months of house-hunting every weekend. Jain, who runs his own optical lens business, wants to shift from his one-bedroom apartment in Ghatkopar, a Mumbai suburb, to a two-bedroom home in the Malad-Kandivali area, another suburban destination. He has a budget of Rs45-50 lakh.

"Even if I stretch my budget by another Rs10 lakh, there is nothing available other than properties in 25-year-old housing societies," Jain said. "So I can either move further north, towards Dahisar, or wait for another six months."

Indiabulls Real Estate Ltd, which is developing the "Bleu" project in central Mumbai at prices that are 15-20% lower than its earlier luxury projects, has also laid out simpler terms for its buyers to ensure sales.

A price correction will help propel volumes, said developers. Analysts predict a 15-20% correction in prices in NCR and rest of India, while "overheated" markets such as Mumbai and Ahmedabad would see a fall of 20% and above.

"If demand is low, we may correct prices," said Vikas Oberoi, managing director of Oberoi Realty Ltd. "We have corrected prices earlier and we will do it again."

In Hyderabad, the Telangana agitation has hurt both property prices and sales. In Bangalore, home to companies such as Sobha Developers Ltd and Prestige Estates Projects Ltd, sales have been stronger.

"You need to keep a price that will be accepted by the homebuyer," said J.C. Sharma, managing director at Sobha Developers. "India is growing and we know people can and are willing to spend now."

The decline in sales, however, has not slowed building activity. Construction in central Mumbai continues, with textile mills being torn down to make way for luxury housing and shopping projects.

An estimated $10 billion (Rs45,000 crore) of new housing projects are in the pipeline in the Lower Parel area of the city, with large developers such as Indiabulls, Peninsula Land Ltd, DLF Ltd and Lodha Developers Ltd in the fray to sell about 10 million sq. ft of luxury housing at an average price of Rs15,000-20,000 per sq. ft.

Knight Frank's Goenka said that despite sluggish sales of premium homes, residences that cost Rs20-40 lakh will find buyers.

Tightened bank lending, declining equity markets, private equity funds demanding steep returns and negligible property sales have compounded the trouble for property developers, said Pujit Aggarwal, managing director at real estate developer Orbit Corp. Ltd.

Indian real estate has always relied heavily on bank financing, with outstanding banking loans to the real estate sector having increased 33% in the past 21 months to over Rs1 trillion, according to Credit Suisse.

Analysts say the pressure is mounting on developers from all sides.

Hari Prakash Pandey, vice-president, finance and investor relations, Housing Development and Infrastructure Ltd, said that if the environment is hawkish--be it the government or financial authorities--decision-making is impacted, affecting business growth.

DLF, the nation's largest developer, said after its third-quarter earnings that it is banking on a series of new properties to generate cash flow and partly pare its Rs20,694 crore debt.

DLF may not meet its sales forecast of 12 million sq. ft by March, as about six of its new projects have been delayed, and due to price rises in recent months, said Angel Broking Ltd in a 1 February report.

To make problems worse, banks may further tighten lending to property developers after DB Realty Ltd and Unitech Ltd have been linked to ongoing investigations into the allocation of telecom spectrum. Lenders are turning down new loan proposals and may also take a close look at the proposed end use of loans that have already been sanctioned, but not yet disbursed to real estate companies.

"Investors want to know whether the money borrowed by developers for real estate purposes are being used for what it is actually meant or are being diverted elsewhere and they want to be doubly sure," said Rajiv Sahni, partner, real estate practice, Ernst and Young India.
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  • Friends (Not addressing to anyone in particular) - When things don't go according to our expectations, we are bound to get angry. Ironically we find a soft target to express our anger - and that results in an uncalled for altercation. We neither own this forum, nor the thread which we start. And we are here more anxious to learn than to teach. Let us be tolerant to extreme views as well as spams. It is the job of forum owner to check both, and we are at liberty to "report post" which deserves to be deleted.

    I have seen many forums, but this happens to be the best in RE, and it is possible only because of the members - I give much less credit to the owner.

    I am personally a very stubborn guy and am gradually learning that one who says in the middle of afternoon that it is night - may also have some reason . He may be blind

    Though this is - chotte muh - badi baat , but I was still driven to write it

    I am new, but have seen dissemination of more personal equations than general information
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  • Arrey !

    Oye, Yeh kya hua?

    Wapis aa ke dekhta hun to thread on fire n ice. Chalo accha hai, good to know both are passionate about their RE views. Thoda emotion na ho to mazaa hi kaha hai life mein. Yeh to khel hi hai Gut feel ka, baaki stats to 10% bhi nahi.

    But on a different 'note', pata nahi tha aap log bhi itne nazuk mizaaz ho. Here is something from my collection,accompanies me when I drink alone some evenings (wife neither approves nor joins, sigh..)

    Ghulam Ali - Dil mein Ik lehar si uthi hai abhi - YouTube

    Kuch to nazuk mizaaz hain hum bhi, aur yeh chot bhi nayee hai abhi....
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  • Originally Posted by matrix_55
    Oye, Yeh kya hua?

    Wapis aa ke dekhta hun to thread on fire n ice. Chalo accha hai, good to know both are passionate about their RE views. Thoda emotion na ho to mazaa hi kaha hai life mein. Yeh to khel hi hai Gut feel ka, baaki stats to 10% bhi nahi.

    But on a different 'note', pata nahi tha aap log bhi itne nazuk mizaaz ho. Here is something from my collection,accompanies me when I drink alone some evenings (wife neither approves nor joins, sigh..)

    Ghulam Ali - Dil mein Ik lehar si uthi hai abhi - YouTube

    Kuch to nazuk mizaaz hain hum bhi, aur yeh chot bhi nayee hai abhi....



    Matrix bhai,

    Most of my replies have been deleted while keeping others intact.
    Quite a bit of manipulation here.

    But then ..who cares.

    Request IGRM to please be impartial and let everybody keep there views.


    Neeche wali meri post Kisi ne delete kar di ..woh to bhala ho Manoja ki unki post me mujhe apni post dikhi....posting the same here for others to see the gadbadjhala....pata nahi yeh kiska kaam hain...

    Quote:
    Originally Posted by vatsalbajpai
    Manojbhai...respected members should also know that What does fresh booking means and how the entire chain of builders-underwriters-brokers work.
    And then throwing a challenge to buy only a "fresh" booking...why is that justified??
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  • Originally Posted by amit001
    Bajapai sahab - vo to aap ki fitraat hain

    And you should some time skeep a check on your langugae, which is not appreciated by many.

    People who have bought in Revanta - like "Shkhan" and "Anuj2703" would know and can couch how I tried very hard to get a floor there and had even send the cheque to Raheja. What I say I say with proof.

    I did not want to get into an altercation but you are crossing your limits.. Lets be respectful tpo each other.

    Chalo dila do Revanta floors fresh booking (excp 500 plC unit). Aaj hi check dunga aur aapko brokerage bhi :)

    Prrof your point or take your statement back!!!


    Will not get into altercation of project getting sold out because of underwriters or not, but I can confirm that Amit001 and I tried real hard to get Tapas for Amit, but couldn't get a unit.
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  • Bajpai sir - if I may ask what do you do for a living?
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  • Originally Posted by vatsalbajpai
    Matrix bhai,

    Most of my replies have been deleted while keeping others intact.
    Quite a bit of manipulation here.

    But then ..who cares.

    Request IGRM to please be impartial and let everybody keep there views.


    Neeche wali meri post Kisi ne delete kar di ..woh to bhala ho Manoja ki unki post me mujhe apni post dikhi....posting the same here for others to see the gadbadjhala....pata nahi yeh kiska kaam hain...

    Quote:
    Originally Posted by vatsalbajpai
    Manojbhai...respected members should also know that What does fresh booking means and how the entire chain of builders-underwriters-brokers work.
    And then throwing a challenge to buy only a "fresh" booking...why is that justified??

    Yes, sometimes software and/or human errors happen. This thread does have a notorious history of flare ups.

    Anyways, The NRI demand is something anecdotal for me. I have really been waiting to put my head around it and our esteemed RE players have finally decided to bestow the Dec quarter results in Feb -10/12th (busy cooking?) so lets wait for them to arrive.
    Nothing much changed in domestic demand from the sep to the latest quarter so its fit to capture the delta NRI specific demand due to USD/INR@55 like a condom. I dont know which accounting rule have they decided to follow this quarter but will use the footnotes provided.

    The RE bear in me felt molested by their loud mouthed VP sales/mktg appearing on every news(paid?) article beaming upon how the NRI pull finally did the trick.
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  • Matrix - The recent appreciation in rupee has clearly been a setback to the possible NRI demand.

    All of us expected the INR to stay in the 51-53 range. With the recent appreciation, some of the expected NRI buying may get shelved.

    Straight 8-9% fall in January :(

    AT 53 the monthly cash flow had increased a great deal (as compared to 44-46 levels).

    Thus cud be a dampner.

    Lets see where the USD/INR goes from this level.
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  • Another angle to look at it is-

    Though the NRI demand due to depreciated rupee may fizzle out.

    The reason for the appreciation can bring a new twist to the tale. The mood in stock markets in particular and economy in general has become much more upbeat as compared to December when rupee was starring down the barrel and the markets looked to move below 15000...So though the rupee has appreciates (throwing the NRI advantage out of the window), the mood has suddenly become brighter...

    NO body knows for how long...

    The Sea saw continues

    I for one want the market to fall now :) to cash on the large dollar reserve i am sitting on

    Comments Invited
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  • Originally Posted by amit001
    Bajpai sir - if I may ask what do you do for a living?



    Some inconsequential type of job.
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  • Vatsal,

    We can always disagree with each other in a polite way.

    Still If i said any thing which you dint like - I appologise and extend a hand of friendship to you, if you allow me.
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  • Tell me about it

    Yeah had picked up some UNI at 19.85, so I am not complaining the stock market recovery. Even bears turn bull at right prices ;)
    And I remember you planning to SIP your kitty to India, so you would still have captured at least some of the Rainbow.

    Thinking of the rotting share prices and my bottle of wine starting to take effect, I really wonder why RE players continue to behave like a license raj and hoarders with their motley group of brokers and illicit practises when simply by playing a clean business game they could earn so much. What is this greed man that you have such a corrupt business model. From the richest RE tycoon on the planet to this level (having lost 25B USD in valuation) and still the gentleman does not understand what is wrong? Must have some really lousy advisors. The same buggers who would have suggested Shakira!
    Why this Kolaveri Di on one side and DLF philanthropical arm -DLF Foundation on another side (i saw one ad on my way back from office and laughed my heads off)

    Originally Posted by amit001
    Another angle to look at it is-

    Though the NRI demand due to depreciated rupee may fizzle out.

    The reason for the appreciation can bring a new twist to the tale. The mood in stock markets in particular and economy in general has become much more upbeat as compared to December when rupee was starring down the barrel and the markets looked to move below 15000...So though the rupee has appreciates (throwing the NRI advantage out of the window), the mood has suddenly become brighter...

    NO body knows for how long...

    The Sea saw continues

    I for one want the market to fall now :) to cash on the large dollar reserve i am sitting on

    Comments Invited
    CommentQuote
  • Originally Posted by amit001
    Vatsal,

    We can always disagree with each other in a polite way.

    Still If i said any thing which you dint like - I appologise and extend a hand of friendship to you, if you allow me.




    I never had any hard feelings.
    Hence no apologies needed from your side .I have already told sorry to you in the post which was removed By some S/W glitch or whatsoever.
    We are on a online forum and a Virtual world and We all are keeping our viewpoints and we should stick to that and yes thanks to the offer.

    Anyway In case if anybody do not know about how RE transactions chain work then it is like this.
    Some builders like to sell there projects directly hence dealing with advertising costs and sales side themselves.
    Whereas some builders do not like these hassles and contact underwriters who underwrite the entire project or a specified part of it .This is a legal agreement between builder and underwriter.benefit to builder is a guaranteed cash flow on which he can then plan his revenue model.
    So Technically this builder is entire "SOLD OUT" and he will not entertain any direct bookings as this will harm underwriters interests.
    Now underwriter having got a specified number of units at say 15-20% discount, will mobilise his entire army of sales comprising numerous of small brokers and his sales staff.
    these brokers get the projects at 7-10% discounted price of unit at MRP.
    then he tries to sell these units to his group of investors giving a discount of 4-5-6% via credit note or whatever means.
    This is a gross summation of entire transaction system ,off course numerical values may vary , but the concept remains mostly the same.
    So when a retail investor see the entire project being "SOLD OUT" in 2 day-1day-2 hour-1 hour-15 minutes type of things and he sees builder not talking to him only ,then he thinks there is a shortage of units , whereas it is the other way around.
    I hope i am enough clear.
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  • Originally Posted by amit001
    Matrix - The recent appreciation in rupee has clearly been a setback to the possible NRI demand.

    All of us expected the INR to stay in the 51-53 range. With the recent appreciation, some of the expected NRI buying may get shelved.

    Straight 8-9% fall in January :(

    AT 53 the monthly cash flow had increased a great deal (as compared to 44-46 levels).

    Thus cud be a dampner.

    Lets see where the USD/INR goes from this level.

    It is still some distance from 44-46 levels, but apart from it...strong rs will certainly improve sentiments here.
    In the larger picture it will be crucial for India to have a strong rupee, let us not forget that we are an import heavy country...
    Regards,
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  • Originally Posted by amit001


    Ggn is a different market. You can see sop many NRI holding 2-3 units in ggn. Now you will ask me about end user demand for those unit? My friend many NRI just buy properties to store their cash, no body likes to maintain a lot of cash in bank accounts, Indians are not comfortable having crores and cores invested in stocks, no body can buy gold worth crores and store it in banks/houses. There are many NRI who save 50 lakhs plus every year where would they put money - there is no alternative except RE. or them they are able to buy 1 flat every tow years on CLP which matches their cash inflow stream.

    Because of lack of better avenues RE remains a strong area for investing.

    Indian RE does not only comes down to just a demand and supply equation. You need to take into account other factors like:

    * NRI Money/Investments
    * Black money in the system
    * Lack of retail participation in the equity markets
    * Limited knowledge of the debt markets (not many people are aware of sophisticated debt products
    * Indians love investing in property/ RE in India is 75% + of a retain investor portfolio unlike western markets where people look at RE as an Illiquid asset and do not allocate more than 20% of the portfolio to it. Pick up any Portfolio management book and check an ideal asset allocation, RE allocation is always 15-20%. India is different my friend


    I completly agree to above points. This is the reason that new projects launch at much higher prices than RTM options available in the same area. The worry part of this whole situtation is the end users. Even long term investors plan to keep their units only till posession. If end users are not ready to buy at these prices, where will be the demand for these RTM flats.
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  • Black money being in the system cannot be an reason for old launches/under construction Projects/ RTM prices being lower than new launches . In fact, it should be the totally opposite .

    Yes, with very limited end users, especially at crazy prices, poor demand of RTM could lead to the bubble being pin pricked hard .
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