Thursday, January 1, 2009

Realty industry wakes up to reality: Bubble has burst

Sun, Dec 28 11:46 AM

New Delhi, Dec 28 (IANS) The five-year boom in India's realty industry came to a crashing halt in 2008, following an acute liquidity crunch, falling sales and rising interest rates.

The year, though, started on a positive note.

The Dubai-based Emaar MGF raised $1.64 from the primary market in late January, and two motnhs later, Delhi-based realtor BPTP registered the country's largest land deal, shelling out over Rs.50 billion ($1 billion) for 94 acres of land in Noida, on the outskirts of the national capital.

But after that, the fairy tale run for the industry ended.

As apartment prices shot through the roof, and interest rates soared, buyers turned away, which immediately hit sales. Subsequently, over the rest of the year, realty stocks began to get hammered on the bourses.

'Slowdown and higher interest rates started spilling over on the realty sector and the immediate impact was visible in realty stocks,' said Sanjay Verma, managing director of South Asia operations for realty consultancy Cushman and Wakefield.

The realty index of 14 real estate stocks was the worst performer and slumped 80 percent, outpacing the 58 percent drop in the Sensex, the benchmark sensitive index of the Bombay Stock Exchange.

As a result, valuations of realty stocks of even major developers such as DLF, Unitech, Omaxe and Parsvnath were greatly eroded.

DLF, which had raised Rs.100 billion (over $2 billion) in June 2007 in what was then the largest-ever initial public offering (IPO) in India, saw its share value dropping by 79 percent.

Emaar MGF scrapped a proposed $1.64-billion public offer in February after failing to attract investors, while Indiabulls Properties Investment Trust, backed by billionaire Lakshmi Mittal, dropped 10 percent on its trading debut in Singapore.

BPTP hit the news once gain in May as the company failed to pay the first instalment on time due to cash crunch and requested the Noida authority to grant a two-month extension to cough up Rs.12.5 billion.

The crisis deepened after investment bank Lehman Brothers filed for bankruptcy mid-September, blocking even the private equity route for developers.

Big developers like DLF, Unitech, Ansals API and HDIL were particularly hit as Lehman Brothers, along with Merrill Lynch, another cash-strapped investment bank that had to be sold, had direct investments in these companies.

'What hurt the overall housing sentiment was the increasing borrowing rate. The current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 31,' said Unitech managing director Sanjay Chandra.

'The liquidity risk was accentuated by the slowdown in the overall real estate market and the increasing reluctance of financial institutions and banks to fund real estate developers,' added Verma.

According to real estate service provider Jones Lang LaSalle Meghraj (JLLM), a steep rise in the interest rates brought down demand of residential properties, which went down by 40 percent.

The slowdown faced by the realty developers was also reflected in their second-quarter results that showed profits dropping, ranging from four percent in the case of DLF to around 80 percent for Omaxe.

Worse, sales failed to pick up during Diwali, the best time for the industry, and even freebies like Mercedes and BMW cars and gold medallions failed to lure buyers. Sales, in fact, dipped up to 50 percent in both premium and middle segments.

Even rental prices for offices and malls fell by as much as 20 percent across India, and are set for further correction.

The impact of slowdown was also reflected in developers downsizing their manpower or whittling down pay packets. Unitech laid off 10 percent of its employees and DLF retrenched 12 percent.

Similarly Parsvnath cut salaries of its employees in the top and middle level management by up to 20 percent, while Omaxe, which fired 70 employees, also cut the remuneration of those who were retained by 10 percent.

Looking ahead, the industry does not foresee any upswing in fortunes in the immediate future, though the government and the central bank have been taking steps to infuse additional liquidity into the system, especially for sectors such as housing.

'This situation seems likely to persist for another 8-10 months at least. Most of the projects are getting delayed and buyers are not showing interest,' said Cushman and Wakefield's Verma.

'Due to higher risks of investing in real estate, the real estate sector will witness lower private equity deals in the next 12 months,' warned a report by the Federation of Indian Chambers of Commerce and Industry (FICCI).

'As funds will not be easily accessible, valuations are expected to go down further and the costs are going to be very high for developers,' said FICCI, adding that existing projects were witnessing time and cost overrun, while new projects were being deferred.

'This would eventually lead to a reduction in price in the coming four quarters and the market is expected to turn in favour of the end users. Focus will shift to mid range and affordable housing with a considerable correction in prices of the existing residential projects up to 15 percent.'

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