Realty pains

Tejeesh N. S. Behl        Print Edition: November 30 2008

The second quarter’s results confirmed in black and red—mostly red—what India’s real estate developers had come to fear for the past few months: buyers are not easy to find, which means unsold property, which means losses. The bravado that personified people like Sanjay Chandra, Managing Director, Unitech, till a few months back, has vanished, leaving behind a furrowed forehead as displayed at a recent real estate conference in New Delhi.

Chandra, who was enamoured of the premium accommodation segment, has realised the value of pragmatism and is altering his plans. “At the Unitech Nirvana, for instance, instead of our earlier plan of offering 100 independent villas, we will be offering three separate apartments per villa—a total of 300 units,” says Chandra. (The plot size remains the same.)

With an interest payout of Rs 900 crore this year, Chandra admits that margins are under stress. His solution: no discounts to customers. “Input costs—of steel and cement—have come down, so rather than giving discounts to consumers, we could look at boosting our margins,” he says. Unitech is, of course, somewhat cushioned by the Rs 6,120 crore it got from the sale of its 60 per cent stake in telecom venture Unitech Wireless to Telenor.

India’s largest real estate company, DLF, too, has not been spared the blushes as it saw its top line decline marginally in the second quarter of 2008-09 to Rs 3,840.2 crore from Rs 3,846.3 crore in the first quarter of the same year. EBITDA margins have also shown a decline of two percentage points in this quarter vis-à-vis the preceding quarter.

“The entire economy is in a crisis mode, so it will have an impact on the real estate sector,” admits Rajeev Talwar, Executive Director, DLF. The company, which claims its pre-booking should keep it comfortably liquid till end-2009, is willing to sacrifice growth over the next six to 12 months to shun risk and could push back the hotel venture’s launch by 12-18 months.

It’s an indication of the magnitude of the change in market dynamics since January this year. “Over the past three years, the plans of the realty companies were certainly ambitious, led largely by economic growth. In fact, the extent of expansion on the land-bank front by many of these developers was quite unnerving,” points out Sanjay Verma, Executive Managing Director, South Asia, Australia and New Zealand, Cushman & Wakefield.

While a general price rationalisation was on the cards as the end of the boom cycle neared, the financial meltdown across economies has left real estate companies gasping. “This credit crunch was unprecedented and it created a panic situation, leading to a lot of uncertainty in the market,” observes Verma.

Sanjay Chandra MD, Unitech
Sanjay Chandra
So much so that nobody is willing to bet on whether the market has bottomed out or not, for lack of data. “There is a huge disparity between cost and selling price—for example in Bangalore’s Vithal Mallya Road, prices had risen 200 to 300 per cent in just over two years—so yes, there will be softening,” asserts Ashish Puravankara, Director, Puravankara Projects.

He also questions the rationale behind the price exuberance. “In places like Gurgaon (in NCR), what was the basis of the price rise, given that it is beset with infrastructural deficiencies?” asks Puravankara, who has not done any new launches in the past one month.

In fact, in a survey carried out by online property search portal and shared exclusively with Business Today, (see The Great Fall) out of the 147 localities across seven cities—the NCR, Mumbai, Chennai, Bangalore, Pune, Hyderabad and Kolkata—72 localities have shown a negative growth in their capital values between January 2008 and September 2008.

Ashish Puravankara Director, Puravankara Projects
Ashish Puravankara
“While not everything has gone down, our assessment is that this is the beginning of a trend and we could witness a major correction over the next five to six months— ranging between 22 and 30 per cent,” feels Aditya Verma, Vice President and Business Head,

The fall in capital values is not leaving the rental values untouched either (see Stagnant Rentals), which have either stagnated in the third quarter of 2008-09 or are showing signs of weakening. Even commercial and retail prices have been socked on the chin. “While the global real estate demand has slackened, the commercial office space has been the worst-hit. Plus, there is going to be an oversupply in the market as the slowdown in the economic growth has affected the demand drivers,” explains Abhilash Lal, Director, Consulting and Research, DTZ.

Much of this pain, says Verma, of Cushman & Wakefield, arose due to lack of research done by the developers. “There was a huge mismatch between rentals and what the tenants could possibly earn,” he argues.

This has forced builders like DLF to prioritise its retail plans. “Since commercial space is always made to order, we are not overexposed in that segment, though rentals could decline in certain areas,” he adds.

Despite all talk of recovery though, the developers’ assurance on their companies’ solvency has not been bought by the market, as the BSE realty index has lost over 80 per cent of its value since its January 8, 2008, peak of 13,848. “Most of these listed companies are very highly leveraged, and while the stock prices may have bottomed out, the real estate prices haven’t. Plus, there’s no flow of credit into the sector and sales are sluggish—so I wouldn’t be surprised if the realty stocks face another pulldown,” says Nirmal Jain, Chairman & Managing Director, India Infoline.

While times are tough, the lowering of interest rates by the banks led to a renewed hope among the developers that the end-user will once again come calling. And what if the buyer decides to hold out a while longer? “Well, then, surviving these times would be akin to winning an Olympic gold medal,” says Puravankara. Some humour in grim times—that probably should help him stay afloat.

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