_deepak_M.jpg "Deepak Parekh") |
The slowdown in the real estate market was long overdue. To some extent this has happened. But the Indian real estate industry is still not out of the woods and I foresee more pain. This is because the adjustment has not been gradual but like a shock packed with alarmingly negative sentiment.
For the past three years, real estate was touted as “sizzling red hot”. Subsequently, some things went wrong—the market grew too fast, some developers went haywire on land deals that resulted in high prices, and investors began demanding unrealistic returns. When these investors retracted, many developers were left scrambling for resources. Prices fell, confidence was jolted, and the rest is known to all.
Realty stocks were completely overvalued, some by about 50-60% at the time of IPOs. So what is happening now is more like a correction. There is an understanding that real estate companies cannot be valued on the basis of their land banks, but on the projects that are being actually executed.
However, the long-term prospects of commercial property are positive owing to the growing opportunities in sectors like healthcare, hospitality, and education. Foreign investors are interested in the Indian real estate market through private equity and FDI. In the first quarter of 2008-9, about 20% of FDI interest was in real estate.
The present situation may call for some consolidation within the real estate sector and perhaps the need to create innovative financial instruments that could support financially distressed developers to tide over the present period. If housing is priced correctly, there is an enormous demand for it. Given the huge housing shortage, saturation is unlikely for a long time. Favourable demographics, increasing urbanisation and rising disposable incomes should make the the residential housing market grow rapidly.
If inflation is controlled, interest rates can also be contained. In the past two weeks inflation has marginally tapered off. With oil and commodity prices cooling and food prices stagnating, I think we may have reached the peak of inflation. However, there are some who believe that interest rates could go up by 0.5% one more time.
Unfortunately, there is no instant relief for this pain. My advice to investors is be patient and not to panic. Don’t resort to a distress sale of property. Instead, have a long-term perspective. Such cycles are inevitable.
My advice to buyers is to purchase a house if they get a good deal and not wait for a correction. Real estate developers should realise that their absurdly high margins cannot be sustained.
Interest rates over a 15-year period would inevitably move up and down. So do not over-stretch a loan and always maintain a sufficient buffer. Eventually, interest rates will come down. The RBI estimates state that inflation would be down to 7% by March 2009. If this happens, interest rates may follow suit. I do not see interest rates reaching 16-18% like the old times.
