Under stress

Pritam P Hans | Print Edition: January 2012

For all its problems, the real estate market - both consumers and companies - lived through interesting times in 2011. Relentless rise in property and interest rates, controversies over land acquisition, the landmark Noida Extension court judgment and, to top it all, the various reform proposals, made for a heady cocktail. The next year is expected to be no different.

Turbulent Market
Global economic uncertainties have affected India's economy, including the real estate market. "Macroeconomic indicators are not healthy. Fiscal deficit and interest rates are high while the rupee is depreciating. All this does not bode well for any industry, especially real estate," says Anuj Nangpal, director, investment advisory, DTZ India, a property consultancy firm.

High prices and interest rates have been dampeners. "Demand has been stagnating in a few cities even as supply remains high. Investors as well as end-users have been showing signs of weariness. Repeated increases in interest rates have led to a decline in sale of residential properties. This is likely to have an impact on residential sales in 2012 as well," says Anshuman Magazine, chairman and managing director, CBRE South Asia, a real estate brokerage.

Flow of funds is a concern for developers. "Real estate developers are reeling under high debt and foreign direct investment inflows have slowed," says Ashutosh Limaye, head, research and real estate intelligence service, Jones Lang LaSalle (JLL) India.

Residential Realty
Analysts are not very hopeful for the residential segment. Issues that have been troubling the market are expected to continue. Given high property prices, interest rates and liquidity problems of developers, the residential market is ripe for a price correction.

Residential Property Rates
Residential Property Rates
"Clear trends in the real estate market are very difficult to predict at this stage, but it seems like a prolonged slowdown, if not a correction. The coming year, in all probability, will see plateauing of volumes and prices. Indicators show that interest rates will remain high, though more likely than not they will stabilise or move downwards, largely driven by a recovery in the US, leading to some liquidity," says DTZ's Nangpal.

"The top priority for most realty companies will be to reduce debt, which could mean deep discounting opportunities for buyers. The Real Estate Regulatory Bill, which seeks to bring transparency, should encourage buyers," adds Nangpal.

However, a price correction may not happen soon. "All indicators suggest a severe correction in the market, but the real estate industry has proven to be more resilient than expected. For example, in Mumbai, volumes have dropped 70% but prices are up 20%," says Nangpal.

Commercial Spaces
If you are planning to invest in offices and retail properties, you need to tread with caution as the global slowdown may constrain demand for such properties. "The office market will remain inundated with new supply being introduced into the market, albeit at a slower pace compared with the previous two years. Vacancy pressures will escalate, which will lead to a downward push on rentals in key cities," says Magazine.

"Demand for offices will be driven by consolidation in and relocation to special economic zones by large information technology (IT) companies seeking to reduce costs," says Limaye of JLL.

"Several IT companies are looking to pre-lease office space to take advantage of the favourable commercial terms currently being proposed by commercial office space developers. Demand for offices is expected to remain stable. However, supply is expected to outweigh demand in most prime cities of India. Commercial office space rents and capital values are expected to increase across all cities, albeit marginally," adds Limaye.

"Prices of commercial properties have corrected by 10-15% in 2011 in most markets. A further correction to a similar tune is expected in 2012. Commercial real estate supply tends to be bulky in nature and, therefore, the price trend is rarely smooth," says Nangpal.

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