Vascon Engineers Ltd

Saturday, April 9, 2011

Real Estate Sector and Economic Downturn

With the allowing of foreign direct investment up to 100 per in 2005 in townships, built-up housing and construction development projects Indian real estate sector has been witnessing ten fold growth and becoming a lucrative destination for overseas investors. Backed by a robust economic growth and a sustainable local stock market presence the real estate curve is heading northwards inspiring many private and public players to foray in this sector which further foster the over all market sentiment. The post liberalisation business dynamics with their corporate entrepreneurial spirit and commercial dominance over their peers opens up new expansion policies which are supported by numerous offices, commercial places and business parks. With the increasing purchasing power and changing lifestyle the residential projects flooded the metro and other II tire cities and thus the real estate sector was pushed up by ten fold.

Almost 5 per cent of GDP is contributed by the housing sector, and in the next few years it is expected to rise to 6 per cent. Moreover, the construction sector has also been responsible for the development of over 250 ancillary industries such as cement, steel, paints, brick, timber, building materials, etc. But during the economic downturn the real estate sector faced a major setback in terms of following ways.

·    Being a capital-intensive industry, the real estate sector started to face a liquidity crunch emanating largely from banks' cautious approach to financing the real estate companies.

·   This approach was reflected in lower loan-to-property value, construction-linked payment and financing only for projects nearing completion. Further, real estate developers also had to cope with other sources of funding, such as private equity and stock markets, drying up considerably; receivables from residential projects under construction getting blocked; falling demand and buyers deferring payments until they took possession of properties.

·    The resultant fall in valuation in the past few months coupled with high interest rates and low availability of money had put real estate developers on the defensive and kept homebuyers away.

Impact on Residential Front

In the residential segment, the first quarter of 2009 witnessed the launch of residential projects with some price rationalisation. However, the price corrections are more pronounced in new launches than existing projects, which are mostly sold to end-users or investors, and whose costs are covered. 

Impact on Commercial Front

As far as the commercial segment is concerned, with a substantial surplus of office space, demand for rentals has declined overall. This has been compounded by subdued absorption levels and a decline in pre-lease activities across the country. Rents are expected to correct in varying degrees, creating considerable opportunities for occupiers and investors. The market is expected to improve sometime in late 2010 based on a better global capital spending environment and stabilisation in other sectors of the economy. Certain reports estimate that the IT and ITES sector alone will require 150 million ft2 of office space across urban India by 2010

Impact on Retail segment

In the retail segment, while rentals are being negotiated downwards, revenue-sharing models for new lease agreements are also being explored. Furthermore, with the liberalisation of the foreign direct investment policy to allow single brand retailing in India (though to a limited extent) coupled with price correction in rentals and growth of organised retail industry, India is enjoying a flurry of tie-ups between the foreign brands and Indian real estate developers and the scope and depth of investment in the retail segment seems to be expanding.

While the government has taken various steps to develop the whole industry, there is a further need to streamline government policies and introduce reforms to boost the real estate sector. Industry experts are advocating a further substantial cut in interest rates and greater ease in credit financing. The government has already announced two stimulus packages, in December 2008 and January 2009, which included cuts in key lending rates and classification of loans up to US$41,670 (approximately) per house, per family, as priority-sector lending. These stimulus packages were crucial steps in the right direction and the momentum needs to be maintained by the recently elected new government.


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