With a slump in the Indian real estate sector due to excessive credit crunch and demand slowdown, home buyers can expect a further correction in real estate prices in the range of 15% to 20% in the next six months. Several factors are working against the Indian real estate sector that can bring about such a price correction.
Liquidity Crunch and Rise in Interest Rates
With the Reserve Bank of India (RBI) tightening money supply and increasing interest rates to fight inflation, developers are facing a liquidity crunch. Banks are becoming jittery over loan disbursals to real estate developers. Even if developers manage to get loans from banks, they are hard-pressed to keep more collateral with the banks.
Expert Opinion on Price Correction
"With the debt market drying up, developers facing the heat of liquidity crunch and PE funds shying away from real estate investments and speculative investments at an all-time low, we can expect a 15-20% correction by the first quarter of 2009," Jones Lang LaSalle managing director Anuj Puri said.
Global Credit Crunch Impact
The global credit crunch, which has affected the Indian market, has taken the sheen off large property firms like DLF and Unitech. The two are seeing their market cap eroding almost completely and their fundraising plans hitting a rut due to unavailability of funds. To further aggravate the situation, the property market has also been witnessing a drop in PE fund flow.
PE Investors Tightening Purse Strings
PE investors, who had been happily picking realty deals earlier this year, appear to have tightened their purse strings now, with September witnessing only two transactions worth just $12 mn compared with August, when PE funds pumped in $427 mn into the Indian realty sector.
Decline in Average Ticket Size
According to data compiled by Grant Thornton, while the number of deals during January-September was higher at 45 against last year’s 39 deals, the average ticket size of the transactions has come down substantially in the first three quarters of 2008, reflecting softening valuations across the crisis-ridden real estate sector.
Rising Interest Rates on Home Loans
The rate of interest on home loans has drastically shot up from around 7.75% in 2004 to around 12.75% now. Almost 90% of home buyers opt for loans to buy homes. With interest rates on home loans on a rise and the severe liquidity crunch in the banking sector due to the global financial turmoil, fuelled by real estate crises, banks are unwilling to lend.
Views from Real Estate Experts
"Now the time has come when you have only genuine buyers for a property. Speculators who believed in short-term investments in properties have completely vanished from the scene. Therefore, to help genuine buyers, developers will have to cut prices," real estate consultancy realty verticals head Rajan Ahuja said.
Price Correction Measures by Unitech
On further price correction in real estate, Unitech MD Sanjay Chandra said: "The prime issue is of affordability. It’s not about per sqft rate, but about the overall price tag of a house. We are reducing ticket size. We now offer three-bed room flats, which is much smaller in size than we earlier used to sell, thereby bringing down the price of a flat."
Decline in Office Space Demand
According to a report on the Indian office market by CB Richard Ellis, a global real estate consultant, seven major Indian cities, including Delhi, Mumbai, Kolkata, and Bangalore, showed a marked decline in demand during the quarter ending September. The report also said leasing of office space had slowed down in the first two quarters of the year.