Land Acquisition Slowdown Grips Indian Real Estate Developers
The Indian real estate sector is experiencing a significant slowdown in land acquisitions as developers grapple with a confluence of challenging market conditions. A decline in the stock market, coupled with rising interest rates and stringent demands from private equity investors, has severely restricted funding options for real estate firms across the country.
Tepid Sales and Cash Crunches Impact Developers
Following a five-year boom period, real estate companies in India are now facing diminished sales and cash flow issues. Inflated property prices and interest rates nearing decade-high levels have deterred potential buyers, contributing to the current market stagnation. Anuj Puri, chairman of property consultant Jones Lang LaSalle Meghraj, noted a substantial decrease in deal volumes, stating, “The aggression for acquiring land has disappeared. Deal volumes are down 35% to 40%, though prices still haven’t moved significantly.”
The current scenario marks a stark contrast to the situation just a year ago, when property firms, buoyed by funds from public offerings and advance bookings, actively pursued land parcels in metros and second-tier towns. Puri added, “My land division guys are crying.”
Land Reserves and Potential Distress Sales
Even mid-sized developers currently possess significant land reserves, estimated at 60-100 million square feet – enough to sustain projects for upcoming years. However, the persistent slump in demand could trigger a decline in land prices, potentially leading to distress sales. Vyomesh Shah, Managing Director of Akruti City, commented last month, “We have not acquired an inch of land in 9 months. I think by December-January, land prices should soften.”
Project Delays and Valuation Revisions
The shortage of cash flow has compelled developers to postpone new project launches and delay ongoing projects. Some planned projects may ultimately be abandoned altogether. An analyst at a Mumbai-based brokerage, which has downgraded target prices on sector stocks by 15% to 25%, explained, “Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays.”
Rising Inflation and Economic Slowdown Exacerbate Concerns
Analysts predict that rising inflation and an anticipated economic slowdown will further compound the challenges facing the real estate sector. Consequently, they re-evaluating their target prices for real estate stocks. One analyst at a domestic brokerage revealed a shift to a net-asset-value based valuation methodology, resulting in downward revisions of target prices. This approach prioritizes current assets over future cash flows. Furthermore, CLSA lowered their net asset value estimate for HDIL by 29%, citing increased costs associated with rising interest rates.