Preparing for lower profits, no new investments, and putting plans on hold… these are some of the responses from real-estate developers as inflation, driven by rising costs of fuel and foodgrains, crosses 11 per cent. The industry, just as most others, is girding up for tough times ahead. The good times of the last 5-6 years had to end sometime, something had to give, and it has, say developers.

The real-estate sector has been witnessing a slowdown in sales over the last several months and it now has to prepare for a lull for a further year or two.

Increasing costs of construction and funds coupled with a slowdown in sales, as buyers’ purchasing capacity is hit, is bound to have an adverse impact on bottom lines. Real estate companies’ staying power is bound to be tested over the next year are two.

Developers say that earlier it was just about tackling cement and steel prices, then prices of aggregates and labour costs went on an upward spiral, soon it was interest costs, which has led to a slowdown in sales.

There is now no relief on any of these fronts and things can only worsen before they improve is the general prognosis. The Government is also not sending out a clear signal on what it plans to do to tackle the rising costs.

Under the circumstances, developers say projects are on hold and they can only commit themselves to the projects in the pipeline. They will not invest in new projects and land deals. Soaring land prices are likely to drop in the coming months — as of now there is resistance to increasing land prices among the developers but landowners are holding on to their properties rather than lower prices. But now with the extended slowdown, prices are expected to come down.

While the hike in the repo rates last week by the Reserve Bank of India was expected to result in banks increasing lending rates, banks, on their part, have chosen to remain silent for now. But with a further hike in repo rates and CRR imminent, it is only a matter of time before interest rates, including home loan rates, go up in tandem. This would mean a further erosion of the buyers’ capacity to purchase property.

The purchasing power consumers is also taking a hit as the cost of living is going up. Families find themselves shelling out 20-25 per cent more on essential commodities monthly. There is no way the average buyers can stretch themselves more to meet the rising costs of owning a home.

If this is the situation now, it is set to worsen in the coming months. One clear indication is that the enquiries by buyers for residential properties are definitely on the decline.

The fall in demand is manifested across all segments. Apart from the market for residential properties, the general slowdown has had an adverse impact on demand for office and commercial space.

The IT space, particularly the non-SEZ ones for which there is oversupply, is seeing lease rents taking a hit and absorption is also down.

Developers are finding themselves in a market where costs are increasing, and these cannot be transferred to the buyers as their ability to pay has eroded.

Responses to bleditor@thehindu.co.in

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