Realty sector hit by debt, inventory pile-up

Ripudaman Singh, 29, is anxiously waiting for 2013. He has been planning to buy a house or a shop for the last two years. But just as Singh would zero in on a property, either the rates would have shot up or the project would have an exceptionally long gestation period.

A disappointed Singh says he will buy a ready-to-move property at a premium, rather than invest on projects with future deliveries.

Industry players, analysts and Government are hoping that 2013 will be better than 2012. With residential prices breaching all affordability limits in major metros, offtake in real estate remained largely subdued in 2012. After being in near comatose state, the industry says that the outlook for the next year will largely revolve around economic improvement.

On the financial side, the major listed realty players have shown huge debts and piling inventory. The transaction size was comparatively smaller this year despite prices remaining stagnant, unlike in the previous two years when most of the cities witnessed a steep price rise.

Listed players, such as DLF, were busy pruning their debts by selling non-core assets. Others like Unitech, Sobha Developers, HDIL had fewer projects compared with previous years.

In terms of projects, green was passé and sports replaced it when it came to master planning. In 2012, projects based around golf, soccer, cricket and healthy lifestyle became the new slogan.

Ravi Saund, COO, CHD Developers, said, “The global meltdown is only a small contributor to this downward spiral graph. Severe monetary tightening by the Reserve Bank of India, high inflation coupled with high interest rates adversely impacted private consumption growth, industrial investments and business sentiment.

One big hitch that cash-strapped developers faced was in getting approvals. They say that obtaining the 57-odd permissions to begin construction can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises.

Hence, despite sitting on inventories, developers say it is impossible to bring the rates down. A muted festival season saw fewer projects being launched, compared with the previous years, despites offers.

Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield notes, “…Given that most aspects of development such as construction cost, development cost, time taken for approval and debt all have been on an upward tangent, developers have not been able to lower cost.”

Outlook for 2013

Residential: Anuj Puri, Chairman, Jones Lang LaSalle, says most Indian cities will see an increase in residential launches in 2013. Bangalore and Chennai will witness a decline in launches.

In commercial real estate, Mumbai, NCR-Delhi, Bangalore and Chennai saw 72.5 per cent of the total commercial space absorption in 2012. These cities will grab the lion’s share of contribution in total commercial space absorption in 2013, certainly within the range of 74-76 per cent.

Retail and rental: Pranab Datta, Chairman, Knight Frank India, points that 2013 is going to be a game changer in terms of policies and regulations, as most of the Bills that have been pending are expected to be passed. The Real Estate Regulation Bill and Land Acquisition Bill would boost sentiment.

Commercial/Office: Rohit Kumar, Head of Research, DTZ India, says the major seven cities in India witnessed restrained office space taken up in 2012. Total office space take-up across the major cities was recorded at 27 million sq ft, a drop of 23 per cent, compared with 2011. Rentals have remained same or are slightly down.

FY 2013 will see a drop of 10 to 15 per cent in office space absorption due to the slowdown in the global and domestic economy. Vacancy levels will remain above 20 per cent in Mumbai and Delhi and over 15 per cent across other cities by end of this financial year due to demand-supply gap.

Investor haven?

The Indian realty market, once a preferred and safe-high return investment option, is increasingly making investors wary, amid sluggish sales and overall slowdown. Industry estimates say India received about $18 billion in investments over the last seven years.

However, performance has not been very lucrative with exits worth $3.4 billion. PE firms are also finding it difficult to raise capital from institutional and individual investors alike, as most funds are faltering on returns.

Sachin Sandhir, RICS, points that the outlook is likely to remain tempered in relation to growing concerns among investors that prime assets in several realty micro-markets are becoming overpriced.

India hasn’t really delivered since 2005 on the promise that it held as an investment destination.

Scams galore

DLF was in the news for an alleged sweetheart deal with Sonia Gandhi’s son-in-law, Robert Vadra. Anti-graft activist Arvind Kejriwal had alleged that Vadra had purchased at least 31 properties worth over Rs 300 crore, for which money came from “unsecured interest-free loans from DLF Ltd”.

Another scam that rocked India was the Lokayukta probing into allegations of irregularities in land acquisition by the Karnataka Housing Board in Dharwad amounting to Rs 20,000 crore.

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