How realtors lost the plot

Rashmi Pratap | | Updated on: Mar 12, 2018




Hit hard by huge debts, rising costs and declining demand

Their sales have slowed down and they have a mountain of debt to repay. And that is forcing real estate developers to sell non-core assets and look for other ways to raise money.

HDIL’s promoters, for instance, have pledged nearly 96 per cent of their holding to raise funds.

DLF has been on a divestment spree since September 2011, selling a 28-acre plot in Gurgaon to developer M3M, NTC land in Mumbai to the Lodhas, and an IT Special Economic Zone in Pune to Blackstone. It has also exited wind-turbine projects in Gujarat and Karnataka and is still trying to divest its stake in luxury hotel chain Aman Resorts.

The tough environment is also forcing developers to sell properties at lower rates.

“There is a lot of pressure. Sales have gone down and cash-flow issues have arisen. Properties are being sold at prices not normally given,” confirms Lalit Kumar Jain, Chairman of CREDAI (Confederation of Real Estate Developers’ Associations of India).

Apart from the slow offtake, developers are also grappling with higher construction costs, which have reduced their margins.

The per sq. ft. cost of construction for a seven-storey building was Rs 1,200 two years back and that has now risen to Rs 1,700.

The overall material cost, including sand, steel and cement, has gone up by 40 per cent while per-day rates for unskilled labour have gone up from around Rs 140 to Rs 200. For skilled labour, rates have risen from Rs 400 to Rs 700.

“Labour is now a scarce commodity. People don’t want to leave villages,” adds Jain.

In part, this is because of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which offers 100 days of work every year to each rural household at a wage rate of Rs 174 a day.

Moreover, with elections round the corner and approvals for infrastructure projects hard to come by, developers will have less room to increase prices.

“Besides, the money from politicians, which gets invested in real estate, is currently being diverted to elections. So, developers are forced to sell at lower rates to generate liquidity,” says an analyst, speaking on condition of anonymity.

Slow burn

The current stagnation in the market is the result of an imbalance created during the last six-seven years, when land parcels were sold at high prices.When the real estate boom was at its peak, builders valued their land at exorbitant rates, created special purpose vehicles (SPVs) with fund managers and launched projects at high rates. To get investors to put money into a project, they quoted high prices, promising quick appreciation.

The result is that while per capita income during the last five years has grown at a CAGR of 13.9 per cent (without adjusting for inflation), property prices have appreciated by over 21 per cent in Mumbai, 13.8 per cent in Pune and 11 per cent in Chennai.

Vicious Cycle

Given the bullishness in the market, investors poured in money in the hope of making quick profits.

Thereafter, they sold their assets at even higher rates to other investors with the same promise of price appreciation in a few months. The price thus rose with every transaction and people got richer buying and selling houses.

The cycle ended only when a real user bought a property, at a very high rate. In today’s scenario, this trading in houses cannot go on due to the liquidity crunch and because real buyers are cautious about big-ticket investments.

Sunil Rohokale, MD of ASKgroup, which manages a PE fund that invests in residential projects, says returns on plain residential projects are better than those on longer-gestation projects, such as Special Economic Zones, industrial parks and commercial buildings. “There is nobody to buy those assets right now,” he points out.


Published on September 17, 2013
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