Demand for Commercial Property will remain Low: ASSOCHAM

November 10, 2009	(Be the first to rate this story!)  Loading ...
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Even though the present situation of the sector is significantly better than later half of previous fiscal, financial condition of developers has not improved to a level that they can hold project for long time. Notwithstanding RBI’s concern over bubble in real estate sector, financial performance of realty majors during first half of current fiscal shows grim picture of the sector with a decline of 56% in net profit; dampened by 51% rise in financial charges and interest cost, according to an ASSOCHAM Financial Pulse Study. The ASSOCHAM Financial Pulse (AFP) Study titled “Reality check in Indian Real Estate Sector” analyzed financial performance of ten top real estate companies. As per the Study’s findings, total income of realty majors declined by average 40%; in line with the fall in net profit whereas the total expenses of sector registered an average decline of 35% despite a staggering increase of 51% in interest cost.

“The increased provisioning for real estate sector loans by banks from the earlier 0.4 per cent to 1 per cent is likely to shrink the liquidity of the sector by bringing additional burden to banks in lending to developers. The tightening of interest rate on home loans would also reduce the demand significantly going forward” said Mr. D.S. Rawat, Secretary General, ASSOCHAM. The Study stated, “the demand for commercial property is likely to remain in doldrums for remaining period of this fiscal unless business confidence improves heavily while tightening of the policy rates in next year will significantly impact demand for housing sector with an increase in interest rate for home loans”. Even though the present situation of the sector is significantly better than later half of previous fiscal, financial condition of developers has not improved to a level that they can hold project for long time. They need cash flow to service debt, which they have taken to buy land and for its development.

Despite decelerating overall credit growth rate, bank credit to the sector has grown at a considerably higher pace. For one-year period till August-end this year, banks lent Rs 283.53bn toreal estate sector, up 41.5% in comparison to same period last year. In stark contrast, home loans amounted to Rs 146.68bn, up by only 5.4% over the same period last year which contradicts a housing bubble scenario in India as the demand-supply mismatch is unlikely to trigger a boom-bust situation due to tight regulation by the RBI, said the ASSOCHAM report. The Study also found that sentiments in the sector which was faced with severe liquidity crunch and slackening demand due to global financial meltdown have improved remarkably during reference period. The price correction has led to demand rising by 20-25% in last two quarters after falling significantly in previous quarters.

The developers had cut prices by around 30% in first two quarters of the calendar year 2009 to stimulate demand of residential units, which tumbled to a low due to global financial crisis. But since the last quarter, prices of affordable apartments and residential real estate prices appreciated by around 10 percent across the country. During last quarter, real estate majors including DLF, Unitech, Indiabulls real estate, Parsvnath, Sobha Developers and Omaxe made effective use of bull run in stock market through the QIP route to fuel their liquidity position amid revival in demand. Supplementing it with growth inreal estate sector lending by banks, overall liquidity situation of the sector remains robust but it has to be accompanied by a strong push in demand to create a bubble like situation. Among analyzed real estate companies, India’s biggest real estate company, DLF, registered a major drop of 78 percent in net profit during the first half of FY ’10 as compared to the same period of the last year, whereas its financial charges increased by a whopping 430.43 percent during the same period. Among other realty companies that witnessed a major decline in net profit while registering a healthy rise in interest cost included Ansal Properties & Infrastructure, CHD Developers Limited, Ackruti city Limited and Omaxe Limited.

News Published Under:   Real Estate India |

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