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India’s Real Estate Goes into Meltdown
The new moon of the lunar month of Kartika marks Diwali, the Indian festival of lights, when Hindus across the country worship the goddess of wealth, Lakshmi. But divinities know full well the laws that govern finance and Lakshmi may not be a little tight-fisted about circulating her riches amid the ongoing global credit crunch.
Indian tradition decrees that it is auspicious to make purchases during the days leading up to Diwali — which falls in October or November. With faith meshing so effortlessly with commerce, the season sees sellers, advertisers and marketers urging the devout to spend money with a religious fervor, hawking everything from chocolates and consumer durables to gold and houses. Buying a home is considered especially propitious. What better way to welcome the goddess of wealth into one’s life than by inviting Lakshmi into one’s new abode? So much so that the period from just before Diwali through March is usually a bonanza for the real estate industry: usually 70% of the annual business is conducted at this time.
Not this year. With just about a week to go until Diwali, the mood is decidedly downbeat. The demon of impending economic doom refuses to die, and as tightened liquidity makes people put off larger purchases, the real estate sector is facing the worst attack. Considered the barometer of economic growth, the real estate sector in India has grown 30% to 35% during the last five years, reflecting the rapidly-increasing demand for office, commercial and industrial space, as well as bigger homes now considered within the range of India’s prospering working classes. But the economic juggernaut has been slowing since earlier this year due to double-digit inflation, a severe liquidity crunch as a fallout of the U.S. sub-prime crisis, and now, the possibility of economic activity shrinking as part of a global slowdown.
The country’s growth estimates of 9% at the beginning of the year have been revised to well below 7%, and the effect is directly visible on the realty sector. There are no takers for flats selling at 20% markdowns. Estate agents are finding it difficult to even meet daily overheads.
Yet, no one is entirely pessimistic. Experts and industry insiders believe once the storm blows over, demand is bound to rise back up for the same reasons it did last time — a large, young workforce; gradual but consistent liberalization reforms; and a high rate of consumer and private sector savings. “The silver lining is that once this phase ends, land and property prices will be corrected to rational levels, speculators will be out, and the sector will have stronger fundamentals,” says Shukla. If everyone’s prayers go right, the goddess will eventually be propitiated and her blessings will issue forth once more.
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