Real Estate to feel the Heat as Inflation Soars

June 25, 2008	(1 votes, average: 5 out of 5)  Loading ...
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The recent fate of real estate stocks on the bourses mirrored the first signs of trouble ahead for the industry. Fuel price hike and lower IIP (Index of Industrial Production) numbers were recent setbacks to the sector and now with a 11.05% growth in WPI (wholesale price index), inflation has emerged as a serious threat to the sector, which has been cooling off in recent times.

Market experts predict further softening of prices. “Even though prices have corrected by 10-20% and even beyond in some regions, it has not yet touched the bottom. It is advisable to wait till at least the year-end to buy homes,” says Jai Mavani, real estate practice head, KPMG.

However, since many developers are holding onto prices and even operating as a cartel in some prime pockets like Mumbai, postponing purchase decisions may not really be a solution. Despite the fact that volumes have fallen sharply, established developers are clearly unwilling to drop prices. According to Kotak Institutional Equities’ research report, home prices in Mumbai market continue to rise since last October.

“Our Mumbai price index shows a 155 increase over the past six months. Indicative prices in key locations in Mumbai vary between Rs 6,500 and Rs 35,000.”

“Many Mumbai developers have raised funds through PE route. The surplus funds these developers have raised allow them to hold on to properties with out releasing the same into the market, thus creating an artificial demand supply mis-match in the system., In Mumbai market, many pocket developers are acting as cartels,” a senior official with a real estate fund said.

Liquidity crunch has already forced developers to go in for high interest loans. While the primary market for real estate has virtually dried up, private equity players are also following a very cautious approach.

Only those developers who have internal cash flows and have not gone for recent land acquisitions will be able to sustain these tougher times. Earlier they were seeking mortgage against property but now credit requirement has forced them to pledge their own shares for securing mortgage, industry officials said.

“The current market meltdown has put downward pressure on sales and further weakened market sentiment. These higher inflationary trends will call for some regulatory moves which will ensure better affordability” said. Sunil Rohokale, head mortgagee & real estate, ICICI Bank.

Though the sector has already factored some of the news impact, there is scope for further correction. Some of the Tier II cities might further see some 5-7% correction, says Vipin Aggarwal, executive director, Omaxe.

News Published Under:   Real Estate India, Real Estate Trends |

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