More Loss Expected in Real Estate Sector

February 9, 2009	(3 votes, average: 5 out of 5)  Loading ...
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Falling prices and interest rates are unlikely to woo once-thirsty home buyers now spooked by slim pay hikes and job cuts, and may push cash-strapped realty firms to drop prices further in order to stave off losses. For months, real estate firms, including top-listed developer DLF and No.2 Unitech have been looking to raise funds to boost liquidity and cash flows rather than to drive growth projects. “This is a major major recession and everything is affected; so everyone has pulled back and no one is willing to commit money or cash and hence there seems to be no other source to bring in that money,” said Anurag Mathur, Managing Director of real estate consultancy Cushman & Wakefield in India.

“Now, will that lead into bankruptcies? I don’t know because that’s going to be a very case-specific question. But very clearly there is a lot of distress in companies.” Banks’ aversion to lend to property firms has increased against the backdrop of the worldwide subprime meltdown, even as other lines of credit, such as debt and equity, dry up. And even though state-run banks, led by top lender State Bank of India, have cut lending rates for buyers following the central bank’s easing measures in October, demand has not nudged up in response. While the banks’ moves would help shift attitude, “many other factors” are now influencing buyers, said Ravi Ramu, director of Puravankara Projects Ltd.

“Let’s see, if things become worse in the world and worse in India then they won’t start buying even if interest rates come down,” he said. “People are worried about their jobs. There are many factors, it is a very complex environment.” Industry players say property prices have fallen by up to 25 percent, to near-2006 levels. In addition, buyer terms have also changed. Home buyers now want projects to be completed before honouring their payments, effectively crippling builders who typically derive a big chunk of their construction costs from buyer advances.

Even as developers hope for some relief on the demand front by March, analysts say they do not see a revival even after a year and anticipate several firms will slip into the red in coming quarters. This could prove a complete turnaround for real estate firms, which rode a four-year bull run that saw property prices more than double on soaring demand. “In the next two to three quarters, many companies might start posting losses. Its going to be really bad. Volumes have completely dried up,” said Shailesh Kanani, analyst at Angel Broking said. DLF reported a 69 percent slump in December quarter profit, while Unitech’s fell 74 percent. They are looking at selling some assets to shore-up against a property slump. But on Friday, midcap realty stocks had risen between 10 and 40 percent on hopes housing would benefit from the interim budget due later this month after the government said it may include some changes in the tax structure and further stimulus measures. The realty index has plunged 90 percent from its year’s high of 12,848.09 in January 2008.

News Published Under:   Real Estate Trends |

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