F for correction

This is the time when real-estate companies can swim or sink. As banks are lowering home-loan rates and the government is considering interest-rate subvention schemes...

Written by Praveen K Singh | Published: February 7, 2009 1:14:46 am

This is the time when real-estate companies can swim or sink. As banks are lowering home-loan rates and the government is considering interest-rate subvention schemes,this looks like the last big chance for developers to grab. But it seems they have not realised it yet. Most of them are still stubbornly holding on to their price lines. Buyers are shy of property because they are looking for a correction but can’t find any. If the lay-offs scare grips the markets in coming months,there will be little chance for the housing sector to survive the downturn. “Sales will get a push only if prices are brought down,” says Sanjay Verma,executive director of Cushman & Wakefield. Offering discounts and freebies is,at best,a cosmetic measure unlikely to result in sales.


Why have developers failed to see doom in high prices? Analysts say there is a feeling that the real-estate sector has a longer trade cycle than most other asset categories. Once prices drop,they stay there for a longer period. That explains the developers’ aversion to price correction. “No matter what logic is put forward,the wait-and-watch approach is not working in the realty industry,” says Anshul Jain,India CEO of DTZ International Property Advisers. Awareness has dawned on top developer DLF. Announcing a 69-per cent slump in quarterly profit recently,it announced a 15-per cent cut in prices for future projects.


While there is a clear aversion to price cuts,developers think they can boost sales by realigning their strategies. “We have modulated payment schedule,made it more customer-friendly,and more in line with the execution of the project,” says Sunil Jindal,CEO of SVP Builders. Some developers are offering a mix of discounts and freebies on their projects. However,all this has hardly pushed the sales,primarily because buyers are watching the price line. Even after these so-called discounts,the prices are unaffordable. “The developers are likely to reduce the size of the units (wherever possible) to improve the overall levels of absorption. We expect the prices to see a correction of over 10 per cent in the next six months,before the transactions pick up,” says Jain. VK Sood,MD of PNB Housing Finance Ltd, wants developers to be more transparent. “They genuinely need to offer discounts on their inflated rates and need to be more transparent in their dealings. Then only,the market can see some improvement,” he says.


Despite assorted steps by the government and the RBI to boost loans,bankers are cautious in disbursement. Sood of PNB Housing Finance says the current scenario is fear-provoking as people are loosing jobs. He says that banks are ready to offer loans provided the climate is reassuring. Many banks are still not seeing a rise in disbursement of loans due to the stricter credit appraisal norms. “This is happening because of the uncertainty in the economy where banks are not sure about the payback capacity of the borrower. We expect the disbursements to take time to pick up,primarily due to supply-side (banks) constraints,” says Jain of DTZ. Though interest rates have come down,the reduction is nothing to write home about. The State Bank of India has announced the lowest rate of interest at 8 per cent. Other banks are yet to come down to this level.


To properly exploit the generosity of banks,developers need to have a fitting attitude. As banks are rapidly cutting down rates in specific brackets,the best step for the developers would be to launch projects in those loan brackets. “Only when the developers will target those loan brackets they will be able to reap the maximum benefit,” says Jindal of SVP Builders. Of late,there has been a rush in the affordable segment as it has become a cashing point for many developers. “Affordability is the key. Many developers have started realigning their market strategy by launching affordable housing projects to regain customer interest,” says Venu Gopal,an associate director at Ernst & Young.


The sentiment among developers that real estate might bounce back is naive,to say the least. Given the current circumstances,the things are going to get worse before they get better. Analysts says the developers who behave as if the end of the downturn is only a few months off are deluding themselves. “If 2008 was a year of pain,we expect 2009 to be a year of more pain. Global liquidity crisis,recessionary market scenario,sluggishness in IT/ITES growth,outcome of national elections etc will be the key factors that will determine the recovery. In our opinion,it will take at least 18 months for the market to bounce back,” says Gopal of E &Y. Developers cannot get out of this mess without reducing prices. Expecting prices to come down,customers will continue to wait and watch. “We feel that the prices are yet to bottom out and you can expect further price cuts happening in new projects,especially in select suburban/peripheral areas which had witnessed a phenomenal increase in prices in the last three-four years,” says Gopal.


At a time when most of the developers are suffering severe cash crunch,the most debatable point is how would real-estate companies generate enough cash to pay back lenders if they keep holding on to their unsold flats,hoping that someday demand would return. “The economic slowdown will lead to a further holdback in demand for commercial property,and the likelihood of job losses and salary cuts should curb housing demand,” says Verma of Cushman & Wakefield. So it seems developers have no choice but to reduce property rates immediately. Otherwise they will get caught in the momentum of the downturn. l


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