Real estate developers are feeling the liquidity crunch -- the sources of funds are drying up even as they get squeezed from both sides: high interest rates and property prices have hurt offtake while rising steel, cement prices have pushed up input costs 20-25 per cent, which developers have to absorb for now.

''The crunch is getting severe. It's not apparent, but will become more apparent in the next six months. Land prices are likely to fall in the next 3-6 months,'' said Chanakya Chakravarti, MD (real estate business), Actis Advisers, a PE firm.

Land prices have been the key instigator and catalyst for real estate prices going through the roof. Real estate observers, analysts and agents say there's enough evidence to suggest that developers are feeling the crunch.

The evidence: Thanks to the demand slow down, actual transactions have dried up. In some cases, where developers have higher sales, the cash flows are not there as the receivables are high, points out the CEO of a real estate fund.

Developers are cutting price tags. DLF recently sold projects in Chennai and Manesar in Haryana at Rs 2250 per sq ft, which were sold in a space of 3-4 days. This underscores the point that there's a market if prices are affordable.

Developers are disguising price discounts with various incentives like free parking or free registration to reduce the overall cost of acquisition for buyers.

Construction cost has gone up by 20-25 per cent with the spike in prices of steel, cement and other material.

''The cost of steel today might be more than the land cost for a 1000-sq ft flat. While the market was able to absorb the increase in land prices, it may not be able to absorb the increase in the cost of inputs,'' said Arun Agarwal of Reliance [Get Quote] Estates, a Delhi-based real estate broker.

Developers, especially mid-tier and local players, are trying to rope in private equity players.

''The availability of bank finance is very limited. As a result, most developers are going for private equity as that's the only avenue left,'' said Vijay Kumar, CFO, Delhi-based Shipra Group, with presence in Ghaziabad and Noida.

To cope with the slack in demand and liquidity crunch, real estate brokers say developers are going slow on the construction of existing projects, with the hope that the pressure from high input prices could ease off in coming months.

Builders are borrowing in the inter-corporate deposit (ICD) market at interest rates of 19-20 per cent. This shows their desperation for cash flows. Companies typically borrow in the ICD market for 3-6 months; thus, they are borrowing with a view that the market will improve and its short-term measure to get some funds.

Developers are entering into bulk deals with large corporates to offload their inventory. Employees of a Noida-based technology firm recently bought 150 apartments in a large project at a 20 per cent discount to the quoted price.

''Prices in NCR have fallen by 25-30 per cent,'' said Sanjay Agarwal, a Delhi-based broker. ''Investors (who constitute 30-50 per cent in a project) have withdrawn as they have seen no appreciation in prices in the last 12 months. When investors withdraw, values are bound to plummet,'' said Sanjay Dutt, CEO, real estate consultancy firm Cushman & Wakefield.

''Barring Mumbai, prices have fallen 10-20 per cent, which is marginal compared to the increase in the last two years, when prices more than doubled in many cities. If you sit across the table with cash and negotiate hard, you can get an additional 15-20 per cent discount on the quoted price,'' said a realty expert.

''Discounts and freebies have been there for a while; it's only now they have come to the forefront after media started writing about it,'' said Chakravarti.

Last week, the grapevine in real estate circles was that another 100 flats have exchanged hands at 30 per cent discount although it could not be confirmed.

''It's not surprising. During the pre-launch phase, builders offer discounts of 14 per cent to investors and around nine per cent during the launch of a project,'' said Sanjay Agarwal, a Delhi-based broker.

''This could be corporate end-user demand using the opportunity to buy or some investor using the good offices of a builder to offload his inventory,'' said Dutt.

''It conveys the pressure to transact and create liquidity, discount values to seek capital,'' added Dutt. Developers are feeling the crunch as other sources have dried up. Debt is expensive and scarce while the meltdown in stock markets will make it difficult to push through public offerings.

''With no IPO, cautious private equity investors, stagnating sales, rising costs and high interest rates further hampering demand, you can't be in a worse situation. Both the supply side and the demand side has been impacted,'' said Dutt.

But developers need to raise capital and complete existing projects and flag-off new ones for which they have bought land. ''Developers realise clearly that in the next six months, the values will not go up. If they have lots of units to sale, it may make sense to do large deals at a discount,'' said Dutt.

For instance, a developer could sell 30 flats a month at the rate of Rs 4,000 per sq ft over five months. If he can sell 150 flats today and realise Rs 3600 per sq ft, the net present value of this deal would be the same as selling 30 flats over five months at Rs 4,000 per sq ft.

The developer gets the capital in the bank, which he can deploy effectively to lower his debt burden or fund another project. This kind of deals can also help the developer ease his working capital pressure or de-risk himself from future setback (further deterioration of capital values).

Observers say the bulk deals also signal that builders no longer have the ability to hold onto the inventory.

Experts say the crunch is more with smaller guys as they have limited resources. These are city-centric builders who are not financially savvy, have small profits and accruals, don't have easy access to the financial institutions as they largely deal in black. Companies that have raised money through IPOs are better off.

''Builders in tier-II cities may feel the crunch more as markets like Jaipur and Chandigarh were more investor-driven markets,'' said a Delhi-based consultant.

Developers try to downplay the liquidity crunch, saying it is not severe: ''It is not yet a panic situation. The free flow (of money) has been restricted,'' said Vijay Kumar of Shipra Group, which is building hotels and homes in the NCR region.

During the last two-three years, developers have made good money, which has helped them somewhat absorb the down turn. Encouraged by good profits, each builder (who were city-centric) wanted to be a pan-India player; every developer wanted to be in every city. So, they began buying land at whatever price, which resulted in prices real estate prices sky-rocketing across the country.

During last Diwali (festive season, when many people book new flats), a Mumbai- based builder had raised prices by Rs 1,000 per sq for his project in Ghatkopar.

Since then, he has not been able to raise prices by even a rupee; the builder has been privately cribbing to his friends. ''It's a question of who blinks first. Pressure is clearly more on the developer,'' said a real estate expert.

Prices could to fall in other segments, where significant supply is being added. ''In IT parks, there would be a correction of 15-40 per cent in rentals as there has been a significant build-out. In the western corridor around Pune, 35 million sq feet is being built. Developers are not finding occupiers,'' said Chakravarti.

Rising salaries and high real estate cost are also negating the cost arbitrage the IT and BPO firms enjoyed. ''Many BPOs (in voice and low-end data processing) can't afford these rentals, which is forcing them to look at Eastern Europe,'' said an expert. If rentals come down, it will encourage people to occupy the IT parks.

Faced with a liquidity crunch, developers are bracing up for more private equity investments. ''Real estate developers are more forthcoming, more flexible and realistic than they were three to 12 months ago,'' said Chakravarti

This is reflected in the financing proposals being structured. Earlier, developers wanted the entire premium for land in the beginning of the project. Developers are now accepting performance-based structures wherein they get deferred premium on land valuations based on achieving certain revenue targets.

Despite the downturn, investors remain bullish on the long term potential.

''The fundamentals of the story are very much in place. India is a long term growth story. Our funds are of seven to nine year tenures. We can take a bit of rough with the smooth,'' said S. Srinivasan, CEO, Kotak Realty Fund.

''There's demand at the budget end of the market, in residential and for budget hotels. Even if GDP growth slows down to 6-7 per cent, there will be demand for a lot of office space, hotel rooms,'' said another expert.

''It's not the end of the road for real estate. This is just the beginning.

In the last 12-14 months, people have got carried away. Correction is a good opportunity to bring in a more committed set of buyers, long term investors and occupiers. The boom in Indian real estate will continue for another decade,'' said Chakravarti.