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So what if the situation is tough, realty will bounce back soon

By Bhupesh Bhandari
July 31, 2015 12:25 IST
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Some builders had offered to pay penalties in case of a delay, but the promise comes laden with so many riders that buyers seldom get paid.

Of late, there has been much talk of an imminent crash in residential real estate.

The sector is expected to crumble under the weight of high inventories.

After the clampdown on black money, fresh sales have come to a halt.

Thanks to low sales and the banks tightening the screws, builders are in a financial bind, which is expected to precipitate distress sales.

One research house has predicted that this will shave sizeable percentage points off India's growth in the coming quarters. Actually, the sector has been stuck with high inventories and faced a liquidity crunch for at least two years now - and yet, prices haven't tumbled.

There has been some correction, but there is no evidence of a crash.

That is because a sizeable number of builders are not highly leveraged, and can therefore afford to sit on unsold stock for some more time.

This is how residential real estate works in India. The builder pays for the land and then sells the project. With the money paid by buyers, he carries out the construction.

The only cost he has to pay out of his own pocket is the land. And if he is a serial builder, he will buy the land from the money he raised for earlier projects - there is no monitoring of these funds.

In Noida, one of the real estate hotspots in the country, he needs to pay only 10 per cent upfront and the rest in installments over several years.

Many builders who have not been able to sell apartments have simply halted construction, rather than take debt to complete their projects.

A majority of projects are therefore behind schedule. Buyers are helpless.

Some builders had offered to pay penalties in case of a delay, but the promise comes laden with so many riders that buyers seldom get paid.

Those builders who are highly leveraged do indeed have a problem in their hands. While banks had turned their back on them long time ago, NBFCs and private lenders have also started to say no to them.

Most of the builders in this category are those who are into commercial real estate as well, where pre-sale does not happen.

Such projects are financed out of debt.

With the debt tap turned off, and the equity market having tuned cold to real estate years ago, these builders are now desperate.

Some large builders I know admit that they are inundated with requests from those in distress to buy their projects.

A Godrej Properties executive recently told Business Standard that his company has been approached by builders who are unable to complete their projects.

But not all stuck projects will sell - those in the boondocks don't stand a chance.

It is, after all, a buyer's market. Those who have the money will cherry-pick their projects. This might lead to a sea change in the country's real estate landscape.

So far, large business houses have stayed away from it.

The reasons are obvious: the cash transactions involved in the business, the headache of negotiating a plethora of rules in every market (every state has its own set of rules) and the never-ending speed money.

But now they see an opportunity in the large number of projects that have got all clearances but are stuck because of the lack of funds.

Trust in builders is really low amongst home buyers.

They are looking for projects that are backed by sound corporations.

And that is where business houses like Tata, Godrej, Bharti and Mahindra have the opportunity.

In spite of the crisis, the love affair of Indians with real estate is far from over.

Projects at the right price (The euphoria over premium homes has died down: not a single premium project has been launched in Mumbai so far in 2015, says a report by Knight Frank!), and backed by respectable names, will still find buyers.

This trend was in evidence earlier this week when Eros, a fairly large builder, tied up with Bharti Realty for a large-sized project on the outskirts of Delhi.

It is worth noting that Eros has already executed projects in that area but chose to partner with Bharti Realty for this one.

This is a clear indication of things to come - expect more such announcements in the future. Will it mean lower prices for home buyers? That may not happen.

This is because builders have sharply cut down new launches, and there is a slight uptake in demand.

According to Knight Frank, in the second half of 2015, launches will be down 52 per cent (from 37,643 in the second half of 2014) to 18,000, while absorption will improve 24 per cent (from 12,075) to 15,000, which will cause the weighted average price to climb three per cent.

The crash in home prices may not happen, after all.

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Bhupesh Bhandari
Source: source