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The endless excitement of real estate sector in India witnessed during the last few years is finally started showing signs of recession. The talks of new malls, complexes, residential projects being built are all now being kept unoccupied. There is an overall slowdown in demand of real estate across the country as has been experienced by industry players. Property prices and rentals are decreasing which have led to the erosion in market capitalization of many listed players like DLF, Unitech, etc.
The slowdown is assisted by the fall in stock markets as wealth creation does not happen and there is lack of capital among investors to invest in real estate projects. Also, to adjust their share market losses, many investors are forced to sell off their real estate properties at a very lower price. Many residential buyers are waiting a price correction before buying a property, which is also affecting the development plans of builders.
IT industry continuously experiencing a slowdown, there may be further constraints on residential as well as commercial demand since IT/ITES segment accounts for 70% of the total commercial demand in India. So real estate players may continue to face liquidity problems in future due to rising costs and unfavorable stock market conditions for further capital raising. Only those players who have achieved considerable revenues from past deals could expect to rise against the flow. But the scenario may get deteriorate if the upcoming properties are not sold off as it may lead to a financial crisis in the property market.
The development of real estate in India is accredited to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centres and programming houses. Presently, the impact of recession in US economy has caused huge impact on Indian real estate market as well. Till now, the real estate industry was a booming industry, which were in pace with information technology (IT) industry. Consequently, the demand for IT space and commercial spaces has grown up. Also, the high net worth of individual investors has created a very fast pace of demand in Indian real estate sector, which has a very high impact image of investing in India.
The recent changes, which happened in American market such as bankruptcy of Lehman Brother and sell process of PE firm Merryl Lynch by the Bank of America, has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested a large part of their funds into real estate sector without having the proper analysing or effect. It has lead to a huge loss for them. All of these changes in the US economy have affected Indian economy and the real estate segment as most of the Indian players have their liquidity funded by both of these firms. The IT industry, which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms.
All of these unexpected changes in Indian and US market created a point of thinking to investors and individuals that where it will go and what will be the best option in real estate investment. The market rates in India are also dropped by 10 to 30 per cent in most of well-known as well as upcoming cities and the trend appears to be still continuing, till it recovers from the ill effects of financial crisis. Buyer sentiment is expected to remain negative due to weak economic conditions. As a result, property volumes would remain muted and prices would decline further. Most of the brokers expect price trend to be negative over the next three months and some expect price trend to be negative over the next one year.
As the money was coming in terms on investment from non-resident Indians as well as private equity (PE) funds, the well-known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has contributed a very high supply of real estate segments either in residential or in commercial or in office space.
Foreign private equity investors are eyeing the Indian real estate market to buy properties from small and mid size developers. In the next six months, we will see lot of distressed real estate deals in India. Small and medium developers with turnovers in the range of Rs 50 crore-Rs 250 crore will be forced to go for distress sales to keep up themselves in the economic downturn. Small and medium size developers across the country are said to be stuck with 5-6 projects on average as demand has been lethargic. They compelled to sell 40 per cent of the existing projects at a discount of 25-40 per cent of the original price to fund rest of their projects.
We could see that presently 50 per cent of total real estate market coming under distressed deals. As foreign private equity (PE) players have the liquidity and staying power, after buying such properties, they can wait 4-5 years or till such time the property market bounce back to sell them at higher price.
However, the outcome of general election can play very important role in the real estate segment because a stable government is a prerequisite to the foreign investors. If there are continuous changes at the Centre, they might turn their back for another five years.