It may look a little strange, but the worst hit in the Indian stock market collapse on Monday — following S&P’s downgrade of US’s credit rating — was the real estate sector.
The BSE real estate index dropped 4.46% on Monday, the highest amongst all indices. On Tuesday, it dropped another 0.41%. In the past week, it has fallen nearly 12%.
The global market worries have exacerbated an already weak position. While developers are battling liquidity pressures, buyers are delaying home purchase decisions on account of rising interest rates. And the economic slowdown worries now imply that demand for property could drop further.
Mumbai has unsold stock of 108 mn sft of residential property that will take at least 40 months to clear at the existing pace of absorption, according to data from real estate consultancy Liases Foras. NCR has 220 mn sft that will take 30 months to sell out. “A healthy market maintains 8-10 months of inventory,” said Pankaj Kapoor, MD of Liases Foras.
Sales registrations data from Mumbai also reflect the same sentiment. Registrations for June are down 27%, compared to the same month last year. The June number is close to the level seen in June 2009. “With no visible signs of a meaningful correction in prices, affordability continues to remain a major cause of concern, painting a grim outlook for the Mumbai realty space,” said Kejal Mehta, real estate analyst at brokerage firm Prabhudas Lilladher.
For developers, the difficulties in raising capital are being compounded by the choppy markets.
“It affects promoters’ ability to pledge shares. Naturally, funding options come down,” said Anand Narayanan, national director-residential in property consultancy Knight Frank India.
Anuj Puri, country head of Jones Lang LaSalle India, said the FII exodus would also affect developers’ capital raising abilities.
But developers dismiss the stock market reaction as kneejerk. “Foreign investment from the US may pose a question mark. However, confidence in India will go up. Our debt is under control and demand is robust; only the interest rate hikes are deleterious,” said Niranjan Hiranandani, MD, Hiranandani Group.
J C Sharma, MD of Sobha Developers, does not expect anything like the 2008 crash to recur. “Then, people lost jobs and banks stopped lending. Developers’ cash flow situation was very tight. In 2011, hiring is robust and things are looking up,” he said.
But will hiring, especially in the IT/BPO sector, remain robust in the wake of the troubles in the US?
“Overall, market sentiments are likely to decline. A reduced spend on IT by the US may impact the IT outsourcing business and affect Indian real estate at various levels,” Puri of Jones Lang LaSalle India said. Property markets in Bangalore and Pune, dominated by IT, could be the most hit by such a development.
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