The global downturn has set off a panic reaction, inducing investors to close deals at losses. It has become almost impossible for those who invested in real estate last year to exit the scene as the downturn has deepened and the prices being quoted do not even cover the purchase costs and interest expenses.
Typical is 35-year-old Rahul Verma, who works with a Noida-based IT company. He bought a flat in Greater Noida early last year purely as an investment with a bank loan to finance 85% of the cost.
Since then his EMIs have continuously gone up thanks to a series of rate hikes by the RBI. However, the prices haven't climbed as expected and the outgoings have made the property expensive. Rahul is now left with the only option of selling at a loss. And given the global economic gloom, he is willing to take a hit.
'Several investors are stuck simply because there hasn't been enough price appreciation in the past one year,' said Raheja Developers Chairman of Navin Raheja.
He said that young investors bought at the peak of the property cycle last year. Many purchased two apartments simultaneously, assuming that they would finance one by selling off the other at a premium. They are now caught in a difficult situation as they bought at a higher market rate and are compelled to service two EMIs.
Some investors have started defaulting. Others are approaching developers to cancel their bookings and return the money.
Meanwhile developers are finding it hard to finance projects and banks have started taking proactive measures to prevent defaults in their real estate portfolio by cutting exposure to loans against property.
State lender Punjab National Bank (PNB) has taken a lead and has stopped giving such loans, while Bank of India, Bank of Baroda and Indian Overseas Bank have decided to go slow on such loans.
'We are discouraging loan against property by refusing to provide overdraft facilities and charging higher margins,' said a spokesman for Bank of India. Other banks are discouraging such loans by valuing the property at distress level or by valuing the property at the price it was purchased.
