Unprecedented growth starts to take its toll on property industry in India
Less than a year ago India's property market was one of the most exciting in the world, there was a buzz, speculators were making lots of money and economists predicted unprecedented growth would continue.
Even a couple of months ago confidence was still high. What credit crunch? Whatever was happening in the US and Europe, property in India seemed immune. A few analysts warned, however, that it was only a matter of time before reality would bite.
The warning signs were clear – soaring inflation, easy home finance, rising interest rates, surging oil prices and increasing construction costs.
The first tremours appeared in June and July. A report from HSBC predicted house price falls of between 25 and 30% in most Indian cities.
India's best know developer DLF, which floated on the stock exchange last summer which was at the time India's biggest ever public offering, announced in July it would buy back part of its equity. It also shelved plans to list its real estate investment trust on the Singapore stock exchange.
Then on Monday the US's oldest investment bank Lehman Brothers crashed. On Tuesday Lehman's India operation was shut down. Then AIG, which provides significant re-insurance capacity in India, had to be rescued by the US government. Turmoil was unleashed on stock markets throughout the world, not least in India.
So it is not surprising that the question on every one's lips right is what now for the property markets in India. One analyst questioned by Property Wire replied simply; 'I don't know. Events are moving too quickly right now for us to be able to take a view'.
However those analysts who have been examining the situation in India over the last few months have formed a view – a sharp downturn will mean it takes some time for confidence to return to the Indian markets. But there is optimism. Return it will, not least because India has a growing middle class population who need homes.
Also developers have seen the future and they are turning away from luxury gated developments to building affordable housing so that when the market bottoms out then it is ordinary investors who will help it to recover.
India's property boom took off in 2005 when the Indian government took positive steps to attract direct foreign investment which boosted the infrastructure sector. It meant big names like Dubai based Emmar Properties was able to join with Delhi-based MDF Developments and put together projects then estimated at $4 billion.
Others joined the party including AIG from the US, Kikken Sekkel of Japan and Cesma International from Singapore. Vancouver-based Royal Indian Raj International is investing $2.9 billion in the prestigious Royal Garden City project in Bangalore.
Retail was highlighted as a key growth area. The growing number of middle class Indians would also want to spend money in new shopping malls. But these would not be ordinary shopping malls, they would be crammed with luxury goods and bigger and better than anywhere else in the world.
Gurgaon, one of the rising Delhi suburbs has an auto mall, Bangalore a furniture mall and DLF is developing what is set to be the biggest mall in the world in Delhi. Cities turned into construction sites. Developers went out of their way to woo property investors. Features like earthquake proofing, closed circuit television and spas became standard.
Now the cranes are largely silent. Developers have delayed projects not just because of rising costs but also because banks have restricted credit. In some areas construction sites appear ghostly calm. On one upmarket development in Gurgaon, which boasts a nine hole golf course and a cigar lounge, less than half the houses in the first phase have sold a year since they were put on the market. The HSBC report also indicated that sales in the luxury sector have fallen by up to 70%.
Even when property prices and interest rates start to fall it could be some time before investor confidence returns. 'It's not like buying a car. House buyers tend to wait for much longer before they think about spending so much money,' said Ashutosh Narkar, an analyst with HSBC.
But those with access to finance ought to be able to pick up bargains as desperate developers reduce prices in order to sell.
The Indian government is anxious to bring down inflation, especially before next year's general election. The price of oil is crucial in this respect. India imports 70% of its oil and heavily subsidizes domestic fuel prices.
According to one senior economist specialising in Asia the reality is that India has had years of fantastic growth at 9% per annum. But India grew too quickly and this level could never be sustained. Turmoil in the US and the global credit crunch has perhaps hastened the start of the slowdown.
'There is a need to have a period of slower growth. Around 7% would be sustainable. This will help in the longer term,' said Robert Prior-Wandesforde of HSBC.
This sentiment is echoed by the Associated Chambers of Commerce and Industry in India (ASSOCHAM) which says that a spurt in property prices and spiralling interest rates was bound to lead to a slowdown. 'Skyrocketing prices have to be addressed. It is necessary to check the flow of speculative money,' said President Sajjan Jindal.
The association believes that in the long term the property market is solid. It estimates that India currently has a shortage of about 19.4 million housing units and that an additional 45 million units will be needed by 2012.
Some developers are bullish. SunCity does not think the current downturn in the property market will affect its 35 acre project with Opus Developers to build 3,400 apartments in Hyderabad. 'We are not building homes in Mumbai or New Delhi where the level of speculation is high. No doubt there will be some impact but in Hyderabad property speculation is minimal. So we don't envisage taking a hit on profits due to a slowdown,' said Koong Wai Seng, SunCity chief financial officer.
However Deutsche Bank has indicated that developers are simply not acknowledging the significance of the downturn. 'They won't acknowledge a significant downcycle but their financials – slowing growth, falling margins, rising debtors and gearing – indicate otherwise,' a spokesman said.
They might not be acknowledging the state of the market in public but their actions do indicate a degree of panic. Firms like DLF, Omaxe, Parsvnath, HDIL, Unitech, Akruti City and Mantri Realty have either initiated or announced plans for new ventures in different areas. They are diversifying into power, telecoms, entertainment, aluminium, cement and steel. Unitech's recent announcement to tap into the 3G Telecom business is a prime example.
According to Jones Lang LaSalle the winners will be those who move into affordable housing construction. 'Large developers are waking up to the fact that affordable housing projects have the fastest absorption rates. The demand is phenomenal and developers getting into this segment can build for years to come. The buyers get what they want and the developers benefit by the sheer economies of scale,' said Anuj Puri.
Although few analysts back the figures of up to 30% put out by HSBC, they do predict a sharp fall. Indiareit Fund Advisors are estimating that property prices in Mumbai are likely to fall by 10 to 15% over the next six to nine months. Orbit Corporation, a leading real estate firm, said there is a total slowdown and nothing is likely to improve until after the elections. 'In reality for the last six months sales were lacklustre. The demand for property will not go up until the general election next year,' said Managing Director Pujit Agarwal.
International property consultants CB Richard Ellis said increasing lending rates, high inflation and unrealistic property values will mean a fall of 15 to 20%.
Colliers International's latest report on the Indian real estate sector predicts the market will bounce back because of demand. 'The situation has become a dilemna for both investors and end-users as the property market has over-expanded in relation to economic fundamentals,' said Surabhi Arora, senior manager.
'Investors will opt for a wait and see attitude to cope with economic uncertainties and rising inflation. But they can't prolong this strategy over the long term due to the inherent need for housing.'
One area where the Indian Government could aid a property revival is a highly controversial one. The government has introduced quite liberal policies to enable non residents to invest in India. But these only apply to non residents of Indian origin.
Other foreigners who wish to buy can do so if they move to India to live and satisfy residency rules. But even this has produced uncertainty, particularly in Goa which is very popular with foreigners.
A number of non Indian UK property investors have found that they are being given dubious advice. They are being told by real estate agents in Goa that they can buy property provided they start a company and it is okay if that company doesn't do any business.
But the local state government is clamping down. It is implementing an amendement to the 100 year old Indian Registration Act that is responsible for registering property deeds in India. Those who have bought homes in the last eight years are being told their deed can't be registered. The status of their residency visas is also being questioned. The ownership of some property is now in doubt.
So when the current fog of economic uncertainty fades many in the property industry hope that in the clear light of day the current hard lesson will also create an appetite for more transparency and reform in the real estate sectors in India.