One of my friend who is a well renowned real estate promoter was struggling to pay his bank loan in the year 2008 when the recession have touched the shores of Indian real estate business. He had to almost sell all his properties of his own to pay back the loan of the bank. Even he had sold his under constructed residential and commercial properties at a very much lower rate than he should have dreamt in his worst nightmare.
2yaers after he stands well ahead of his worst days. He not only gained everything back but also made some realistic approaches. As we all know that earlier every real estate business was running at costly and lavish housing models. But when the recession started off every one realized that the growth of the business over the long term lies in the womb of small and affordable housing categories. This concept of small and affordable was not only recognized in real estate sector but also in automobile space too. That’s why toady we find the traffic jam is mainly caused by small cars. Real estate business took a sharp turn around and made dramatic changes in its approach. Small houses are the ones which are on the highest point of the demand followed with highest purchasing parity in this segment. So after the debacle of 2008 real estate moved towards small projects which have lifted the balance sheet form the color of red ink. Today all the top 5 real estate developers across the country are floating in profits and prices of the properties are now about to cross the peak high of 2007-2008.This have been further approved by the leading home-loans lender, HDFC, feels that residential real estate prices in the country are hitting the peak levels observed pre-slowdown.
Small houses takes less time for construction as its does not needs any lavish outfits and the consumer numbers are very high. Hence wastage of capital due to delayed in sales process in next to negligible in small projects. This was equally applicable in commercial projects where large projects were divided and reduced to small sizes. At the same time the prices of the properties were back to 2007 levels and abundant flows of capital have increased the prices of the sector. Cost of raw materials were the only factor which have pushed up the cost of production but the higher level prices have not been able to affect the profit margin of the real estate sector.
But the situation for the coming days seems to be around for another small correction in the real estate sector. Prices are now so high that demand is taking a hit and will continue until prices comes down. Moreover the rising cost of loans is also putting pressure on the decision of consumers to go for fresh buys of real estate. Banks interest will put pressure put the high prices are the real trigger for pulling down the growth of the sector. We need proper valuation methods for the property prices and regulatory cap to check unhealthy price hikes for the sector. If these two practices are not adopted then the sector will make seesaw ride for very one. The consumers might postpone their decision of buying but what about the real estate developers they will have to face the building cost of inventory followed with increased working capital requirements.
At the same time a huge number of projects have been taken up from all corners by the developers. If the slow down hits the road theme these developers will be under great threat. According to some private players its estimated that in the next 12-months, over 4-million square feet of office space will be available and this will put pressure on prices as supply is simply crossing over demand. The slowdown in Europe and China will put brakes over NRI sell of property and so again domestic demand will have to come for rescue but that seems to be over stretched. What we need a cautious approach for this sector where only one thing follows for now Wait and Watch
Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.