Is the India Real Estate Boom Over?

DHRUVA JYOTI CHOWDHURY, KOLKATA, INDIA

In India, it has been all gold for real estate developers and especially rewarding for those companies who are floating their companies to cash on the booming demand and spiraling real estate prices.

Real Estate strategists in India feel that after the out-of-the world mergers in the real estate sector, it is now time for consolidation in real estate sector which is feeling constrained by falling inflow of funds, rising interest rates and the reserve bank of India axe which has cut off some of the profits of the realtors.

Further adding to the woes of the major real estate developers, the Indian Government last month decided to bar developers from raising money abroad to develop integrated townships in view to check excessive capital inflows in real estate sector in the country.

Though tightening of External Commercial Borrowing (ECB) norms was related to only integrated townships, the norms has spilled all over the real estate sector and affecting it in one way or the other.

Besides, RBI has raised risk weights on housing loans, followed by interest rate hikes to curb demand in the sector.

Much to the chagrin of real estate developers, Finance Minister P Chidambaram had recently said "Intention is to constraint demand in those sectors where there are signs of what you call overheating and example of that could be real estate and housing. I think in these sectors there is reduction in demand”.

"For big developers there is no impact of rising interest rate but small players are finding it difficult to raise money for their proposed projects. They would need to sell their projects to big developers," Ansal API Vice-President (Marketing) Kunal Banerjee told The India Street.

Distress sale of projects is already happening, he said, adding the industry would witness more of it in days to come.

Edelweiss Capital Senior Vice-President George Mathew pointed out that RBI has been squeezing all sources of funds gradually to rein in inflation and a possible correction in this sector could be in the offing.

"Higher funding cost is expected to reduce attractiveness of real estate projects, reduce the land banking run and bring prices down," he said, adding debt financing is not available for land acquisition.

"More than rising cost of borrowing, lack of availability of funds from financial institutions would lead to consolidation in real estate sector," Parasnath Developers Chairman Pradeep Jain said.

He said small developers would have no other option but to join hands with big players to fulfill their commitment to the end user.

Over the past six months, cost of borrowing has gone up over six per cent due to successive measures taken by RBI and the government to check surging property prices.

New players who joined the business in the last 2-3 years may have to sell their projects, said Zoom Developers CEO Rumneek Bawa.

As banks and financial institutions are hard-pressed with funds owing to stricter measures by RBI and the government, small developers are unable to get financing from these institutions.

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BAR ON OVERSEAS (ECB) LOANS FOR REALTY PROJECTS MAY GO

Sanjiv Shankaran, New Delhi

Mint

The government will revisit its recent decision to stop companies borrowing abroad for real estate infrastructure projects in July because it expects to get a better sense of whether the central bank’s inflation-fighting efforts are working by then. The government decided to block the ECB route for real estate infrastructure projects to help the Reserve Bank of India slow down the growth of money supply, which took inflation to a two-year high.

“A high-level committee on external commercial borrowings will take a look at the policy in mid-July. It’s a temporary measure (the decision to block ECB route for real estate infrastructure),” said a senior official of the finance ministry who did not wish to be identified.

In a few weeks, the government would get a better sense of inflation levels and interest rate trend, which would help it, decide if ECBs should be opened for realty companies again, the official added.

Final data on ECBs comes with a lag of more than a month. When the high-level committee meets next month, it would also be able to access accurate data on the extent of overseas borrowing in there cent past for real estate, the official said.

ECB inflows surged in 2006-07 on the back of investment demand, touching $9.1 billion between April and December 2006. In 2005-06, ECB inflows were $2.72 billion.

Realty companies were allowed to raise money through ECBs provided the end-use was restricted to the development of integrated townships spread over at least 100 acres.

Data on the extent of ECB inflows to realty companies is not available and a senior executive of a realty company, who did not wish to be identified, said “it was not so much.”

“Not much money came in through the ECB route from pure lenders,” said Avinash Narvekar, partner at audit firm Ernst & Young.