Residential real estate in 2015: Blue skies some way off

Date : Nov 14, 2014

Calendar 2014 was nothing to write home about (pun intended) for residential segment of real estate firms. The coming year may not be any different, at least in metros and tier 1 cities, unless property developers are willing to drop prices to a point where it become attractive to a potential buyer to own a house instead of renting one. With the government recently relaxing foreign direct investment norms for real estate firms, property developers have a got a fresh lease of life when it comes to funding.

That will enable them to hold on to prices for a little longer in the hope that buyers will finally throw in the towel and buy the houses at the inflated rates. But it remains to be seen if holding on to prices will be of much help. A recent by brokerage house UBS shows that on an average pre-sales were down 50 percent in 2014 while residential inventory is close to a seven-year high on an average. 

According to a report by real estate consultancy Knight Frank, there are around 2.3 lakh unsold houses in Mumbai. The situation is not much better in in Delhi-NCR, where there are about 1.7 lakh unsold houses and sales were down 37 percent during the first half of the calendar. Anecdotal evidence suggests that sales were muted during the festive season as well, reflecting buyers’ resistance to higher prices. Interestingly, property prices have been stagnant even as the stock market has been on a tear since September last year, with benchmark indices rallying over 75 percent. In the past, there has been direct correlation between the stock market and the property market. A rally in the stock market invariably fuelled a similar upswing in property prices, as investors ploughed profits from their stock deals into real estate.

That has not been happening for some time now. A key reason is that retail participation is not at the same level as it was during the bull run of 2004-08. And the investors who have made money don’t seem to think of property as the best place to reinvest their profits. There is another reason why house sales are yet to pick up despite the boom in the stock market -- jobs. Jobs are not being created at the same pace as they were being in the previous bull run. There is still over capacity in the system, and most companies are right now focusing on getting their balance sheets in shape before expanding capacity. Property prices could still see a meaningful correction, if banks start putting pressure on the builders. When property prices crashed in 2008-09, banks should have ideally forced builders to sell property at reduced prices if need be and repay the loans owed to banks. Instead, with some regulatory help as well, banks restructured the loans more liberally than they should have, allowing builders to get away lightly. But the RBI has become stricter about banks’ exposure to the real estate sector in the last few years. Recently, Reserve Bank of India (RBI) deputy governor R. Gandhi expressed concerned about the level of exposure of banks to the real estate and housing sector.

The real estate and housing sector accounts for 13-14% of banks’ exposure.  Gandhi said RBI was “very much concerned about further exposure beyond these levels,” adding that increasing exposure would not be prudent, reported the Mint newspaper. The number of real estate players that can access FDI is limited. Most builders still have to rely on domestic channels of funding, and banks are an important source. Already banks have been nudging real estate firms to bring in more equity capital, and industry sources say the instances of ‘evergreening of loans’ (borrowing afresh from same bank to repay old loan so as not to be declared defaulter) involving realty firms are on the decline. Starved for capital, state-owned banks are less inclined to indulge real estate firms.

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