When Will It Burst?

  • Abhishek Behl / FG
  • India
  • Feb 27, 2015

The unprecedented demand and the ever-rising prices of Real Estate till a few years ago had made developers out of builders and builders out of property dealers – and a new project was being launched almost every week. All they needed to do was to accumulate the magical 10.01 acres that was necessary (in Gurgaon) to get a licence for construction. Now the demand – both residential and commercial – has gone, and the supply has been left (literally) hanging. A large inventory across the new sectors remains unsold; a large ‘sold’ inventory lies with ‘investors’, who now desperately want to exit. Builders (and even many investors) are facing strong pressure from their lenders for the repayment of loans. Real Estate experts say that the right option for the builders and investors would be to accept lower rates/prices, which have anyway reached very high levels in Gurgaon. However, despite having made many a ‘killing’ in this market, the greed of most has not yet been satiated. Many builders have preferred to take additional loans (sometimes from the same banks!), to service their debt – and are now playing the waiting game. This is despite the fact that the latest data (July to December) shows an over 40 per cent reduction in the sale of new property in the National Capital Region! Experts believe that these are ominous signs of a Real Estate bubble. 

Sanjay Sharma of Qubrex says that there is going to be a correction and property prices have to come down, as the lack of buyers is putting immense pressure on builders. Sharma adds that long delays in the delivery of projects, shoddy quality, lack of promised facilities and poor civic infrastructure have also badly dented the image of the builder community in Gurgaon. The crisis is so deep that a large number of property dealers who had set up their business along the Dwarka Expressway, and even Sohna Road, have closed shop. Pradeep Kumar, a dealer, says that earlier there were a couple of queries for new projects everyday; this happens at best once a month now…and the conversion rate for these is almost negligible. Property experts say that the ‘hope’ of property prices rising later this year is a pipedream; in fact Gurgaon (with its current ‘unreal’ rates) could specifically face a major collapse. It’s 'payback' time for speculators (the so-called ‘investor chain’ of Gurgaon). Reality is fast catching up with their realty. Sanjeev Sharma, a Real Estate consultant, says that there has been no research carried out to ascertain demand and supply for property in the City and how sustainable it is; there has been no economic research conducted to quantify the likely job growth scenario in this City over, say, a decade. The earlier govt.’s key role seems to have been to 'Master-Plan' the acquisition of land for supply to its favoured sons – the builders. "A number of companies have already left Gurgaon for Tier II, III cities, as the rentals here continue to be very high, the public transport system remains non-existent, and a water crisis is looming large," says Sharma. Another problem is that a large population of home buyers has been ignored by all builders, because they have no ‘product’ to offer them - thus forcing these folk to invest in plots in unauthorised colonies and disputed areas (like around the IAF Ammunition Depot). The State agencies (like HUDA) too have retreated from the development of housing for the middle class, and this has resulted in the dominance of private builders. In fact the middle class in Gurgaon has given up; they know that they will never get an affordable flat in this City. They applied in large number for the 2014 DDA scheme (which offered thousands of ready-to-move-in flats).

Real Estate consultancy CBRE had warned in September 2014 that an over-dependence on investors was going to hurt the industry as a whole. “In the case of NCR, developers continued to launch projects in far-flung places that had limited infrastructure, promoting them as future hot spots. Although these projects were in the affordable and mid-segment range, buyer interest was limited. The fact remained that these were homes, and not commodities that could be traded." CBRE further said that the large number of (end user owned) residential units that are available in the resale market has also impacted new-build sales. As a result, the number of new launches has halved – with many of those choosing to continue, doing so because they saw it as a lesser evil. However, they are really just adding to the supply, as even subvention schemes and other financial tools that are being used to lure the end users, have failed. What is surprising is that even the coming of a strong and stable pro-business government at the Centre has failed to enthuse the market. The form (sentiment) may have picked up, but the content (substance) is still weak. Weak balance sheets of many banks, which have lent excessively to the infrastructure and Real Estate industries during their heyday, could further spoil any expected party. They have now almost put an embargo on loans to realtors. Simultaneously, the demand for commercial estate, from the IT/ITES industry, has also crashed – thanks to the ongoing global slowdown.

The Budget may well turn out to be the turning point. If there is nothing in it to directly stimulate a significant demand growth for housing and property, Real Estate prices should fall. The cost of not doing so could be real scary. A property bubble burst can impact the entire economy, and also leave a black mark on the banking sector. Many a Millennium City Real Estate empire, built on speculation, might just soon vanish in thin air.

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