The whole business model depended on the ability to infuse cheap monies at the earliest stages, including additional infusion through exits at the end of each stage to be able to funnel monies back to stage one-- land acquisition. Further, as each project funds another in this working-cap intensive business, liquidity is the key driver of the business. With decreasing options, distress-sale of land parcels was the only option for some.
“We see the discount on offer as the last attempt of developers to hold on to current prices with a marginal discount of 5-8%, before they are forced to adjust property prices taking into account the challenging macro economic realities. We do not expect volumes to recover in the current economic uncertainty which would worsen the cash flow problems for the sector. We expect sharp and visible correction in prices by developers from early next year,” said a report of JM Financial.
In most cases, we observed that property prices were maintained or increased from the level they were about six months back. Taking into consideration the slowdown that capital market related activities have seen, we feel that the current prices are not in line with the affordability of buyers.
The government, in March 2005, amended existing norms to allow 100 per cent FDI in the construction business. This liberalization act cleared the path for foreign investment to meet the demand into development of the commercial and residentialreal estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.
“With debt market getting dried up, developers facing the heat of liquidity crunch and PE funds shying away from real estate investments and speculative investments at an all time low, we can expect a 15-20 per cent correction by the first quarter of 2009,” said Anuj Puri, managing director, Jones Lang LaSalle.
Moreover, private equity investors who had been picking realty deals earlier this year appear to have tightened their purse strings now. September month has witnessed only two transactions worth just $12 million.
According to real estate consultants, seven major Indian cities including Delhi, Mumbai, Kolkata and Bangalore showed a marked decline in demands during the quarter ending September. Leasing of office space had also slowed down significantly.
Only those players who have achieved substantial revenues from past deals could expect to rise against the tide. “Rationalise costs, move to affordable housing and be realistic in pricing; those who cannot do that would be in danger of being pushed to bankruptcy,” warns PINC Research's Shenoy.
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