The world recession, has clearly impacted general business environment with manufacturing and all related sectors, including service industry feeling the pinch. There is pile up of finished goods on one side and costly raw material inventory, on the other. There are lay offs across all business sectors.
Lets take a look at the wrong side……where all of us try to avoid looking..... for fear of losing sleep!
Indian Govt. View
Though the Govt. may try to show brave face and announce day after day, that the Indian Economy is protected and cocooned from the impacts of global recession, the fact remains otherwise.
The Foundation and Driving Force of Growth
The Indian Economy has boomed on the cascading effect of exports of material, software and services. If we explore, it would be obvious that any activity in the country including building of roads, airports, factories, commercial establishments etc eventually point to impact of growth, powered by either direct exports or impact of foreign investments.
It Came Steadily and Merrily and then IT Went!
Foreign money had poured into stock markets and directly into infra/real-estate projects, during last 3 years. While the injection took 3 years, the extraction has happened over 6 months. Coupled with this fast disappearance of billions of rupees of hard cash, the rapidly falling exports of goods, has crippled the economy. As the global economy contract, there is every reason to believe thatexport of services would also be hit badly.
Real Estate is not a stand -alone industry. The Real Estate demand was driven by growth abroad, which spurred big time manufacturing/industrial /infra and housing sector expansion in India, as lakhs of jobs got created resulting in a boom in business/retail activity. A turn-around in Real Estate market looks unlikely, until there is discernable improvement in the overall industrial /business scenario.
Sticky Wicket. Taking Guard.
We had maintained earlier, that the property prices in prime areas will not fall, except for marginal softening, due to Non Reduction of Land Cost , Owners holding on and Impact of Black.
However, its time to revisit the matter!
The marginal fall in property prices that we have seen so far, is due to developers reducing profit margin and also passing on part of the effect of steel/cement price reduction.
In the light of the impact of slowing output in industry and reduction of general business activity, its felt that there is a chance for land price reduction since Owner's resistance might melt way.
Though this may not happen in next 3 to 4 months, if the situation continues, owners of prime land who are into various businesses will find the need to dispose of land, to raise cash. The fact is that with banks tightening credit conditions to industries and all businesses, a stage would be reached, where business men need to look for the last alternative…sale of fixed assets.
If land price in prime areas fall, the constructed property prices will come under tremendous pressure.
Will Govt Intervention / Price cuts Help?
Prop-ups like interest rate reduction is not going to help much, except create temporary ripples. If builders can cut price by big numbers, there may be some buying interest. But the cut has to be massive not cosmetic. In fact 10 to 15% cuts have not even forced people to look at properties, let alone think of buying. The problem runs deep & wide and hence needs macro level management and is unfortunately tied with the status of global economy.
Feel Good Vs. Feeling Right.
Its always easy to spread feel good factor and be comfortable till shaken up! May be many would disagree with the above arguments.
Other than Fixed Deposits and the like, all investments are prone to risks. Returns are always proportional to the amount of risk taken. What we can do is only to minimize risks. Many would have got away by de-risking early. Others may find themselves at loss, but unless there is pressing reason, its better to hold on, till return drifts into positive territory, rather than sell and incur loss of capital. The question…….. "how long?" …… would take time to find an answer. But all will agree that India as a country will grow. The ups and downs are cyclical and hence we could wait for the peddle to come up.
Good properties bought at better than market rates, will always have the capacity to withstand market pressures. And they would appreciate faster when trend reverses.
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