BW Communities

Feeling The Winter Chill

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[HARD HIT: Projects across Mumbai have slowed down or stalled (Pic by Satheesh Nair) Jet Airways, which had bid successfully for a prized Bandra-Kurla Complex (BKC) plot in Mumbai for a whopping Rs 826 crore, has walked away from the deal. Jet was intending to build its corporate headquarters there, but the Rs 23,000-per sq. ft tag for development rights of the complex made the company realise that discretion was the better part of valour. Officially, Jet has sought an extension of the payment deadline from the Mumbai Metropolitan Region Development Authority (MMRDA) overseeing the corporate enclave, but few doubt that the deal is dead as a dodo. An email query to Jet Airways failed to elicit any response. Earlier, Citra Developers, a 100 per cent subsidiary of Indiabulls Real Estate, withdrew its Rs 676-crore bid for the 134-acre PAL-Peugeot land in the Dombivli-Kalyan region, about 100 km outside Mumbai. Citra had acquired the land in a Bombay High Court organised auction in April this year. These instances highlight the current flavour of the property market. Builders are walking away from deals inked earlier, while poor Diwali sales have put paid to expectations that festival season buying would shore up the crashing market. Realty stocks also took the worst beating in the stockmarkets (see ‘Crumbling Value’ on page 86). “Builders are bowing out to limit their exposure and cut losses,” says Akshaya Kumar, managing director of broking company Parklane Properties. But the ones who are stuck with land they picked up when property prices had peaked are under extreme stress. For instance, BKC’s most expensive auction last November sold a less-than-2 acre plot for Rs 831 crore to Wadhwa Developers, an unbelievable Rs 46,800 per sq ft. Can these developers make a business of these deals or will they go belly-up? Vijay Wadhwa, chief promoter of the group, puts up a brave face. “The Maharashtra chief minister has accepted our demand to increase FSI from 2.0 to 4.0 in BKC. (FSI or floor-space index is the built up area allowed in proportion to the plot size.) This will double the commercial space we can exploit.” Yet the reality is that “lease rentals in the BKC have fallen to Rs 200 per sq. ft per month”, says Pranay Vakil, chairman of broking house Knight Frank India. Meanwhile, defaults by developers are piling up and the queue of unpaid suppliers and contractors is lengthening. “Every builder in BKC owes me money. Wadhwa Developers have Rs 8 crore pending,” says Navin Keswani, managing director of Aluplex, India’s largest supplier of glass-cladding and façade engineering. Wadhwa, on the other hand, says Keswani had delayed his Platina project in BKC, which dealt him a Rs 200-crore loss. Diwali Was A Dud Developers had hoped Diwali and the festival season would turn their fortunes. Many of them had borrowed funds at very high interest rates — ranging from 20-36 per cent — to complete projects in time for Diwali or to service previous debt. But very few sales have been reported. “The customer is holding out perceiving a further fall in the property market,” says Ashok Gupta, legal head of the diversified property company Housing Development and Infrastructure (HDIL). “Interest rates are still high despite the RBI rollback. ICICI Bank has even increased its lending rate.” In Delhi and the NCR region too, Diwali sales were poor. “There were few upfront price cuts, though brokers were passing on some rebates on the sly to home buyers,” says Anshuman Magazine, CEO of property consultant CB Richard Ellis. Kumar Gera, chairman of the Confederation of Real Estate & Developers Associations of India (CREDAI), and a leading Pune-based builder, says there were no all-India figures available on the market slowdown, but estimates — going by fresh registrations with the Pune Municipal Corporation — indicate that there has been a 30 per cent decline in fresh supply of constructed homes compared to the beginning of the year. This, despite disguised Diwali rebates such as waivers on stamp duty and registration fees or free parking space. J.P. Industries offered free BMWs or Skoda Fabias with its villas in Gurgaon depending on the size. Very few have directly cut prices. Orbit Corporation and Wadhwa Developers have both offered 10-15 per cent rebate for their Mumbai projects, but that is perceived to be a marginal cut. “There is no substantial cut in the builders’ rate cards,” says Arvind Pahwa, managing director of JP Morgan Asset Management Real Estate. “There is some reduction, but considering prices have gone up 300 per cent over three years, this is not good enough,” he adds. Banks, facing defaults from builders, have also been chiding them for not slashing prices. O.P. Bhatt, chairman of India’s largest bank, State Bank of India, says the real estate markets had to head southwards as people cannot make their mortgage payments anymore. “We may witness up to a 50 per cent correction,” he predicted at a Ficci-IBA Banking Conference last week. Taking The Cue Some builders have taken the cue and are planning lower prices to move sales. A developer that has several hundred ready residential homes in central Mumbai, disclosed Vakil, has decided to let the broking house do a price discovery and market his project, after witnessing virtually no sales for several months. “We will open sales for the residential project at Rs 11,000 a sq. ft in two weeks in a locality that has seen a Rs 27,000-30,000 per sq. ft market. This will get the market going and hopefully put pressure on others to cut prices,” he says. But the withdrawal symptoms, as of now, are quite severe. With the collapse of major FIIs such as Lehman Brothers and Wachovia Bank, the flow of funds to realty projects has stopped. Private equity investments in real estate fell from Rs 7,100 crore in the third quarter of 2007-2008 to Rs 6,830 crore in the six month-period ended 30 June, 2008. The decline in subsequent quarters could be sharper. How long will the downturn last? “Probably another 18 months till supply dries up. Then buying volumes will swell, but at lower prices,” predicts JP Morgan’s Pahwa. gurbir.singh@abp.in (Businessworld Issue 18-24 Nov 2008)