Can real estate see a comeback?

Thu, 31 Jan Pre-Open

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The real estate bubble is finally showing signs of bursting. But can home buyers finally celebrate? Home sales have been slowing despite a number of new launches and a correction in prices. The Reserve Bank of India (RBI) may have recently cut the repo rate and the cash reserve ratio by 0.25%, however interest rates for real estate firms continue to be high. With cash flows deteriorating, many are finding it increasingly difficult to pay interest rates on loans and are defaulting.

While this may be bad news for banks which are already facing asset quality issues, buyers may get a chance to get a great deal. The more the sector is under pressure, these firms will be forced to sell their inventory at throwaway prices in order to build up cash-flows. Plus, they are facing a liquidity crunch, as the RBI has refused to allow banks to restructure loans to real estate firms without providing for potential defaults.

Most real estate firms have high leverage, which they tanked up on when the economy was in an upswing. Their balance sheets are now goaded up with expensive bank loans, and when the going gets tough it gets more and more difficult to pay back. This is similar to what happened to Dubai. With the onset of the global financial crisis of 2008, Dubai's real estate market declined after a six-year boom. Real estate value tanked and expensive plots remained vacant.

Now for Indian firms, even raising equity capital in this environment is difficult. Earlier these firms would pledge shares with banks. But with these stocks severely underperforming the market, even this funding route is capped. Shares in Housing Development & Infrastructure (HDIL) in the last week tanked over 30%. The company's consolidated net debt was at around Rs 38 bn as of September 2012. The reduction of debt hinges on cash flows from two Mumbai-based projects. Other real estate firms are also in a similar soup.

Buyers can however cheer. According to Pankaj Kapoor, Managing Director of Liases Foras, a property consulting firm, the Mumbai real estate market is ripe for a correction. The city has seen the highest number of new launches since the recession of 2008-09. But the good part is that the prices of the new launches were 24% lower than those of the existing supply. Plus, now with the RBI cutting rates, while banks may be cautious to lending to real estate players, they will be more than willing to pass on the benefits to retail home buyers. This could lead to a comeback from the real estate sector which has been lagging behind for the past few years.