Does this mean real estate would get cheaper? - Views on News from Equitymaster

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Does this mean real estate would get cheaper?

Jun 9, 2011

Real estate prices in India have been on the upswing for a while now. Home prices have almost doubled in some of the cities. The price rise has been quite sharp, especially in the metro cities. However, even Tier-II and Tier-II cities have not been spared from this rise. So much so that most people decided to start putting off their home purchases in the anticipation that maybe prices would cool down.

Well, looks like their prayers have been answered. Let us see how.

Most real estate companies have huge levels of debt on their books. As interest rates have gone up, so has the interest burden for the companies. In fact, cost of interest has gone up by as high as 14% for some companies. Compared to the 8-9% that they were paying earlier, the increase interest burden has pressurized margins. This combined with higher prices for materials, labour, etc; margins for most real estate companies have been compressed.

On the revenue front, sales have come down due to the sluggish demand from consumers. Higher home loan rates and rising inflation has led many customers to postpone or cancel their home-buying plans. As reported by a leading daily, currently there are only 3 to 4 apartments sold in a month (in a particular area) as compared to the 10-15 sold earlier. As a result, the real estate companies have seen their inventories on the rise .

This has led to a severe crunch in the cash flows for many companies. To make matters worse, thanks to the recent spate of scams, the banks are now becoming increasingly reluctant to lend money to the real estate sector.

As a result of this, real estate companies are now faced with two choices. The first is to sell non-core assets to generate funds. This is something that companies like DLF have resorted to. However, there is an extent to which a company can sell assets to generate cash. At some point or the other, this option would dry up.

So the next option available to the realty companies is to cut down the prices of their inventory of homes. This way, there would be a demand push for the houses. This would boost sales and help the cash flows as well. However, this would bring down the margins for the companies.

Hence, it appears that for now the realty companies are stuck in the middle of a vicious circle that would not end unless they bring down their selling prices or start constructing cheaper homes. In either case, the consumer has a lot to celebrate because for now it definitely seems that real estate prices in India are on their way down.

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2 Responses to "Does this mean real estate would get cheaper?"

MADHRI

Jun 19, 2011

Mr.Ghosh is 100% right. Real estate has become a nightmare for the Indian Middle class. When they want to purchase, obviuosly everybody quotes higher. When they want to sell, nobody comes forward complaining of reduction in prices. Eitherway, they are losers. This is happening mainly becuase real estate is unregulated in India nad mostly the business is contolled by politicians.

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Mr. D. Ghosh

Jun 17, 2011

This does sound like soothing music to the ears of the middles class whose one of the quests always has been a primal one - a shelter of one's own. BUT!!! But, we have heard this so many times and do not see this happening significantly. There has been variances but not so significant. And again, this discussion is also relative to cities. Bangalore had seen a dip in real estate prices in 2009 but that was because of a global recession. When the price had come down, the buyer's pockets were empty and he being hard hit with salary cut and inflation, was not able to arrange for the reduced cost. Reduction in real estate prices could only be meaningful when the income and other expenditures of the buyer remain steady.
A lot of properties remain unoccupied in Bangalore but when one goes to buy, there is never a discount offered because of that. The underlying nexus of the politicians, land mafia, builders and the media, ensures that it is the regular tax payers who carry the final brunt as always.

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