The Indian property market is witnessing a dearth in volumes. Sky rocketing prices and high interest rates are the main culprits here. Considering that the appetite for new launches is on a considerable decline, amidst falling affordability, prices may moderate in the near future. Also, the fact that many developers are loaded with huge debt makes correction in prices virtually inevitable.
If not, they will not be able to make their debt repayments on time. In fact, we believe that a developer's ability to service the debt will determine where property prices will head from here on. Until now, many developers were unwilling to offload the inventory at lower prices. That's because they had a belief that the demand environment will improve soon. Shortage of dwelling units in India made their case even stronger. Seeing huge demand potential in future, builders managed to get a moratorium/extension from their respective banks rather than selling the inventory at lower prices for loan repayment. Even banks gave them the extension as classifying the loan as non performing asset (NPA) attracts higher provisioning.
As a result, the property prices refused to correct. But considering the inherent risk attached to real estate lending many banks have reduced their exposure towards the same. In fact, growth in the commercial real estate lending has come down from 23.2% in June 2011 to 4% in June 2012. Drying liquidity leaves no option for the builders but to reduce prices.
If builders do not lower the prices then volumes would remain low (no revenues). This coupled with rising interest rates will make survival difficult. It may be noted that in the past rising interest rates have impacted the profits of real estate companies. In fact, between FY10 and FY12 while the increase in debt was marginal the interest cost increased by 81%. This was the time when RBI raised rates to curb inflation. As a result, many developers saw their bottomline contract.
While now the interest rate environment has cooled down a bit buyer appetite is low due to higher prices. Thus, a price correction is just around the corner. Lower prices will be a win-win situation for both developer and the consumer.