Thursday, June 12, 2008

Realty Investors Begin To Under-Cut Builder Rates - June 12, 2008

Mumbai: The carnage in the stock markets — where realty stocks have taken a beating along with the rest — may hasten the slowdown in the real estate market over the next six months, say experts.

“The market is already slowing as high property prices have affected sales,” says Balaji Rao, managing director, Starwood Capital India Advisers.

“Developers are delaying construction and delivery of new projects as they are facing a liquidity crunch. In addition, rising input costs, with the probability of an increase in interest rates, has dampened realty stocks. Even assuming that oil prices and inflation go down, the market faces a rough time.”

Even as realty stocks are quoting at huge discounts to their issue prices (DLF at Rs 479.85 against Rs 525 issue price; and Omaxe, Parsvnath and Puravankara at 40-50% discounts), realty is suddenly looking scary for investors.

Many investors are thus opting to book profits by selling their flats at up to 15% lower than the builders’ rates. These are investors who don’t want their notional profits to be eroded if the rates decline.

“Mind you, these investors may be selling at a discount, but they are still booking huge profits as they had booked the flats at very low rates two to three years ago,” says

Rajiv Jain of Jaisons Property Management, a real estate consultant at Bandra, who has sold at least eight investor-held flats in the past three months.

“In Bandra and Khar,” he says, “investors are willing to sell at Rs 21,000-15,000 per sq ft as against the prevailing rates of Rs 23,000 and Rs 18,000.”

Mahesh Ahuja of Aruba Homes Pvt Ltd, another real estate consultant, says, “Unlike six months ago, there are too many sellers, but hardly any buyers. Sales have declined as property prices have appreciated, making some investors rethink their exit strategy before the lull sets in.”

Ahuja, who has also sold seven flats in the past three months, believes that it makes good business sense for investors to exit now and reinvest down the line. “Holding on to property when rates are stagnant or falling results in reduced return on investment,” he says.

A recent report by Credit Suisse says that though developers insist that prices have remained stable or are increasing, they are finding it difficult to raise funds from the equity and debt markets.

“It is leading to distress sales and a slowdown in execution,” says Anand Agrawal, the bank’s analyst.

“Further, as companies follow the percentage completion method for recording sales and profits, rising input costs may lead to write-downs in future if costs incurred are higher than estimated.

Pranay Vakil, chairman, Knight Frank, global property consultants, says that though the amounts may be small, developers are borrowing at phenomenal rates of 24% to complete their projects. “Unless they complete the projects, they won’t be able to rent or sell flats,” he says.

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