Total chaos in the real estate market; but big builders won’t admit!
According to recent reports, home sales have dropped 20 to 30 per cent since last December in the metros. The higher discounts and more sweeteners (now offered by mid-sized developers) are seen as the first sign of a correction looming. These discounts should bleed them badly if seen with the huge interest cost they have to bear on borrowings for funding the race for high cost land acquisition amongst the big developers that was on till recently.
Now the big builders will tell you the slowdown is only on the housing front. For commercial properties, it is business as usual. They want you to believe that. Weak dollar has broken the back of IT and BPO/KPO businesses – the two huge consumers of bulk commercial real estate. Now they are looking at increasing productivity rather than adding to headcount – needing less and less real estate.
Then there is the incremental supply to deal with. Other businesses like textile mills and manufacturing units are fast closing shop in cities [because of falling revenues and higher operating costs] freeing up priced real estate for development. That augmented supply dents the cost of real estate further down.
The excesses of recent years have sucked out the entire liquidity from real estate players. They stretched their finances too thin to buy high price land and now when there is a global liquidity crisis, they are falling short of funds to execute their mega plans. Sample this -
Earlier in 2006, Unitech outbid India’s largest real estate company DLF to bag the 340-acre city development contract in Noida for Rs 1,583 crore. Other landmark deals include DLF buying prime Swatantra Bharat Mills land in Delhi from DSCL for Rs 1,675 crore in 2007; Unitech bagging 1,750-acre plot in Vishakhapatnam for Rs 3,228 crore in 2007; sale by Mumbai Metropolitan Region Development Authority(MMRDA) of nearly 75,350 sq. m. of land in Bandra-Kurla Complex for a total of Rs 2,798 crore in 2007. City-based developer Wadhwa Builders had paid Rs 5.04 lakh per sq. m. for the 16,500 sq. m. plot auctioned by MMRDA, marking the largest-ever deal on the basis of the value per sq. m. Wadhwa paid Rs 831 crore.
With rising price in steel and cement, construction costs have shot through the roof. The budgets of builders, both big and small, have gone haywire (now it hardly covers 11% lease rental + 8% stamp duty) and they will soon enter the despair zone.
Vulture funds can't wait to feast on...