It Is Really Bubbling

  • Abhishek Behl / FG
  • India
  • Sep 27, 2013


The slowdown in growth, coupled with inflation and the weakening of the rupee has had a cascading effect on the Indian economy, particularly the Real Estate sector - which is today in the doldrums. The tightening of credit norms to this sector (due to anticipated defaults) alongwith the poor market sentiment has slowed down the market, with builders increasingly finding it difficult to sell their Real Estate - which once was ‘sold-off’ even prior to the official launch. In some projects in Gurgaon people have even decided to cancel their bookings; this has happened for the first time, in what is one of the hottest Real Estate markets in the country. Sources reveal that developers are in a precarious position, and it only a matter of time when we see who will blink first. Real Estate analysts say that given the current market conditions, there should be a correction in the prices by 25 to 30 per cent in the near future. If the rates are not brought down to realistic levels, there is every chance that the Real Estate bubble - which has been sustained by big ‘investors’ and ‘underwriters’ - could burst, destroying the wealth of a large population.

Vineet Singh, Business Head, 99 acres, says that the Real Estate prices in the secondary market have already seen a correction of 10 to 15 per cent, and this will soon be reflected in the primary market as well. “How can a developer continue to sell a product for Rs. 6,500, which is available for Rs. 5,500 in the secondary market? It is imperative that builders understand that realistic prices will have to be offered to sell real estate,” says Singh. He expects the market in Gurgaon to correct by 25 to 30 per cent within the next year, and says that subvention schemes and other such incentives cannot stop this slide. In fact there are investors who are now ready to exit a property by making as little as Rs. 200 per sq. ft. profit on their investments – and even at this rate they are finding it hard to find buyers.

To add to the gloom, a recent Report has revealed that top builders in India are sitting on a combined inventory of around Rs. 58,000 crores – due to a substantial increase over the last two years. DLF, HDIL and India Bulls are having a huge inventory of unsold stock, as sales have declined during this period. The figures do not include unfinished and under-construction projects, which are substantial. A Report by Real Estate firm JLL states that since 2009 the total supply of ‘office stock’ has nearly doubled, to 70 million sq. ft. in the NCR. This has unfortunately led to a high vacancy rate, as IT/ITES companies, which power Gurgaon and Noida, have witnessed a downturn in this period. The retail sector also witnessed downsizing, with most of the major retailers shutting down stores where their volumes were low. The ‘unrealistic’ prices still demanded by most builders has also slowed down buying. 

Sam Chopra, CEO Remax, a Real Estate brokerage firm, says that most developers have already sold everything to the investors and underwriters. “To help the latter, developers continue to ‘officially’ increase prices, to provide them options to exit – hopefully with reasonable profit,” says Chopra. His argument is that developers are caught between the devil and deep blue sea; they have borrowed money at high interests rates - or got it from investors and private equity funds - which forces them to increase the prices constantly, despite opposing market conditions. To make matters worse, the recent changes in the Real Estate sector in Delhi - which was hitherto controlled by DDA - are also likely to impact Gurgaon and Noida in a big way. Chopra finds the recent Delhi Land-pooling Policy as well as the Delhi Master Plan as an excellent way forward, for increasing the supply of Real Estate in the Capital. “Now, either the builders in Delhi will raise their prices or realty prices in Gurgaon will come down - the time frame is about 3 to 5 years,” he says. Chopra also sees a correction in the short term. He also believes that the market will have to provide options to the middle classes to buy affordable (Rs. 3,500 per sq. ft.) housing. Surely a pipe dream in Gurgaon!

The realtors have been hit by the recent decision of the RBI to tighten credit to the Real Estate sector, and also by a restriction on subvention schemes, which were being used by the developers to fund their projects indirectly. Industry analysts say that the primary objective of these policies/actions has been to ensure that the holding power of the builders is reduced, so that they are forced to reduce their Real Estate prices, which will help reduce the near-alarming inventory levels. The industry is presently saddled with unsold supply of a 14 to 15 months’ level, which is uncomfortable. Ashutosh Limaye of JLL predicts that there could be a correction in prices of certain projects aimed at the mid-income segment. It would be within a range of 12-18 per cent, depending on specific projects and their builders’ holding capacity. The large-scale exit of black money from the Sector, due to the ensuing elections in some States and the Centre, is also likely to put builders in a difficult situation

Ramesh Menon, CEO Certes Realty, says that the Real Estate market in Gurgaon has changed from a sellers’ to a buyers’ market. “There had earlier been an astronomical rise in property prices, due to easy availability of money, speculation and developer greed. The economy’s slowdown, alongwith measures taken by the RBI, will certainly deflate the bubble,” predicts Menon. He also suggests that while buying a property the customers should check the licences and building plans and even find out if the developer has something personal at stake. Someone who enters into a joint venture with farmers, and has not invested in the project, needs to be avoided. There has to be correction in prices in the coming months, he asserts. Who, how and when are the imponderables. Many new builders and investors seem to wish to exit, but have bought land at high prices. The recent introduction of the Land Acquisition and Resettlement Bill is also likely to raise the cost of land prices, as farmers will demand more compensation. A squeeze in supply for some time may in fact be a lifeline for the Sector. The investor class today would prefer that projects be delayed, hoping that they can make profit. It is the buyers, the end users, who would end up suffering. 

Is the honeymoon of Real Estate investors likely to end? Reports say that the Property Sector will now see mid-term moderate returns of 10 to 15 per cent, unlike the 30 to 40 per cent earlier. The NCR, which sees a sale of 70 to 80, 000 units in a year, is unlikely to even see growth.

Some reports have already predicted that the role of speculators in the Indian Real Estate market is likely to reduce, as a number of factors are combining to set the stage for a correction. This could also bring an end to the very high Real Estate prices - which are amongst the highest in the world. The control on liquidity, the reduced exposure by banks and the exit of Private Equity players - who have suffered losses due to the weakening of the Rupee – could lead to a crisis, warn experts.

Sanjay Sharma, MD Qubrex, predicts a further slowdown in construction and the delivery of projects in Gurgaon, as builders try to conserve their cash flow. “The delay will help investors, but not real buyers. This will also make it difficult for new projects to be sold,” he says. He adds that even the rental market has gone down. “There has been no rise in rents in the last one year in most places; in fact, for premium properties in the Rs. 1 lakh plus per month range, the rentals have even come down,” he adds. Sharma opines that if the economy does not improve, and negative perceptions stay, then prices could fall, over a year or so. It seems that big investors are looking to hold on to their assets upto the next elections. It could be a costly mistake. It just needs a few to blink; that could trigger a downward spiralling effect on property prices. It would be better if rationality and mature business sense prevails now, and the bubble is deflated in a ‘controlled’ manner

Many Real Estate consultants say that they are advising their clients to adopt a wait and watch approach, and not look at the market for investment purposes. “If your are buying a house to live in, it is fine; otherwise the market is in a bearish phase and it will be long before it recovers,” says Chopra. It is not as if buyers are not at all there and deals are not happening; it is just that the these few customers now first want to check out the ‘real’ picture. Singh of 99 acres says that the recent trend is that people now want to buy ready-to-move-in properties or those where possession will be given within a year.


It seems that big investors are looking to hold on to their assets upto the next elections. It could be a costly mistake. It just needs a few to blink; that could trigger a downward spiralling effect on property prices. It would be better if rationality and mature business sense prevails now, and the bubble is deflated in a ‘controlled’ manner.


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