Connecting the dots : From the global economy to the Indian real estate scenario…

The fallout of global financial turmoil is a potential bargain hunting opportunity in Indian real estate. The patient homebuyer may be able to avail cheaper property rate as well as lower interest loan going forward.
Opening Scene, India Take any newspaper…this Deepavali, there are more ads from real estate companies than from retail shops. “Assured 21.47 per cent Return on Investment” claims one ad. Another claims the builder will pay your full home loan EMI for the first 18 months. Yet another builder promises to buy back your apartment after two years, at an assured higher price — “just make your booking today with 15 per cent down payment”. Are these hard sell campaigns telltale signs of desperation among developers?
Occupancy levels in many recently completed residential complexes in key metros hover around 50 per cent. Those who have bought homes in last few years have seen interest rates gallop faster than an Arabian purebred. Many middle class families that stretched themselves to buy a home are barely able to make ends meet. Banks have turned paranoid that the Indian economy would slow down and loan defaults would increase due to high interest rate levels. Consumer loans have trickled down…you might have stopped getting those annoying tele-marketing calls for personal loans. Some bankers don’t even want to speak to real estate or infrastructure companies anymore (it’s an irony that the same companies, until a few months back, were the focus segment). Many on-going real estate projects are hanging in mid-air due to lack of capital, both from buyers and from bankers. Some builders have already defaulted on delivery date commitments made to advance reservation customers. The fund situation turned so grim over the last two weeks that it appears banks don’t even believe each other any more; Inter bank lending rate (the rate at which banks lend money to each other) touched 20 per cent p.a. (on October 10, 2008). Many leading banks are just hoarding cash and playing a wait-and-watch game.
Scene 2, Rest of the World Loan defaults in U.S. housing market has increased to unanticipated levels. Investors, Investment Banks, Commercial Banks (those that give loans to companies), Consumer Banks (those that give loans to you and me) and Managed Funds across the world with stakes in U.S. mortgages, are grappling huge losses that threaten their survival. Financial Institutions have started collapsing like a deck of cards. Global banks have drastically slowed down lending due to lack of trust and lack of cash. Even genuine companies are not getting funding from banks, resulting in a slow down in new investments. Leading Investment Banks and other International Financial Institutions have embarked on a desperate survival attempt by selling their holdings in stocks, bonds, and commodities markets in order to release cash. The Federal Reserve (equivalent to our own RBI), sensing trouble, has lowered interest rates rapidly to make money cheaper and more easily available but the damage doesn’t seem to ease.
Massive job losses have been triggered by the global services sector, dominated by financial services. The fear of job loss has taken a toll on consumer spending as well. The combination of a rapid sell off by financial institutions and the prospect of economic slowdown have pulled down the stocks and commodities market world over to new lows. The Dow Jones Index (New York Stock Exchange) has retreated to year 2002 levels.
Scene 3, following the dots to India Massive FII (Foreign Institutional Investors) selling and conversion of their holdings from rupees to dollars for repatriation (English translation: selling lock, stock and barrel and running back to their country with the money) has resulted in the rupee falling to nearly Rs. 49 a dollar as against a high of Rs. 39 a dollar. The Sensex has dropped below 10,000 as I write because of an expected slowdown in earnings growth by Indian companies, disproportionate FII selling, Indian Investors panic or all of the above. Due to the fall in rupee, Indian companies that had borrowed overseas are suddenly faced with higher repayment in rupees for their dollar loans. Foreign banks have drastically reduced fresh lending to Indian companies, because of their perceived risk. Indian companies, particularly real estate ventures, now look to Indian Banks to fulfil their loan requirements. But the Banks in India have displayed a knee jerk reaction to the global crisis and significantly curtailed lending to corporates and individuals. Defaults in personal loans have reached 10-15 per cent levels compared to earlier levels of 2-5 per cent. As a result, many Banks and NBFC’s have stopped lending in this segment, including biggies such as Reliance Consumer Finance. With access to funds drying up for our companies, job loss, hit in export demand due to problems in U.S./ European economy, rise in cost of imports due to rupee depreciation (as importers will have to pay more in rupees for the same dollar value), loss in investors confidence in the stock markets, and drop in real-estate demand, the Indian economy seems headed for a slowdown Real estate companies seem to be among the worst hit in the current situation. Developers who got used to selling out even before the project started (the trend that prevailed during the past few years) are now facing the prospect of investing significant amount of their own money to complete the project. Unfortunately, banks are not too eager to fund the developers at this point. I guess the dots across the world economy are connected after all.
Epilogue: What is in store for the future?
There are only two exit routes from the current deadlock. One, the real estate developers will reduce the pricing. Two, the RBI will ease money supply. The latter has already started happening with the recent announcement that allows banks to use a larger portion of their money for lending purposes. Going forward, one can reasonably expect interest rates to come down. The implication for the retail homebuyer is that home prices may not appreciate for some time to come. Those who wait for the current situation to pan out may not only be able to negotiate a discount on property rate but also get a lower interest loan. So watch out before you hastily book a home this Deepavali. Happy Deepavali!
The End