US meltdown will further hit real estate market

The US financial crisis, which has seen some big Wall Street giants collapsing, is bound to have a cascading effect on the Indian real estate market that has already slowed down considerably over the past one year.

Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion).

According to housing experts , about $4 billion has been pumped into the Indian real estate market by FIIs and venture capital funds. "Another $12 to $14 billion was to flow in within the next 18 months. This will not come anymore,'' said Pranay Vakil, chairman of Knight Frank India, a global property consultancy firm.

The collapse of Lehman Brothers, the most recent of the big names crashing, will have a tremendous effect on the already floundering property market in India. "Money is going to dry up. Options before developers are very few as they are not able to raise money. As a result, their existing projects will suffer,'' said Vakil.

Lehman Brothers Real Estate Partners had given Rs 740 crore to Unitech Ltd, for its mixed use development project in Santa Cruz. Lehman had also signed a MoU with Peninsula Land Ltd-a Ashok Piramal real estate company-to fund the latter's projects to the tune of Rs 576 crore.

According to him, longterm sentiments are bad and it will only worsen. Sources said several builders have started taking loans from private money lenders at high interest rates of 30% to 40%.

Anuj Puri, chairman and country head of Jones Lang Lasalle Meghraj said this is not the end of the global financial crisis. "A lot more will come out, which will have a negative impact on the property market,'' he said. Puri observed that in Tier 2 cities prices have already dropped by 15% to 20%. However, there has still been no price adjustment in Delhi and Mumbai.

"Developers are expecting business to pick up during Diwali . But it is unlikely to happen anytime soon. As it is, developers are facing a liquidity crunch. The big ones are using their own capital they made when the market was booming for the past four years,'' added Puri. However, he said that none of the builders had gone belly up.

Vakil of Knight Frank said builders are still holding on to their prices, and unless they lower the prices, demand for flats will not open up. "At lower prices, volumes will improve ,'' he added.

TOI has learnt that in Borivli east, a developer who was quoting Rs 7,300 a sq ft in his residential project, recently slashed the price down to Rs 6,300 a sq ft. "He sold about 35 flats during the Ganpati festival itself,'' said a broker.

A property expert, not wishing to be identified, said the recent collapse of banks like Lehman Brothers and other big financial institutions, will render thousands of employees jobless in India. "Many of these employees would have taken home loans. Unless they find new jobs fast enough, the banks will not offer them an extended buffer period to start repaying their EMIs,'' he observed.

Akshaya Kumar, CEO of Park Lane Property Advisors said the global crisis will see money dry up even further. "The developers will be strangulated further,'' he predicted.

(via Times of India)