Realty Sector Slows Down In First Half Of 2008

Slowdown in the Indian realty sector has spilled over to small towns, where housing demand fell by 25 per cent during February-July 2008 period because of higher cost of borrowing, according to a report by the Associated Chambers of Commerce and Industry of India (Assocham).

The research by the Assocham said realty transaction has gone down by nearly 25 per cent in most of tier II and tier III cities between February and July 2008. These small boom towns registered a growth of 22-23 percent in property purchases when compared with the same period last year. Assocham secretary general D.S. Rawat said,

“Approximately 15 million people in about 30-40 tier II and tier III cities were unable to make purchases as higher inflation and interest rate have dampened their enthusiasm and eroded their budget.

“Also higher borrowing cost has compelled most of real estate developers to defer their projects.”

Besides rising cost, non-availability of inputs such as bricks, cement and steel, and power shortage also cause inordinate delays in project completion. The chamber has urged the government to introduce real estate investment trusts (REITs) to bring the much needed class of institutional investors to strongly support the domestic real estate market.

According to the Assocham, REITs can also help develop commercial mortgage backed securities (CMBS) market and create a source of cheaper loans for commercial real estate. Data for this study included feedback from affiliated real estate majors like Parsvnath, Omaxe, DLF, Unitech, and BPTP, which are developing projects in small towns throughout New Dehli.

Describing the current bearish trend of the real estate sector a ‘transitory slowdown’, consultancy firm Ernst & Young said that the outlook of the sector is still ‘positive’ in the medium-to-long term in a report released at a Ficci-organised summit.

Ernst & Young believes that the market is witnessing a transitory slowdown. However, considering the opportunities present as well as the strong economic fundamental drivers, the outlook for the mid-to-long term is positive,.

The momentum of the market in the mid-to-long term would be sustained by the emergence of new markets, innovative products, ongoing corporatisation of the sector, merging with global markets, greater transparency and new funding mechanisms. The real estate sector is set to grow by 100 times in the next ten years as compared with the past 10 years, though profit margin would be less, said Hiranandani Group of Companies Managing Director Niranjan Hiranandani.

“The age of super-profit is over for the real estate sector and developers will have to remain content with low profit margins. If you do not believe in this and keep on waiting, somebody else will take business away from you,” Hiranandani said.

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