How the real estate sector is adjusting to survive

Expect the unexpected from the realty sector. With both financiers and customers in short supply, thanks to the two successive downturns of the last few years, the industry has been forced to adjust - and fast. Even the mightiest have faced up to reality: in August last year, for instance, DLF, India's largest realtor, sold 17.5 acres of prime land it owned in the heart of Mumbai, the country's costliest real estate market, to trim its debt.property in indirapuram

There was a rush of foreign direct investment into Indian real estate when the sector was first opened, but that is now drying up. Private equity (PE) players, foreign and domestic, have greatly reduced their exposure - their investments in real estate fell by 36 per cent in 2012 over 2011, as compared to a 19 per cent reduction in such funding in India as a whole. And those still backing realty projects, such as Motilal Oswal PE or IIFL Private Wealth, have started offering loans instead of acquiring equity charging interest of more than 20 per cent and seeking collateral often twice the size of the loan. Finally, home buyers had better take care. In their bid to stay afloat, even reputed developers are now foisting one-sided agreements on customers in which the developers hold all the cards.

Photograph by Vivan Mehra & Shekhar Ghosh

The real estate boom had begun tapering off even before the first downturn struck in September 2008 with the collapse of global financial behemoth Lehman Brothers. In Mumbai, the average rent paid had already fallen from a high of around Rs 260 per sq. ft. per month in 2007 to Rs 200 in 2008. After the downturn it dropped even further to Rs 160 in 2009, thus declining 38.5 per cent in two years. In Delhi, the drop during the same period was 31.4 per cent. Housing prices too fell around 25 per cent in both cities in these two years. Since then commercial rents in Mumbai have fallen by a further 20 per cent, though in Delhi they have stayed constant. "In 2006/07, top developers were very bullish," says Navin Raheja, Chairman and Managing Director of Raheja Developers. "They miscalculated and invested most of their money in land and non-core assets. It was a time when every developer had started aspiring to be No.1."
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