Impact of Recession on Real Estate in India

Real Estate

• Contribution towards the Economy

1. Contribution to GDP of about 7%
2. Second largest employment generator in the country
3. Real estate growth gives boost to steel and cement sectors
4. Real estate is a growth engine for development of over 269 allied industries

• Major growth Driver

Residential Segment:

1. Increase in Income level combined with trends of higher urbanisation and nuclear families.
2. Backed by easier availability of housing loan

Commercial Segment:

1. India emerging as global back office for services
2. like IT & IT based business, multinational companies , SEZ’s.

Retail & Entertainment Segment:

1. Given growing disposable income & emergence of organised retail, entertainment destinations.

• MORE CATASTROPHIC THAN THE AMERICAN BANKING MELTDOWN

1. American Banking Collapse is more miniscule
2. 1000 times bigger than the mortgage bubble
3. RBI examined books of 10 realtors to verify solvency and assess risk of possible defaults on loans and deposits
4. Companies Identified – DLF,Indiabulls,Unitech,HDIL,Mahindra Lifespace, Ansal Properties, Phoenix Mills,Akruti Citi,Peninsular Land

• Effects on Melt Down on Economy

1. Fall in stock markets
2. Increase in interest rates
3. Slowdown in IT industry
4. Unemployment
5. Inflation
6. Retail & tourism has also suffered

As a result real estate space witnessed pressure from demand side and become very difficult to sell projects.

• Impact on Real Estate Sector

1. Increase in prices of inputs due to inflation effecting all areas of economy like cement, steel, etc.
2. Increase in home loan interest rates resulting into additional EMI burden on the borrowers.
3. Reduction in salaries and layoffs resulting into reduced demand for Real estate
4. Demand-supply imbalance
5. Forced correction in prices
6. Reduction in Commercial Rentals
7. Projects’ stagnancy
8. Slow down in infrastructure projects
9. Difficulties to raise fund (Failure of Emaar IPO)
10. Loss of Jobs
11. Shortage of skill workers

• Price Reduction

1. Overall price cuts of 10-12%
2. In Banglore, DLF group reduced prices by 25%
3. In Thane, Lodha group cut prices by 30%
4. In Mumbai(Lower Parel) Orbit group cut prices by 20%

• Effect on Finance

1. Overall 76 % dip in profits & 57 % fall in sales in First Quarter of FY 09-10 over First Quarter of FY 08-09
2. DLF – 79 % decline in profits & 57 % slide in sales
3. Unitech – 63 % decline in profits & 50 % slide in sales
4. Parsvanath, India bulls, HDIL, Akruti, Shobha, Purvankara have reported decline in profits upto 95 %.

• Measures

1. Reduction of interest rates.
2. RBI policy for restructuring loans.
3. Reduction in excise duty on construction material like cement.
4. Encourage property development in Tier II and Tier III cities
5. Under the Interest Subvention Scheme Loan upto Rs. 10 Lakh, & property value is not above Rs. 20 Lakh will get 1% lower interest.
6. Corporate like Tata’s introduced Nano Housing for Rs. 3.9 Lakhs- Rs. 6.7 Lakh called as Shubh Griha project.
7. SBI introduced 8 % housing loan scheme for one year followed by the other PSU & Private Sector Bank as well.

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