Originally published in the financial Chronicle on the 17th of November, 2011
Despite increasing demand and higher property prices in some markets such as Mumbai and New Delhi, India’s real estate market is shrinking. Property developers are reporting a steady decline in their revenues and profits. For one, the dormant markets in south India are not helping the situation. The RBI fiscal measures that have led to increase in both interest rates and EMIs have compounded the situation further. High commodity prices for steel, cement and increasing labour cost have added to the worry.
According to Rajeev Talwar, executive director of India’s largest real estate company, DLF, the industry’s profits are shrinking due to high labour costs and commodity prices, high interest rates on loans, among others. His company’s negative top line growth over the past few years is substantial as sales declined due to negative consumer sentiment on the back of global economic uncertainties and also high interest rates of housing loans.
According to a recent Knight Frank report, revenues of real estate companies have dropped by 19 per cent and profits have declined by 70 per cent, over the past four financial years, since 2007-08.
The consultancy firm has conducted a financial analysis of 19 leading realty players across the country. These companies have shown a dip in profit mainly on account of high debt, which has increased by 1.5 times while interest outgo has increased by 2.3 times during the four-year period.
Interest costs have risen, and so have debt levels. Higher construction cost is also eating into their profits. “Earlier, the construction cost used to be around 25 per cent of the total revenue, which has escalated to more than 45 per cent,” says Talwar. Higher cost automatically translates to lower margins.
The Knight Frank report said residential prices in most of the cities have either remained steady or increased marginally in the past few quarters. Financial condition or holding capacity of real estate players is one factor that influences the price movement in the market to a great extent. The report pegs the main cause of concern as high interest rates on debts, which has eroded profitability of developers.
But according to Sharma, high interest rates and debts are not the only reason why profits of real estate players are declining. “Barring a few markets and locations, most others have a huge inventory. But sales volumes have really come down as consumers stay away from purchasing property due to uncertain economic conditions and high interest rates on housing loans,” he says.
Knight Frank warns that there is a possibility that competition might get aggressive among the builders. Some players, who are not able to raise fresh funds, may resort to reducing prices in their projects in order to meet the short term cash flow requirements. Although, this may not necessarily mean that real estate market will witness a significant fall in prices. But there certainly will be isolated pockets wherein developers may offer huge discounts to existing prices in their projects for the purpose of improving the cash flow situation.
In the past six months, the sector has already witnessed a price correction of 15-20 per cent in residential prices, says Kapoor. This will obviously reduce profits further, say analysts. Surojit Pal, a Mumbai-based stock analyst who follows the sector religiously, doesn’t believe in a quick recovery for the sector till March 2012. “There aren’t any positive signs,” he adds.
As things go, it certainly looks like the realtors are going to have a tough time ahead before things improve.