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  1. 1. Recessions positive effects on Indian realtysectorNamrata Kohli, ET Bureau Aug 7, 2009, 07.37am ISTArti Khanna, a senior executive with a leading MNC, equates recession with the medicine thatpeople initially complain is bitter , but in the end, come out far healthier and are better off for it.More cautious spending and greater saving by consumers, more prudence by lenders, shift infocus from premium to lower- and mid-end segment of housing by developers, is exactly whatour economy needed for its long-term health and recession is having the desired impact.Arti reminisces how they saw bad times during the dot-com bubble in 2001, and yet how theyounger generation continues to be over indulgent, leading a hedonistic way of life and notpaying heed to saving money. Arti says, "In many ways it brings the much needed discipline topeoples way of life, while for corporates across various sectors, there are many positive rippleeffects - for instance it allows people to analyse and identify their core competencies.It also helps in rebuilding focus, pruning tangential activities to achieve cost controls, which helpin creating more effective systems and processes. And, it forces people to come up withinnovative ways of handling problems, something mandatory for survival."Among the three most affected - end users, investors, developers - surely , the end user hasbenefited the most during this period.The end user has benefited as, finally , the supply chain started addressing the real demand inmarket - mid-end and affordable housing. Earlier, developers in their greed to garner higherprofit margins, focused primarily on premium housing.But now, suddenly , the supply is shifting where the demand is. Even well known developers likeUnitech, DLF, Raheja, Jaypee and Omaxe, primarily engaged in raising high-end homes, havebegun talking of affordable options.Recession has also been a time to introspect for everybody. "It has been a good learningexperience, though not a pleasant one," says Samir Chopra, CMD of RE/MAX India, (RE/MAXis a global network of real estate agents operating in 70 countries). "There have been things tolearn, relearn and unlearn for all the three - end users, investors and developers.Consumers have become more vigilant in transactions , and they are more thorough about boththe market situation and their own needs. They are beginning to learn how to investigate andresearch before spending their lifelong savings. Investors have also become more conscious.They are more careful about spending huge sums of money in development and are looking forother avenues for investment in the real estate sector. They have become more delivery oriented,
  2. 2. innovative and price conscious in this volatile market . They have learnt from the difficult times,reduced prices, and learnt to make more beneficial offers to consumers ."While at a superficial level investors may seem to be winners with recession giving them anopportunity to pick investments at more realistic prices, recession has also seen them investingless. According to investor Shalabh Bhasin, director of Kshitij Portfolio Services Pvt Ltd, "Therecession period has seen me investing less in property market because the previous prices whereunduly inflated and even now it cant be said with surety that the prices have bottomed out. Also,most of the investors were already stuck with loads of investment at higher prices, so there wasnot enough liquidity for further purchasesIMPThe Development of real estate in India is attributed to the off-shoring and outsourcingbusinesses, such as high-end technology consultation, call centres and programming houses. Thedemand from the information technology sector certainly has changed the urban landscape inIndia. Several multinational companies (MNCs) continue to move their organizational operationsto India to take advantage of lower manpower and other costs. Providing human resources andhome at their work place assumes great significance and therefore, the requirement to createspace for people to live and work that in turn causes the development of other relatedinfrastructure. It has been a predominant trend to set up the world´s best business centres, oftencampus-style establishments, bearing a distinguishing corporate stamp. Some of these locationsare so distinctive that they are termed as the ´temples of new or modern India´. It is just anindication of the extent to which the development of real estate has been taking place.The real estate market in India remains unorganized, fairly fragmented, mostly characterized bysmall players with a local presence. Traditionally, real estate developers were viewed with anelement of skepticism. Developers were often identified dealing with large amounts ofunaccounted money, lacking transparency and would use unscrupulous mean to acquire a varietyof regulatory approvals. The tremendous growth of the real estate sector is attributed to variousfundamental factors such as growing economy, growing business needs, etc. This boom howeveris restricted to areas such as commercial office space, retail and housing sectors. The impendingconcerns of this sector namely- skill shortage, non availability of statistics, lack of low cost-affordable housing, lack of sustainability, high RE prices and last, to meet a future that mighthave downturn due to oversupply.The industry is presently facing a major resource crunch – an obvious lack of qualified skilledpeople from construction firms, PMC firms, etc. Coupled with this manpower shortage is theshortage of availability of relevant statistics which has created an ambiguity as to how muchconstruction activity is actually taking place and one can´t gauge the demand and supply trendsaccurately. The opportunities and issues of affordable, low cost housing in India are mainlyrelated with tremendous shortfall of middle class housing as majority of the developers areinvolved in developing high class housing, so there is a dearth of low cost affordable units. The
  3. 3. negative version of Indian real estate industry is “they have complete disrespect forsustainability” and that the concept of green buildings, proper waste disposal methods and thelongevity of the product are often dismissed.Presently, the impact of recession in US economy has impacted Indian Real Estate Market aswell as it is also witnessing the recession. Till now the real estate industry was a very boomingindustry in India which were in pace with IT industry. Accordingly, the demand for IT space andCommercial spaces has been grown. Also the high net worth of individual investors has created avery fast pace of demand in Indian real estate sector which have gain a very high impact imageof investing in India.As the money was coming in terms on investment in India from NRI as well as Private Equityfunds, the well known developers and real estate players have grown their portfolio as well manysmall sized players have also created in Indian market. It has provided a very high supply of realestate segments either in residential or in commercial or in office space. SEZ has also creates avery good opportunities for investors as well as corporate to invest and get benefited from Indianreal estate market. So the booming market has created a niche as modern living in India andcreated a very mass employment in Indian segment.The recent changes which happened in American market such as Bankruptcy of Lehman Brotheran oldest financial firm of American market and sell process of PE Firm Merryl lynch by thelargest US bank Bank of America has created a very fast drops/recession in financial industryand created a crisis in all over US economy. Both of these firms were invested their more part offunds in to real estate sector without having the proper analyzing or effect. They also have giventhe funds for mortgage industry of US which is currently facing the hurdle of Sub prime lendingand have impacted many players to bankrupt.All of these changes in US economy have impacted in Indian economy as well as Real estatesegment as most of the Indian players have their liquidity funded by both of these firms. Also theIT segment which was mainly funded by the PE firms or have their export to US markets havenoticed very sharp drop of net worth of their firms. This recession also impacted the Sensexwhich has bullish very sharply and brings down the net worth of the leader of Indian real estateplayer very low. The impact can be shown in share price of DLF, Unitech, GMR group, Reliancegroup, Wipro, Satyam etc groups.All of these sudden changes in Indian and US market created a point of thinking to investors &individuals that where it will go and what will be best option in real estate investment. Themarket rates in India are also dropped by 10 to 30% in most of prominent as well as upcomingcities and the trend appears to be still continuing till it will not recover the effects of thisfinancial crisis.
  4. 4. 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 DriverResidential Segment: 1. Increase in Income level combined with trends of higher urbanisation and nuclear families. 2. Backed by easier availability of housing loanCommercial 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
  5. 5. 2. Increase in interest rates 3. Slowdown in IT industry 4. Unemployment 5. Inflation 6. Retail & tourism has also sufferedAs a result real estate space witnessed pressure from demand side and become very difficult tosell 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.
  6. 6. 4. Encourage property development in Tier II and Tier III cities5. 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.8.Recession Results In Property Boom In India9. February 21, 201110. tags: Indian Property, Property Boom, Real Estate Boom11. The period of recession has proved to be disastrous for economies all over the world but it was also a blessing in disguise for some. This period of slow-down helped investors in certain sectors chance to materialize their dreams by offering many realistic opportunities of investment.12. Real Estate Fared Better Than Others13. Many sectors of Indian economy were adversely affected during the recession phase such as aviation industry, travel and tourism, banks etc. On the other hand, the recession impact felt by the Real Estate Sector proved profitable in many aspects, to the end users as well as the builders. In fact, the recession has ushered in a positive change in the property market in the current times.14. Recession, A Blessing In Disguise15. The global economic recession witnessed a slackened period in the property market in India. The current high-income group comprising of the working population of MNC’s also underwent an anxious phase of frequent layoffs by the employer firms to stabilize the occurred losses. Salaries were slashed down and the job prospects for varied professional qualifications witnessed no or few vacancies. This disheartened economic scenario ultimately resulted in the decline of the buying power of the common man. As a
  7. 7. result, the prevailing recession also made it hard for the Real Estate Developers to find buyers for their overpriced properties.16. Therefore in order to tackle the situation, developers adopted a strategic approach of low margins high-volume sale of properties. The strategy has given rise to the concept of affordable housing where realty developers have begun launching low-cost residential projects in Indian cities. This has provided a much needed relief to the developers from the ongoing slump and endowed buyers with an opportunity to own a house at reasonable rates. In fact, the recession has stabilized the never-ending property rate hikes as well as restricted the monopoly of builders to tag properties with inflated rates. This has thus led to the surge of investors to the property market and resulted in a real estate boom.17. Progress Consistent Post-Recession18. The phase of recession saw the sellers having a real hard time while the buyers had the privilege of gaining the low cost residential and commercial properties. But the current period of post recession appears to be a boon for sellers too with prices soaring everywhere. The investors have started selling their properties on high profit margins, which were purchased at quite economical rates during the recession.19. Bank Loans, Icing On The Cake20. In addition to this, during the market slump, the banks have started offering loans on very low interest rates. Many property buyers may still enjoy the benefits of such loans in fixed plans. Besides, the property market during the phase offered many choices of affordable long-term investments such as investment in rental properties.21. Therefore, we can conclude that recession has more or less assisted in establishing a balance by restricting the burgeoning bargains of economies of the world to provide them with a fresh beginning. 22.A DV E R TI S E M E NT