REALTY - PICTURE LOOKS PRETTY GRIM

By Ruma Dubey

In your childhood, you would have surely, at one time or the other, made a picture by joining dots. Though the plotted and numbered dots gave you a rough idea of what the picture is all about – an animal or a flower or a house; the whole effect comes to fore only when all the dots are joined.  

We are going to try and relive a small part of this childhood but by joining dots in the big, bad world, especially that of the Indian realty sector. There are some news items which appeared in random sequences. Join the dots and see the picture which emerges.

According to the latest report from Liases Foras, a real estate survey firm, 1.65 lakh housing units are lying vacant in the Mumbai Metropolitan region. The percentage of vacant flats has gone up by 73%. The same firm said that home sales in Q4FY15 dropped 8% (YoY) and it estimates that to find buyers for the unsold homes in Mumbai alone, it would take around 46 months – almost 4 years!

There was another news report a few days later, which said that bankers have now got reluctant to lend to realtors. Only quality builders get any or some debt but most are shown the door by bankers. In a recent interview, Chairman of Bank of Baroda, Rajan Dhawan was quoted saying, “There’s a lot of demand from builders and commercial real estate developers for loans.  There’s a limit to how many builders we can finance. The current economic scenario has made us very cautious.”

As per a report in Bloomberg, RBI data shows that expansion in lending for commercial real estate slowed to 8.9% in the 12 months through March 20, from 22.4% a year earlier. Three out of India’s five biggest banks reported an increase in bad loans in FY15. RBI has stated that bankers are bringing down the loan-to-value ratio for mortgages - percentage value of an apartment that the bank may lend to customers.

With bankers getting reluctant, builders are rushing in to refinance, dominating the realty sector. NBFCs and PE funds are lending for refinancing at frantic pace. In fact 65-70% of transactions by NBFCs and PE funds are all about refinancing realtors only. Pune based, Kumar Urban Development raised Rs.280 crore from Xander Advisors to partly refinance existing debt. And one of the largest transactions in recent times was seen in Omkar Realtors, wherein it raised Rs.1200 crore from Piramal Fund as project-specific debt for a luxury residential development in Mumbai.  Here, we will not even get into the debt situation of realty firms, that a reality which we all are living through.

And now a different sized “dot” but needed to connect and draw out the big picture. Some retailers have started downsizing their retail outlets. Many are even closing them down – Mahindra Retail, which owns the Mom & Me chain of kidswear has shut nearly 25% of its stores. And there are many more international brands which have announced closing down of their stores. They are not closing because there is no demand; in fact demand has grown manifold. But they are closing because they do not see the point of investing in big retail outlets when all they need to do is use the omnichannel – buy online and take delivery at a store nearest to you. So they will keep few stores or maybe tie-up with others, merely to act a ‘delivery point’.

In the midst of all this, companies, who are sitting on vacant, idle flats, with no one to buy are looking at the option of getting formally into the business of leave-and-license , which is basically rentals.

So all the dots are placed. Connect them all. What do you see? A very bad picture of the Indian realty sector. Things are sticky, irrespective of what “research reports” suggest.  Last week, lading global realty firm, JLL India said that it expects prices in Mumbai to go up by 6%. Really? How? Who is buying? And frankly, who is able to afford? Even if RBI brings down the rate, realty prices remain largely out-of-reach for most.  So if prices are expected to go up further, won’t it nullify the rate cut benefit which RBI gives?

And commercial realty is most certainly going to go through some major change. E-commerce has indeed changed the way in which business is done. Maybe demand for warehouses and smaller offices, that too in suburbs will go up. Why invest a huge unviable sum on buying an office in prime area when all you need today is a very strong web presence?

Maybe the childhood “joining the dots” was a much better game?