Real estate developers need more options for funding

Written by Shubhra Tandon | Updated: Dec 31 2011, 18:52pm hrs
The past will come back to haunt real estate developers in 2012. Volatile stock markets continue to deny them access to cheap capital while high interest rates and project costs deter home buyers from purchases. Lenders caution to fund them will fill developers cup of woes.

Developers new strategy to push more residential flats than commercial properties may improve their cash flows in the short term, but will continue to discount sales to attract home buyers.

Residential properties can be pre-sold and customer advances can almost finance the actual construction, Pirojsha Godrej, executive director, Godrej Properties told FE in an earlier interaction.

Lease rentals for commercial properties and rental yields for apartments are expected to remain flat as companies tighten purse strings in a slowdown.

Rentals will continue to remain flat in most Indian cities, says Jai Mavani, head of infrastructure and real estate, PricewaterhouseCoopers India. Since vacancy levels continue to remain high, no major movement in rentals is expected in 2012.

But multinational companies looking to build businesses in recession at low costs could push demand for office space in the second half of the fiscal.

This economic slide is leading a lot of US companies to have offices now to reduce costs, says Anuj Puri, chairman and country head, Jones Lang LaSalle India or JLL, a global real estate consultant.

Commercial real estate turned out to be a damp squib in 2011. Developers sold 36 million square feet ( m sq ft) in 2011, a marginal rise from 35 m sq ft in 2010.

It looks like there will be a decline of 10-15% in absorptions in commercial real estate in 2012, says Anshul Jain, chief executive officer, DTZ India, the Indian arm of the global property advisor.

The demand will be for roughly 30 m sq ft in 2012 as companies cut down plans for fresh office space.

Developers were caught in a bind in 2011 with little to cheer. Residential flat sales continued to fall as the Reserve Bank of India hiked interest rates and the global economic slowdown and delays in completion of projects made buyers postpone purchases.

The Reserve Bank hiked banks lending rates 13 times since March 2010, which impacted home loan borrowers equated monthly installments or EMI tenures and new customers deferred purchases.

Sales dropped in the prime cities of India, says Ashutosh Limaye, research and real estate intelligence service head at JLL. Cautious buyer sentiment prevailed due to the adverse impact of rising interest rates and surging inflation.

Delay in project approvals, rise in construction costs and lack of buyers hit fresh launches. Capital values increased to a limited extent, says Limaye of JLL.

Although brochure prices either remained stable or increased marginally in select projects, developers offered discounts on their prices or other freebies during the festive seasons to improve sales, he adds.

Sales of residential flats in Mumbai, the largest market, declined by 23% to 53,166 units till November 2011 from 69,431 units during the same period last year, data published by director general of registrations, Mumbai showed.

The residential sales also suffered because of the falling stock markets, says Jain of DTZ.

People have invested in stock markets in 2010 and 2011. However, now that the markets are not performing well that money is not rolling in, he adds.

The liquidity crunch will slow down investor interest in 2012. Salaries are unlikely to rise in the coming year as economic growth slows. This could also hamper property purchases. Delivery of apartments for which bookings have been made six to 12 months back will be key in 2012, says Rajiv Sahni, partner, real estate and hospitality services, Ernst & Young, India.

Developers hope that lenders will fund them in 2012. There needs to be more funding options for the real estate sector, says Manoj John, vice president, corporate planning and strategy at RNA Corporation, a Mumbai-based real estate developer.

ECB or external commercial borrowing to build non-townships or Real Estate Investment Trust or REITs which can invest in rental housing projects are needed, adds John.