Slump in Real Estate Investment

Published: January 27, 2009
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According to an ASSOCHAM Investment Meter study, the real estate sector investment plans slumped drastically from INR 1,15,326 crore in Q1 FY 208-09 to meek INR 22,482 crore in the Q3 of the fiscal. Owing to tighter credit and a steep decline in demand, CAPEX announcements of the sector plummeted 82% between the first and the Q3 of the fiscal. The real estate sector investments declined from INR 115,326 crore in Q1 FY 2009 to INR 36,400 crore in the Q2 owing to the aftermaths of monetary policy stance which kept interest rates higher to cool off then soaring inflation. The spike in interest rates led to a fall in housing and commercial demand for the sector. During the period the central bank raised its repo rate by 75 basis points to 8.5%.

During the Q3, a sequential decline of 38% in the CAPEX announcements of the sector, to INR 22, 482 crore from the previous quarter could well be attributed to the buoyant call rates in the money market. With the banking sector’s increased reluctance to lend, the freezing credit situation had its share in drying up the sector’s investment plan. Despite a huge shortage in the housing sector requirements, the demand has declined due to higher interest rates and economic slowdown. According to an Assocham study “Reality check on Real Estate”, India has a housing shortage of about 19.4 million units. It is also estimated that an additional 45 million units would be required during the 11th plan. The slowdown in the housing sector demand is adding to the pains of the sector as it constitutes almost 80% of the Indian real estate development.

Mr Sajjan Jindal President of ASSOCHAM in Real estate sector investments: Assessment & Outlook said that “Even as the economy face major shortage of housing and commercial space, the subdued demand due to high interest rates, credit tightening and global financial crisis have dampened the real estate investment plans. The capital expenditure announcements in the sector have witnessed a sequential decline of 68% and 38% in second and Q3 of the fiscal so far.” Mr Jindal said that “Even though the real estate sector investment plans have dried up considerably, the swift policy actions announced by the government and the RBI are likely to act positively in reviving the demand and address the funding problems of real estate players.”

The sector witnessing a plunge in demand by up to 50% leading to a drop in prices by 15% to 20% has dampened the investment announcement in the sector during the first three quarters of the fiscal. The number of projects announced by the domestic real estate companies also declined from 16 in Q1 to 10 in Q2 and 11 in Q3 FY 2008-09. Among the top 5 investment announcements for the sector, In May 2008, Omaxe had announced the biggest CAPEX plan worth INR 80,000 crore to develop 10 lakh affordable homes in Haryana & Rajasthan during next 5 years.

On the outlook for the sector the study stated, with the concentrated efforts of the government and the central bank to heal the Indian real estate sector which is crippled by credit freeze and falling demand, the stimulus packages for the sector along with the lowered interest rates are expected to revive the sector; provided the lending to the sector is made smooth and consistent. Meanwhile, the main challenge as to remain on demand side, with demand of commercial property in doldrums because of the sinking business confidence, the residential demand could improve due to lower interest rates. The swift policy actions like cheaper home loans up to INR 20 million may push up the demand.

Source: Indian Realty News


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2 Comments so far

  1. Kevin Mitchell October 6, 2010 11:54 am

    stimulus packages are very helpful for kickstarting the economy`;”

  2. Chipboard Sheets  October 20, 2010 11:13 pm

    we can say that the stimulus package that were issued several years ago have been taking its effect now“”

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