Will US financial crisis impact Indian real estate?

Published: September 27, 2008

The recent crisis in the banking system of US is bound to impact markets and economies all over the world. But the extent and nuances would be different for every sector and every country.

How would this impact the Indian real estate market? The stock prices of Indian realty giants like DLF and Unitech have already come down by more than 60%. In spite of this, none of the stock market experts are currently advising buying these beaten down stocks.

Let us try to find out the most important aspects of this whole issue -

  1. Dependence on foreign funding - Real estate development is a capital intensive business. Several billion dollars of investments were made by the now infamous Lehman Brothers in several Indian companies. The liquidity crunch in US is certainly going to impact project execution capabilities of these companies. But as there are RBI restrictions on real estate sector for raising money through FCEB route, the dependence is still minimal. The debt instruments of real estate companies are sure to face resentment because of negative market sentiments.
  2. Demand-Supply - There has been a flood of new projects in the market in last 2-3 years. The market has therefore seen some amount of price correction already. The lack of demand coupled with lack of new funding can prove to be a lethal combination. A middle class consumer who can afford to pay EMI of upto 20,000/-, which roughly translates into properties priced at 25 to 30 lakhs is clearly the largest market in India. Such a consumer has very few options available in metros, in spite of the correction so far, because of unprecedented rise in property prices in last few years.
  3. Properties bought by investors - Because of recent trend of property investments by NRIs and wealthy Indians, which was largely unseen in Indian market till a few years ago, the volatility of the market is high. An investor is highly likely to change his decision based on macro sentiment factors than a consumer who needs a home to live. This creates big cycles in the market with huge appreciation and correction cycles.
  4. Consolidation - This testing period will separate men from boys, and the players with high debt can get acquired by larger players having clean balance sheets.
  5. Positive for consumers? - All of this just might be a good news for consumers waiting to buy their sweet home, as everyone expects an average price correction of 15-20% across markets. But there will still be issues on the home loan front, as RBI is unlikely to relent on the liquidity tightening they have introduced in last few months by increasing interest rates. This might also be a good time to negotiate hard with the developers on price, as they will be more willing to relent a bit on their margins.
  6. Funding available for right projects - In spite of gloomy sentiments, sanity should prevail in the longer term, and the right kind of projects should get funding. Companies are floating new funds with clean slate for their coming projects.

This festive season will be a key determinent of the market direction for 2009. A lot of developers have their fingers crossed for Diwali, and if the demand doesn’t pick up as expected, price corrections are definitely on the cards.

Posted under categories: Indian Real Estate, Indian economy
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About Zamanzar

Zamanzar Advisory Pvt. Ltd. is a real estate advisory firm located in New Delhi, India. We offer online property search tools and offline services to help complete the transaction. Our services cater to real estate buyers, renters, and sellers. Visit Zamanzar to find out more!

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