Fall in prices by about 30 per cent should be enough to trigger demand’

Fall in prices by about 30 per cent should be enough to trigger demand’
Indian Express, February 07, 2009

Praveen K Singh

Working towards establishing a benchmark for real estate professionals in land, construction and property related areas in India, Sachin Sandhir, MD and Country Head, Royal Institution of Chartered Surveyors (RICS) believes that there is a growing consciousness among all stakeholders to revive the sector. He expects that the market to turn around in next 12 months as the real estate prices are at their lowest ebb now and this is the perfect time to enter the market. Excerpts from a conversation with Praveen K Singh:

What’s your assessment on the current market scenario when the global meltdown erodes market capitalisation of Indian real estate companies?

The global financial crisis continues to unravel, the real estate sector around the world continues to take a hit with credit in short supply and consumer demand in housing witnessing record lows. India too has seen real estate values decline while the government undertakes a two-pronged approach of investing in infrastructure and facilitating consumer spending in real estate through interest rate cuts and easing of liquidity norms for banks.

The situation in India is however slightly different from that of the West. In India, the conduct of the monetary policy and regulation over banks and housing finance companies ensured that the housing bubble did not develop. Further, the actual equity component in housing is much higher than in the West. Thus, housing prices in India have fallen by about 20 per cent and may fall further, but unlikely to get into a free-fall situation

What we are all witnessing today is a period of complete transition for the real estate sector with some fundamental differences this time. Customers will purchase based on need rather than based on the euphoria and hype we saw in 2006-2007. Already, sizes of homes have reduced and customers will be more circumspect in their purchase decisions. At the developer end, the indiscriminate growth will also give way to more rational and safer growth plans as a result most new projects will be price corrected with realistic values.

Current environment notwithstanding, the domestic real estate sector still presents enormous opportunities. I am bullish on the sector from the long term perspective, and believe the current down cycle is unlikely to stretch beyond 12 months. The residential segment which is driven by rising population, urbanisation, nuclearisation, and low penetration of housing finance will be a key driver.

What sense you are getting from international investors about the current scenario in India?

The one common thing that seems to be going around in everyone's mind is that since the prices are low. One can plan investment now or wait for the market to bottom out. Quite obviously, the latter would seem logical given the sheer amount of changes happening. However no one knows... where's the bottom? The problem is that everyone is trying to catch the bottom, and that is what needs to change.
Lenders are slashing home loan rates, Prices of real estate have slipped in tandem with the stock indices, recession in the United States and Europe has forced many NRIs to rethink their property investment plans in India leaving thousands of plush homes in so-called NRI colonies without buyers. There has been a drop of 50-60 per cent bookings by the NRIs over the last three months owing to tight liquidity conditions in the international markets. A lot of developers expect the situation to continue till the liquidity situation improves in foreign markets.

Do you think developers need to bring in further correction to make the sector in force once again?

Developers may need to bring in further correction but this standalone measure may not be adequate. A lot of measures need to be taken and by all stakeholders which includes the government, developers and consultants and they need to get together to work towards viable solutions with the aim to trigger demand in the market. Over long term, actual sales of developed properties will be required - I would like to state that while the liquidity for the next 12 months may be generated by land bank sales and asset liquidation, over the long term, only actual sales of developed properties will help the developers avoid any such concerns. Sales will only take place if prices are cut to bring back affordability. The key going forward will be the completion of projects to lifting cash-flow rather than to spend on new land or new projects planned but yet to be initiated.

Is it the right time to scale up investment activities in India, as valuations are expected to be down to more realistic levels?

The downtrend is likely to continue for at least 12 months and the market could take a couple of years to turnaround.

It is the purpose of purchase that should determine an ideal time to buy a house. From a self-use perspective, the decision can be made as soon as a property that meets the budget, location and size requirements is found. Most developers are offering special deals and willing to negotiate and therefore this may well be a good period.

The decision can be stalled for next 3 to 6 months to get a better perspective on the effects of various reforms being announced by the Government and players directly related to it.

When do you think situation will improve?

There is a growing consciousness among all stakeholders to revive the sector. I expect the interest rates will continue to fall and that coupled with a fall in prices by about 30 per cent should be enough to trigger demand and I see the market turning around within the next 12 months as I do believe that real estate prices are at their lowest ebb now and this is the perfect time to enter the market.

What according to you are the critical factors in front of the real estate sector?

First of all, we need to institutionalise real estate in India with a mechanism to review professional standards. Secondly, there's a requirement for a uniform land laws and a single window clearance system. Thirdly, we need quality safeguards in projects. Fourthly, efficient land records and effective regulation of land valuations and international standards to be followed for valuations as prescribed by the RICS and effective regulation to ensure that we don't see the overheated situation we saw in land prices till June 2008. And finally, we need to address the resource crunch and lack of skilled manpower and reliable information.