As realty heads for a tailspin, 4Ps B&M’s pawan chabra & savreen gadhoke probe the impact on developers and how they are gearing up for it

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A few years earlier, India’s real estate behemoths were in the news for making massive investments into the setor. In 2007, most of the players came out with an IPO as there was an enormous need of funds at a time when the boom in the realty sector was touching new skies everyday. But more recently, they are making the news because of their ‘non-realty’ movements. Whether it is DLF foraying into the business of financial services and retailing or Parsvnath in talks with global retail giants or, for that matter, Unitech buying spectrum in Karnataka, they actually seem to be making deliberate attempts to diversify. Considering the way reality is meeting realty nowadays, the coincidence seems quite stark indeed.

As Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj recently opined at a CII conference, “Next 18-24 months are going to be crucial for the real estate sector”. The reasons are simple and straightforward - inflation has surpassed all expectations and reached a two digit figure of a shocking 11.42% (reaching a 13 year high); accompanying it are the dropping stock markets as the Sensex recently touched a 15-month low at 12,961 points (realty has been among the worst hit). With interest rates mounting new heights, problems of the realty sector don’t seem to be ending in the short-term at least.

Conditions of demand saturation leading to devastating consequences for companies are not new to the realty sector globally. A report by Macquarie Research said that in December 2007, an Australian real estate giant, Centro Properties Group was unable to refinance its short term debt obligations on a long-term basis. The worst part reported was that the group had an additional debt of $1.2 billion on the balance sheet apart from the existing refinancing requirements. Well, you can easily skip it by saying the Indian and Australian economies are very different in terms of accounting practices and ratio calculations but what has urged us to go back in the history is the fact that there are some strking similarities too among the two economies and the sector. Interestingly, Australian equity markets were going weak at the time of the Centro collapse and also interest rates were rising due to government policy. Could we have some Indian ‘Centros’ coming up too?

Industry experts are quite confident in their prediction of a price correction in the sector in the next 2-3 months and 4Ps B&M probed further into what are the various reasons that have led this sector to reach such a situation and what it means for both big and small players of the arena.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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