WILL THE PROPERTY BUBBLE BURST?

By Ruma Dubey All that which goes up has to come down; that&#39;s the law of gravity. But the Indian realty sector has been defying this law for a long time now but it looks like, not gravity but the burden of debt is slowly but surely pulling down not just the prices but many builders/developers too. A few days ago, HDIL really spooked the market and the sector when in early Jan, the promoter of the company had to urgently sell some stake to raise Rs.57 crore for land payment. For a company which was the largest realty company in terms of market cap, this panic sale sparked fears and till date, it has not been able to dissipate these worries. The stock had hit a new 52-week low on 22nd March on market rumours that the Maharashtra Gov might cancel its contract for Mumbai International Airport Limited project, where it is building homes under slum rehabilitation. Though the company has refuted these rumours, market refuses to relent. There is now talk in hush-hush voices that the company is close to a default. The market is seeing the stake sale as early signs of default as its debt repayments could get tighter. HDIL is sitting on a total debt of Rs.3800 crore and its repayment depends completely on quick sales happening at its two Mumbai projects at Goregaon and Andheri. And sales does not seem to happening at all, not just at HDIL but at most other realty projects. There is more reason to worry. In Jan, a Bangalore-based real estate major Century Real Estate defaulted on its debentures in Jan. There was also report of builders on Noidsa defaulting to the tune of Rs.3000 crore and this was on plots which were allocated to them during the Mayawati regime. At that time, they were allowed to pay just 10% as down payment of the total amount and today, they are unable to pay not just their monthly EMIs but have also not paid the 14% interest or rather penalty on default. Property consulting firm Liases Foras has put out a report wherein it has stated that home prices in the Mumbai Metropolitan region have dropped by 1% in the last quarter. It has stated that despite the lacklustre market, 11,000 new residential projects were launched in 2012; so one hand, there is no demand and supply has gone up further which is why it expects prices to soften. But can we expect prices to crash? Not really. Yes, we are presently living in a realty bubble where a shanty or filthy shack also costs anywhere above Rs.20 lakhs. Buying a home is out of reach of majority of the Indians today. Affordable houses are not affordable to most. So the moment prices come down, there is so much pent up demand that people will rush in to buy. RBI cut rates last week by 25 bps but this is not transmitted to the people and thus EMIs are not expected to come down in a hurry. Yet, it would be right to wish for the realty bubble to burst. Today, a person earning Rs.25,000 to 30,000 per month, cannot help but buy a 1 BHK for anywhere starting Rs.50 lakhs and he ends up paying a EMI of around Rs.25,000 to 30,000 per month. Thus what does he earn and what can he save? But if developers default, yes, it does not speak well of the state of the economy bit isn&#39;t that the reality? By building castles in the air, we are trying to show a landscape which does not exist. Pressure has increased on builders after the RBI turned down the demand of banks to restructure stressed realty loans without providing for potential losses. This leaves little alternative with builders as banks will now increase pressure to recover loans and this in turn means, that builders will have to bring down prices to push sales. Banks are also in a bind. They have to classify restructured loan of a real estate company as bad loan the moment it is reworked. The total real estate bad loans, net of provisions of all commercial banks, was up 55% at Rs.64,900 crore at end of 31st March 2012. The share of PSU banks in this was at Rs.59,100 crore, up 64% on YoY. In terms of exposure to realty sector, SBI is the top bank, followed by ICICI Bank, Axis Bank, PNB, IDBI Bank, Bank of Baroda, Stanchart, HDFC Bank, Bank of India and Union Bank of India. There is no doubt that the pressure is mounting and we can only wait and watch, hoping for prices to crash so that the dream home becomes a reality. The bubble will burst only if defaults happen, or else we could see minor corrections and once EMIs rates start going down, well, rates will again go up.