MARKET REPORT- A PRESS REPORT – REAL ESTATE SCENARIO – Planning to buy for self use and occupation – Wait till Feb, March 2018 – A Suggestion

The implementation of the new real estate regulation along with the ongoing insolvency and bankruptcy proceedings by the National Company Law Tribunal (NCLT) against debt-ridden builders are likely to push for sale of distressed assets, triggering a fall in land prices by February 2018, according to a report by brokerage firm Ambit Capital Pvt. Ltd.

The report also indicates stress for non-banking finance companies (NBFC) and housing finance companies (HFCs) that have large exposure to developer loans.

The report, titled ‘Real Estate-Recovery is far away’, pointed out that limited availability of funding for real estate developers, the inception of Real Estate (Regulation and Development) Act and NCLT process are making developers hold off from launching new projects. Besides, with inventory piling up over the last three to four years, most developers are focused on offloading their current stock rather than launching new projects.

As per a 5 July report by property consultant Knight Frank, launches of residential projects in India’s top eight cities declined by 41% in the first six months of this year.

“We expect land prices to fall from February 2018 as Insolvency Practitioners (IPs) liquidate the assets of bankrupt companies. As land prices fall, it is natural that real estate developers launch cheaper properties through 2019 and 2020,” said the report.

The failed auctions for prime plots in Mumbai and Oberoi Realty’s discounted land purchase in Thane from GlaxoSmithKline Pharmaceuticals (GSK)) is proof of this dynamic, it said.

In September, GSK sold around 60 acres land at Thane in Maharashtra to Oberoi Realty for around Rs555 crore. The transaction translates into Rs9 crore per acre. A decade ago, the same plot of land would have fetched double the amount, the report said.

“Thanks to the oversupply of flats in Thane and due to punitive sanctions imposed by RERA, no other developer had the means or the gumption to bid for this plot,” it said.

NCLT has started insolvency proceedings against Delhi based developers like Amrapali Infrastructure and Jaypee Infratech for failing to repay loans to banks.

“Land prices have already started softening as landowners have become more realistic. Landowners and co-developers have understood the reality of the market and have started rationalizing their expectations. Instead, developers and landowners are opting for partnerships and more structured transaction in the form of area or revenue sharing,” said Vrushank Mehta, head of the corporate strategy and land acquisition at Wadhwa Group, a Mumbai-based realty firm.

The report by Ambit also said that because of fall in land and property prices homeowners may start defaulting on their loans. “Homeowners who are repaying mortgages which are far bigger than the prevalent prices of their property could start defaulting on their mortgages,” the report stated, adding that NBFCs and HFCs with large developer loan portfolios may take a hit.

According to the report, JM Financial Ltd, Piramal Enterprises Ltd, and Edelweiss Financial Services Ltd have the highest exposure to developer loans. “There is trouble ahead for NBFCs/HFCs since their ability to refinance or evergreen stressed developer loans will progressively get compromised as the downturn prolongs. Real estate developers with strong balance sheet and strong brands will benefit,” Ambit said.

Analysts are of the view that only those NBFCs and HFCs may face stress that has not followed adequate risk management policies and have large exposures in high-end properties.

Harsha Patkar, senior analyst—financial institutions at India Ratings said that a slowdown in real estate was prevalent even during 2014 and that property prices have corrected during the current fiscal after the demonetization impact started to wear off.

“Stress on NBFCs and HFCs will depend on the kind of portfolio they have and the risk mitigation policies they follow. Lenders have ring-fenced the project cash flows as well as have decent cash flow cover over assets depending on the project stage,” he said.

Ambit expects Godrej Properties and Sobha Developers to gain market share in the real estate business. It said that property market will see a consolidation and only those developers will survive who can manage their capital well and execute projects speedily.