Image Credit: Harsh Mangal

By the grace of US economy meltdown Domestic Real Estate sector bubble seems to have busted.  Real investors are regaining their sense. After stock market, real estate is the most affected sector.  Indian real estate market which has grown at about 30% annually is slowing down.

Investors are not the only affected party.  Banks and financial institutions that have financed Real estate ventures, Real estate companies that have mushroomed in hordes in the last few years, brokers who market these ventures, politicians who bought plots near so called Special Economic Zones or what is called ‘corridors of growth’ and suppliers of raw materials who has put up huge investments in production with the notion that grown is real and will never go down, all seem to have been hit by the declining values mounting losses.

99% of the averages Indians still believe that putting money in real estate is the safest form investment and believe that real prices will always go up or remain where they are but will never come down.  They should be made aware of what has happened to real estate in US.  Owning a house or a piece of plot is considered as a status symbol in India.

In the past 4 years dream of own house for middle class India became a reality as they found a decent employment with Corporate India and easily available Housing finance.  With news of  amazing economic growth, NRIS pouring money in real estates (special ventures came up to cater to the needs of only NRI investors), Government coming out with SEZ, IT parks, Ring roads,  promotions held by Real estate companies ..  All contributed to the real boom.  Unknown companies became National companies in no time.

Some borrowed money at abnormal interest rates; some went for IPOs with mind boggling valuations and started huge projects without considering the actual demand and ways of financing and marketing their projects.  Couples of sectors mainly cement and steel benefited most from real boom.

Land and flat valuations sky rocketed.  In most of the metros 1 Crore worth flat has become a normal thing.  Developers started huge gated communities, luxury villas and developed plots.  In the name of projects they artificially increased the prices of the plots.  An acre of land which would have costed 5 lakh suddenly became 5 crore plot.

In Hyderabad alone prices increased 10 fold in 3 years.  Poor peasants became millionaires overnight.  Lush green fields paved way for black top roads and ventures mushroomed around urban areas.  Every other day we had a call from a real estate company offering plots or flats.

When everything was going well, Subprime crisis in US came into light and the real show started getting disturbed. With the recession that has almost set-in in most of the countries, liquidity crunch and falling stock markets, real estate also started coming down. 

Due to increase in Interest rates by Banks, demand started falling.  Real estate companies which were operating on Bank loans, initial booking amounts from customers and private borrowings could not bear the cost of funds as the sales plummeted. Raising cement and steel prices added to the cost and they had to raise the prices of flats and plots.

Infact sales went down not because there wasn’t enough demand.  It was lack of affordability that brought the demand down.  Even an employee of a Multi national company earning 50 thousand per month wasn’t able to buy a two bedroom flat as the average price of a 2 BHK was between 30 to 50 lakhs and his entire salary would go towards payment and a meager residue is not enough to maintain his life style.

Those who initially made money started bigger ventures and those who saw big bucks started fresh ventures.  I personally know a cash rich aquaculture farmer who ventured into real estate…  Totally unknown territory for him and now lamenting about the unsold flats.  Take a look at the valuations of the Real estate companies that came out with high valuations and their stock price in the past few days..

Companies that have taken the reality ‘Bite’

Now most of the companies are sitting on huge built up space and find no takers.  If the situation continues for few more months I am sure we will see more ‘Auction notices’ from banks and financial institutions in place of advertisements. 

If you want to but any real stuff in metros like Hyderabad, Mumbai, Bengaluru, Pune, Delhi or Chennai, be patient and wait for another 5 to 6 months.

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