Newspaper article International Herald Tribune

Real Estate in India Stunted by Rupee's Fall ; Developments Are Stalled as Market Is Stymied by Tight Credit and Red Tape

Newspaper article International Herald Tribune

Real Estate in India Stunted by Rupee's Fall ; Developments Are Stalled as Market Is Stymied by Tight Credit and Red Tape

Article excerpt

Rising financing costs are all the more painful because India's real estate developments take a long time to build, given the vast and often corrupt regulatory apparatus.

The Orbit Grand, a block-size complex designed to have at least 26 floors of elegant apartments, an extensive array of ground-floor stores and abundant parking for the chauffeured cars of residents and shoppers, was supposed to be the crown of India's real estate market.

Now it is turning into a symbol of the slumping fortunes of property developers and owners in a once-promising emerging economy. Construction of the Orbit Grand has almost ground to a halt at the 10th floor, the construction crane at the site seldom moves, and the builder has defaulted on its loan.

"There's no real work going on right now. There's just a minimum number of workers coming in to do small things," said Alam Sheikh, an electrician who is one of just 14 workers left at the site.

Real estate markets in cities across India are crumbling as the country's economy slows. The rupee has dropped nearly 20 percent against the dollar since early May, scaring away foreign investors.

The Reserve Bank of India, the country's central bank, raised a key short-term interest rate for commercial banks' borrowing by two percentage points in mid-July, to 10.25 percent, mainly to prevent further declines in the rupee. To put a brake on the flow of money leaving the country, the bank followed up last month with a regulation banning Indians from transferring money overseas for real estate purchases.

Rising financing costs are all the more painful because India's real estate developments take a long time to build as a result of a vast and often corrupt regulatory apparatus. Publicly traded real estate investment groups in India are heavily in debt, so they struggle to make interest payments and are not in a position to bankroll further projects.

That combination has produced bearishness about the short-term prospects for residential, commercial and industrial real estate prices in India. Sanjay Dutt, the executive managing director for South Asia at Cushman & Wakefield, the world's largest privately held commercial real estate company, predicted that prices would fall 10 percent in big Indian cities and 15 percent on the outskirts of large cities, where many speculative projects have been built. "Given the universal sentiment of the market, there could be a sharp correction between now and Gudi Padwa," Mr. Dutt said, referring to a festival next March that has long been considered an auspicious time to buy real estate.

What has sustained prices so far, and what might prevent more serious losses than those predicted by Mr. Dutt, has been the willingness of developers to hold growing inventories of unsold apartments, shops and offices without offering price discounts. The volume of real estate transactions has slumped in India as developers have refused to offer discounts for fear of starting a market rout.

"If they drop prices, investors will panic, and it will be a self- fulfilling prophecy," causing further declines in prices, said Siddharth Yog, a co-founder and managing partner of Xander Group, an international real estate investment firm started in 2005. That was the year India began allowing foreign institutional investors into its real estate market.

But with sellers refusing to cut prices, many potential buyers are losing interest. Devkinandan Agarwal, a Mumbai-based broker with three-quarters of his business in residential real estate and the rest in commercial real estate, said that until the last few months, he had had at least three or four separate meetings each day with genuine, interested buyers; now he has only one a day.

"There are now only actual users in the market. There is hardly anyone buying real estate as an investment," he said.

One longstanding complaint about business practices in India is that the country's banks lend heavily to a wealthy elite who often put very little of their own money into deals. …

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