Indian real estate sector in recession mode

THE DEVELOPMENT of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centres and programming houses. The demand from the information technology sector has changed the urban landscape. Several multinational companies (MNCs) continue to move their organisational operations to India to take advantage of lower manpower and other costs. Providing human resources and home at their workplace assumes great significance and therefore, the requirement to create space for people to live and work that in turn, causes the development of other related infrastructure. It has been a predominant trend to set up the world’s best business centres, often campus-style establishments bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ’temples of new India’. It is just an indication of the extent to which the development of real estate has been taking place.

The real estate market in India remains unorganised, fairly fragmented, mostly characterised by small players with a local presence. Traditionally, real estate developers were viewed with an element of skepticism. They were often identified dealing with large amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals.

The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs etc. However, this boom is restricted to areas such as commercial office space, retail and housing sectors. The impending concerns of this sector namely skill shortage, non-availability of statistics, lack of low cost-affordable housing, lack of sustainability and to meet a future that might have downturn due to oversupply.

The industry is presently facing a major resource crunch – an obvious lack of qualified and skilled people from construction firms etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics, which has created an ambiguity as to how much construction activity is actually taking place and one can’t gauge the demand and supply trends accurately.

The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing. So, there is a dearth of low cost affordable units. The negative version of Indian real estate industry is ’they have complete disrespect for sustainability’ and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed.

Presently, the impact of recession in US economy has caused mammoth impact on Indian real estate market as well, as it is witnessing the recession. Till now, the real estate industry was a booming industry, which were in pace with information technology (IT) industry. Accordingly, the demand for IT space and commercial spaces has been grown. Also, the high net worth of individual investors has created a very fast pace of demand in Indian real estate sector, which has a very high impact image of investing in India.

As the money was coming in terms on investment in from non-resident Indians as well as private equity funds, the well-known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. Special economic zone (SEZ) has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So, the booming market has created a niche as modern living and created a very mass employment in Indian segment.

The recent changes, which happened in American market such as bankruptcy of Lehman Brother (one of the oldest financial firms of American market) and sell process of PE firm Merryl Lynch by the largest US bank, Bank of America, has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds into real estate sector without having the proper analysing or effect. They also have given the funds for mortgage industry of US, which is currently facing the hurdle of sub prime lending and have affected many players to bankruptcy.

All of these changes in the US economy have affected Indian economy as well as real estate segment as most of the Indian players have their liquidity funded by both of these firms. The IT segment, which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also affected the Sensex, which is bullish and brings down the net worth of the leader of Indian real estate player very low. The impact can be shown in share price of DLF, Unitech, GMR group, Reliance Group, Wipro, Satyam etc groups. All of these sudden changes in Indian and US market created a point of thinking to investors and individuals that where it will go and what will be the best option in real estate investment. The market rates in India are also dropped by 10 to 30 per cent in most of prominent as well as upcoming cities and the trend appears to be still continuing, till it recovers from the ill effects of financial crisis.