January 25, 2020
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Shaking Foundation

With interest rates zooming real estate could see a slump in demand and speculators could cause a lethal crash.

Shaking Foundation
Like A House Of Cards
  • Floating home loan rates are up from 7% in 2004-05 to over 11% now. This could see a slump in demand.
  • If speculators in the market start selling out, the crash could be lethal
  • Scourge of black money—illegal money flows out through hawala, returns through banks into property
  • Small-time builders caught in a debt trap will be the worst hit


Buyers, who were thrilled with a loan at less than 7 per cent interest (floating) in 2004-05, are in despair. The rates have shot up to over 11 per cent, and EMIs are either up by over Rs 4,000 on a 20-year loan of Rs 15 lakh, or the number of instalments have increased. "Such a rise is going to impact the market. It may lead to a drop in property rates, as prospective buyers think about postponing their decision. But I don’t expect a correction of more than 10 per cent," says Niranjan Hiranandani, MD, Hiranandani Properties, one of Mumbai’s leading real estate developers.

His prediction may be true about projects that have taken off in the past 12 months, and are nearing completion. In such cases, the builders have sold out the properties. But the problem will arise for future plans. If interest rates remain the same, or creep up even higher, the developers will find it tough to find new buyers. In such a case, they will have to either postpone their investments, or give massive discounts. (In India, property prices as such never go down.)

The worst-hit will be the small and medium players. Most of them don’t have the capacity to buy land; so they either take it on long-term leases or borrow money to acquire it. Hence, they will be forced to complete their projects even if they are unable to sell the individual properties in their projects. The reason: they have to repay loans or pay lease rentals, and recover the expenditure they have incurred. These will be the first ones to start offering massive discounts to potential buyers.

It could turn into a nightmare if the speculators, or those who invest in real estate to book profits, start selling out. This would further dent demand. It’s a possibility as the incidence of black money is very high in this sector. "Indian realty will continue to be a preferred destination for money-laundering," says Deepankar Sanwalka, head (forensic services), KPMG. He adds that the preferred route for unaccounted inflows is through round-tripping—that is, illegal money flows out through hawala and returns ‘cleansed’ through banking channels to buy properties and plots.

One patented safe way for black money to come back is through real or benami non-resident Indians. This trend has got a boost in the past few years as the government has eased norms for NRI investments in real estate and also repatriation of the sale money. For example, NRIs with Indian passports don’t require RBI clearance, can pay out of their foreign earnings or Indian bank deposits, transfer or dispose of the property without having to take permissions, and repatriate the money. "The removal of repatriation restrictions provide an exit route to NRIs who didn’t have the comfort earlier," says Anshuman Magazine, head (South Asia), Richard Ellis.

Agrees Harvesp Mehta, national director (investments), Knight Frank, "Apart from residential, NRIs have begun to take an interest in commercial spaces as they prefer to go with investors who are running these properties to ensure steady returns." Adds Sanjay Chabra, partner in law firm Archer and Angel, "We have seen a steady growth in enquiries from NRIs undertaking speculative investments in Chennai, Hyderabad and Gurgaon. They are also interested in tier-II cities like Kochi, which promise very high returns."

The extent of speculative mania among NRIs can be gauged by this example: A Mumbai-based source reveals that NRIs based in the Middle East are forming JVs with local players to buy agricultural land in Devanhalli, on the outskirts of Bangalore, where a new airport is planned. As prices shoot up in the area, the JVs are selling the land at manifold profits. "Even those based in Singapore and Malaysia want to indulge in such speculative buying," says the same source. Says a categorical Sumit Makhija, associate director, PricewaterhouseCoopers: "Small construction firms deal in large amounts of black money, which is creating a boom in real estate and keeping real buyers out of the market."

However, Indian developers believe that the proportion of black money has drastically reduced. "The black component has been significantly marginalised as quality foreign and domestic funds are coming in, and individual buyers (salaried professionals) prefer to pay in ‘white’," says Sanjay Chandra, MD, Unitech. Adds Hiranandani, "I am buying land from 1,000 farmers in Thane and all the transactions are through cheques. This shows that we have come a long way in the real estate sector."

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