THE real estate industry, which until recently saw a boom in Tamil Nadu, is passing through its most difficult period in several decades, owing to weakening occupier demand, oversupply and a market slowdown triggered by the financial downturn.
The immediate fallout of the situation is that 10 lakh construction workers belonging to different categories have become underemployed as the number of workdays has been reduced to three a week.
The unprecedented situation has paved the way for a healthy debate on issues relating to the housing requirements of different sections and the need for taking their affordability into account while launching projects in Chennai and other places in the State.
It is a paradox that the occupier demand for IT building space is dwindling even as the gap between demand and supply in the housing sector, particularly in the case of the economically weaker section (EWS) and lower income group (LIG) categories, is widening.
Tamil Nadu is one of the States with a huge demand for housing. According to official sources, in 2001, out of the total shortage of 6.95 lakh housing units, 5.97 lakh units were in the urban areas, accounting for 85 per cent. The total housing demand is estimated to be 26.27 lakh units in 2012, with the average annual demand working out to around two lakh units. More than two-thirds of the families requiring housing belong to the EWS and LIG categories.
According to the Eleventh Five Year Plan (2007-2012) details published by the State Planning Commission, the structural characteristics of housing in the State as per the 2001 Census indicate that temporary and semi-temporary structures built with materials such as grass, thatch, mud and unburnt bricks constitute nearly 35 per cent of the total available housing stock. The problem is more acute in the rural areas where such structures account for nearly 48 per cent of all housing units. The requirement of upgrading these houses has to be kept in mind while planning for housing needs of the State, the document says.
Participating in a property fair in Chennai on February 13, Vikram Kapur, Member-Secretary of the Chennai Metropolitan Development Authority, cautioned real estate developers against the tendency to ignore the demand for housing by the LIG and EWS categories. In fact, more than 95 per cent of the anticipated demand will come from these categories, he said. Kapur also said that affordable housing was one of the main objectives of the Second Master Plan for the Chennai Metropolitan Area and that various strategies were being contemplated to make housing available to all sections of society. Every year we anticipate a requirement of anything from 40,000 to 60,000 new dwelling units in the Chennai Metropolitan Area and we are not able to meet this fully, he added.
During the IT boom, developers focussed mainly on high-end buyers in both the residential and commercial sectors. Most of the 40,000 apartments planned by prominent developers were to be located in the IT corridor. These apartments were priced above Rs.40 lakh, targeting IT professionals and investors, who until recently were keen to have houses of their own. Enquiries with realtors reveal that this clientele has withdrawn or is adopting a wait-and-watch approach. As of now, apartments in the Rs.20-25 lakh price band are widely received.
According to an expert who has been monitoring real estate trends for long, of the 23.5 million square feet of available IT building area, only 0.1 million sq ft has been absorbed by companies in the sector, leaving 23.4 million sq ft vacant in the third quarter of 2008. Quoting the Research and Real Estate Intelligence Service Report of Jones Lang LaSalle Meghraj, a real estate consultancy group, he said the significant fall in the absorption of the IT building space would result in a further fall in rental values by 17 per cent.
But several real estate developers are still putting up a brave front and have not scaled down the square-foot rate of IT or non-IT space or housing space. According to real estate sources, Chennai, Kancheepuram and Tiruvallur districts, accounting for over 20 per cent of the transactions in Tamil Nadu, are the worst hit. Some projects formally launched in 2008 have not seen the light of day.
R. Singaravelu, the president of the Construction Workers Federation of India, said around one-third of the States 30 lakh construction workers belonging to 38 categories were hit by the slowdown. While IT companies were reluctant to occupy built-up space at the prevailing rate, IT professionals had postponed their construction plans. As a result, migrant workers had become jobless for three days a week, he added. Singaravelu said the government should intervene in a big way to protect the interests of these workers by launching employment-generating welfare projects.
Property transactions fell sharply as builders stopped work abruptly in many places in Chennai and other urban areas. Official sources acknowledge this fact. According to official data, the States revenue from stamps and registration fees in 2007-08 was Rs.3,804 crore. Although the budget estimate for revenue from this source in 2008-09 was Rs.4,888 crore, which was 28 per cent more than the revenue in the previous year, the revised estimate has been lowered to Rs.4,229 crore, accounting for a 16 per cent increase. The budget estimate is pegged at Rs.5,093 crore for 2009-10, accounting for only 15 per cent more than the revised estimate for 2008-09.
Realtors have urged the Centre to ensure that State governments reduce the stamp duty and registration fees to 5 per cent. (Tamil Nadu charges 8 per cent stamp duty and 1 per cent registration fee.) They have also called for relief through re-introduction of corporate tax exemption, reduction in the rate of interest for housing loans to 7 per cent, and release of funds through banks and non-banking financial institutions to promote projects.
Builders who had made huge investments and those who were unable to raise money towards working capital needs felt that they were caught in a trap even as buyers remained cautious, hoping for a further fall in the market.
Bhadresh P. Mehta, president of the Chennai Real Estate Agents Association, is optimistic that the market will stabilise in a few months.
In front of the concrete jungles of unfinished skyscrapers, it is impossible to miss the rows of shanties put up to house the migrant workers lured to Delhi with the promise of jobs at construction sites and a steady daily income. However, work at these sites has either stopped or is going on at such a slow pace that not all of them would be needed to complete a days job. Since there is not enough work, the contractors rotate workers depending on the amount of work a day.
These workers are completely unaware of the external factors such as the global meltdown and the poor financial condition of the Indian real estate sector, which are behind their current predicament. The white collar workers in the real estate sector and other ancillary sectors are feeling the crunch in a more direct way.
The countrys largest real estate developer by market value, DLF Ltd, has fired some of its employees and put on hold some of its residential, commercial and hotel projects because of the slump in real estate demand and the liquidity crunch. We must have laid off some employees somewhere, DLF chairman K.P. Singh had said on the sidelines of the India Economic Summit organised by the World Economic Forum in New Delhi. He did not disclose the number of employees retrenched.
In October, while announcing its second quarter results, DLF denied it had retrenched any of its employees. DLFs net staff strength came down by 10 per cent at the end of the quarter to 3,500 employees, but the company said that was owing to voluntary attrition. Close to 350 people chose to leave us but that was natural attrition and not layoffs. People tend to look for job options after increments, Rajiv Singh, vice-chairman of DLF, told the media on October 31.
Most of the real estate developers claim that there is a high attrition rate or say that non-performance was behind the removal of many of their managerial employees. The job market has taken a major beating. Flattening of compensation by about 15 to 20 per cent and potential pay cuts are seen everywhere. The real estate sector is the worst hit, Shiv Agarwal, chief executive officer of ABC Consultants, a recruitment services company, said.
Since the realty sector determines the scale of the business of industries that supply raw materials such as cement, glass and wood and provide engineering services, layoffs have been reported in these industries, too. Anshuman Magazine, chief managing director of South Asia for CB Richard Ellis, another real estate consultancy, said: A strong fiscal stimulus is needed from the government because infrastructure does not mean just housing but includes other development works. We have to strengthen the supply side. We are lucky to be in India as there is still enough scope for infrastructure development here.
The real estate sector in India grew by 30 to 35 per cent in the past five years, reflecting the rapidly increasing demand for office, commercial and industrial space as well as for bigger homes, now considered within the range of Indias prospering middle class. Real estate prices in the property markets of Gurgaon and Noida in the National Capital Region went up by 100 to 200 per cent during the boom between 2005 and 2007.
However, a double-digit inflation, which forced the government to gradually increase home loan interest rates to 14 per cent from 6 per cent, and the liquidity crunch induced by the sub-prime crisis in the U.S. led to a crisis. Prices of homes have since fallen by 10 to 15 per cent in some pockets of Gurgaon and Noida owing to a fall in demand, according to real estate consultants.
Vijandar Bhandari of Sai Ganga Associate, a middle-level estate agent in Noida, said that the realty sector had gone beyond the reach of the middle class and that it had been heading for a cyclical slowdown even before the current slump. Over the past few years, increasing demand had pushed up prices, with speculators further inflating the market. Eventually, inventory piled up when buyers refused to pay unrealistically high prices.
So many transactions were taking place between speculators and investors that no one bothered to find out what the end user, the family that would eventually live in the house, would be willing and able to pay, Bhandari says. Home-owners are the biggest target of Indias real estate sector: almost 80 per cent of real estate developed in the country is residential space.
The sector became an investor-driven market. One of the major reasons for this was the huge inflow of foreign funds. The U.S. channels funds to Indian realty in three ways investments by non-resident Indians (NRIs), foreign institutional investors (FIIs) and partnerships with or exposure to finance majors such as Lehman and Merrill Lynch. Although the exact figures of investment by NRIs are not available owing to the non-organised nature of the sector in India, experts estimate it to be to the tune of several billion dollars, mainly in tier-I and tier-II cities. The rise of funds led to greater speculation in the market, and in the past two years, the prices of commercial spaces and residential property grew three times more than what had been expected.
At that time, the job market in the sector was also growing at almost the same rate. But sustainability of the market was always doubtful as the demand was artificially generated through speculators and investors, and the supply matched the pace because of foreign funds. With the recession, the funds stopped coming and the demand bubble burst.
It is for this reason that Rohtas Goel, the president of the National Real Estate Development Council, and CMD of Omaxe, said: Influx of such FDIs should be replaced by government-farmer-builder partnerships, where the government gives good prices to farmers for their land, keeps the revenue and sells the land to the builders at a reasonable price. However, Rajesh Srivastava, country director of Meinhardt India, a project management group, said there should be a strong government regulatory body to control developers and the pricing of property.
Anuj Puri, chairman of Jones Lang LaSalle Meghraj, told Frontline that a reduction in interest rates alone would not suffice to bring about a positive reversal in the negative demand dynamics in the real estate market. The recent measures taken by the Reserve Bank of India will need to couple with lowered property prices and further injections of liquidity to effect any significant changes. Until then, domestic demand is likely to sink even further, and international interest will remain at cautious levels before the situation gets better. There has already been an overall drop of demand to the tune of between 45 and 50 per cent, he said.
According to Pranay Vakil, chairman, Knight Frank, another international realty consultancy, there will be a lot of mergers, acquisitions and closures of real estate firms in the coming year. Insiders believe that big developers with a strong financial back-up may just be able to sail through, while over-committed small and medium developers with limited funding will have to look for new sources of capital. Developers must understand that volumes and turnover will improve only at a lower price, Vakil said.
One common link between the Great Depression of 1929, the East-Asian crisis of 1997 leading to the term crony capitalism and the current financial meltdown is that the sector precipitating the crisis in all the cases has been real estate. If the opinions of experts are to be believed, it is unlikely that the sector will turn around in the next 18 to 24 months, at least in the housing sector.
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