Indian Realty Sector - Has the sun set ???

These days most of the pink press reports indicate sunset on the Indian realty sector. Today lets understand the same in a nut shell the reason behind this bear case scenario as many of us analysts name it professionally!!!

The Key contributing factors are:

• Slowdown in realty unit sales and delays in customer payments. The common reason behind this is lower disposable income among the prospective buyers which is on account of lower pay hikes & freeze on level changes/ promotions in their professional domains. Further, the higher interest costs on availing home loans or personal loans in the current inflationary scenario had played a spoil sport in the real estate “Bubble” party !!!


• Subdued equity markets had sent the prospective real estate players into a tizzy delaying their fund raising ambition to strike it rich in the soaring premium stock markets and thereby fund the purchases of newer land banks. In case of raising finance thru debt, the higher financing costs would have choked their bottom line, hence a restraint on that front too.


• Private equity too choking off, as return expectations have gone up to guaranteed IRRs of ~22%+


• Inability to raise further debt on account of already high leverage.


• Put options being exercised , which reflect an obligation to repay, on current debt pre-maturely due to worsening perceptions, forcing developers to fund EXISTING debt repayments thru exorbitantly high short-term loans/ highly discounted land deals.
  
  So, What went wrong?
  
  - Aggressive land acquisition at peak prices through short term, high cost debt + huge working capital mismanagement (short term debt used for long term projects). Traffic diversion in bankers parlance !!!!
  
  - Developers stubbornly held on to selling prices and high cost inventory on hopes of renewal of demand and uptick in prices.

So as mentioned in the earlier post on this blog, the Realty alias the Real estate sector will have to take a reverse gear at least for the next few months. A possible catalyst for the up swing later in the year can be subdued inflationary pressures in the economy and there by improved interest rate scenario, better liquidity and enriching stock market valuations. As of now, Realty sector to move north- wards will ask for nothing but a Miracle !!! Hmm...The next question on your curious mind will be.... Can Miracles happen......What should I say.Visualize it or Fantasize it....option is yours !!!!!!! Leave you with that thought. Good day.



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