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“The price correction expected in the sector is what is driving us to play safe and therefore you will see most of the investments by us in the commercial space,” said Dr. Anil Jindal, Chairman, SRS Group explaining the strategy of the group to bank on commercial land in order to stay away from the major correction seen in the sector. Tinku Sigh, Group President, SRS Group added further, “We will be focusing on Tier-II and Tier- III cities only as the prices of properties in metros are almost attaining saturation level.”
There are certain developers in the country that have raised debt at a very high rate of interest as there was a enormous scarcity of supply as compared to the demand in the sector (remember the boom in the sector), which made them believe on the formula of ‘Higher risk, higher return’ blindly. According to Unmesh Sharma, real estate analyst, Macquarie Research, the problems of the real estate players don’t seem to be ending with the festive season around the corner as he states, “Given the current interest rate scenario, I see a higher than 50% probability that recovery in sales volume will be weaker than expected.” This, if true, can surely raise some problems for the famed players in the industry.
Already, there seems to be a shift in strategy by mid and small players, signalling some consolidation. They are already facing a liquidity crunch and have seem to be sending an SOS message to big developers. Small and mid-sized players are more than willing to sell their land to biggies in order to arrange funds for the ongoing projects. “The real estate sector is facing a slowdown altogether and the players are facing a major liquidity crunch at this point of time” avers Susil Dungarwal, an independent realty & retail analyst.
Even Parsvnath Developers saw blood on its balance sheet as they announced a 17.8% dip in net profits for the quarter ending March 2008 standing at Rs.108.88 crores as compared to Rs.132.44 crores in the corresponding quarter last year. And their problems seem to be getting compounded with the rise in input prices; which could make it difficult for the company to script a comeback this year.
For DLF, the brand value continues to shield the group quite well from the sectoral upheaval. Recently, Symphony (a UK based PE fund) invested a hefty amount of $450 million in DAL (DLF Assets owned by the promoter of DLF, DE Shaw, Lehmann Brothers and Symphony Capital – with no cross holdings between DLF Ltd and DAL), which eased the risk of off-take for the commercial properties of the realty major. The problem of liquidity crunch is bothering Unitech the least as it is capable enough of raising the fresh venture capital and attracting new PE funds even after the debt the company has on the balance sheet.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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