In- House Trouble

As more and more residential properties remain unsold, companies and PE players may have to rethink strategy.

- Mahesh Nayak

Rahul Patil, 36, a marketing executive with a big media group in Mumbai, changed his mind about buying a house at Mira Road – on the city’s outskirts – at the last minute. The reason was two-fold: first, a general apprehension of forthcoming retrenchments across corporate India – if it happened to Patil, he would find it impossible to repay his housing loan. But more importantly, he knew he would lose nothing by delaying. “I don’t know if real estate prices will fall in the near future, but they sure won’t rise any time soon,” he says.

It is a sentiment widely held in the residential real estate market. “Between 2009 and 2013, real estate prices were escalating every month and the developer was king,” says Sharad Mittal, Director and Head, Motilal Oswal Real Estate Fund. “Property prices became unaffordable for most people. Prices remain the same today, and it is my sense that in micro markets like Lower Parel in Mumbai, they will stay the same for the next three to four years. This has led to serious trust deficit and affordability issues for the industry.”

Most important is the problem of cash flow. “The slow pace of sales over the last 24 months is causing cash flow mismatches for developers,” says Vikas Chimakurthy, Senior Executive Director, Kotak Realty Fund. Caught in a pincer are private equity (PE) players who have invested in residential real estate. With inventories remaining piled up, they are forced to stay invested – exits, with decent returns, are extremely difficult. Chimakurthy believes that more than half the estimated $3 billion PE debt investment in residential real estate is unable to get refinanced. “These non-refinanced developers have to either bring in more equity and reduce some portion of their debt, or reduce prices of properties to increase the pace of sales to service existing debt obligations,” he adds.